Is General Electric (GE) Bankrupt?
The Dynamic Wealth Report
March 6, 2009
Unemployment Hits 8.1%... Everyone Asks Is GE Bankrupt?
This economy is dismal. The unemployment numbers just crossed
the news wire and we’re hitting new highs. More than 600,000 people have
lost their job just in the last month. Right now the unemployment rate
is at 8.1% - a level last seen in the early 1980s. That recession was
horrible… this is worse.
I’m wondering if GE could make it even worse? More on that in a moment.
There’s a big problem with the unemployment numbers. Think about this.
For every person who has already lost their job, there’s got to be 2 or 3
others worried about losing a job. Some firms are cutting back on hours.
Others are asking employees to take unpaid vacation.
Every time a company announces layoffs it sends shivers up the spine of
the collective workforce.
My back of the envelope estimates are ugly. By my figuring, 25% to 30%
(or more) of the nation’s workforce is either unemployed or worried
about becoming unemployed. It’s a scary thought that doesn’t do much for
consumer confidence. And that means spending and economic activity will
remain low for some time.
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Let me give you a perfect example why.
General Electric (GE), is the old stalwart of the financial markets. Over 100 years ago, when Charles Dow created the Dow Jones Industrial
Average, GE was one of his top picks. He started with 12 companies and
GE was one of them.
It’s the only company in the index since its founding.
Now that very survival is in question. Shocking isn’t it? In this market
some companies are trading at levels not seen in decades. Strong brand
name companies are treated like the walking dead and the bankrupt. If GE
were to go bankrupt, more than 300,000 jobs would be in question.
Just look at GE’s stock and options. The stock is at 18 year lows. Let
me say that again. The stock is trading at 18 year lows. The options
market looks worse.
As you know, put options give option traders the opportunity to sell
stock to another investor at a fixed price. It’s a bit complicated but
here’s what you need to know. Put options go up in value when the
underlying stock goes down. So if you buy put options on GE, you’re
expecting the stock to fall.
Unbelievably, options traders were buying put options by the bucketful
on GE. The scary statistic is the options they were buying had a strike
price of $2.50 a share. That means these options would only be worth
more money if GE fell below $2.50 in the next few months…
Can you imagine GE trading below 2.50… that would put the company on the
verge of bankruptcy. There’s a ton of traders who think its a distinct
possibility. And they’re willing to risk huge amounts of money on the
trade.
Knowing this, do you think the 300,000 plus employees feel their job is
safe? I don’t exactly see them running out to buy new homes, cars, or
expensive electronics anytime soon. If the bad news at GE continues, the
economy could get worse.
Personally, I think the sell off is overdone. I own GE in my own
account, and considering its value today, I’m considering investing even
more money. I might be wrong, I know that’s happened on occasion. But I
also might be right.
If I am, can you imagine owning GE at around $7 a share! Consider buying
some for your own account today.
• Wheat ($4.90 per bushel)
Wheat prices have continued to trend lower. The price of wheat is now
approaching the lows from December of last year. This is good. Lower
wheat prices will continue to pressure food costs.
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