C.M.O. 3.10.2009
Credit Market Overview
March 10, 2009
If there is any truth to the adage: “It’s not what you know, but who you know”; then you might consider a slight variation on that theme: “It’s not who you are but who you follow”. Jeffrey Immelt stands as testament to this second phrase as coming to the helm of luxury liner General Electric after Capt. “Neutron” Jack was never expected to be an easy voyage.
Investors on the good ship GE, enjoying quarter after quarter of Jack’s “perfectly groomed” earnings were lulled into complacency like those lying on the sun deck of a Caribbean cruise. Unfortunately, it wasn’t long after poor Jeffrey grabbed the wheel that hurricane season started.
If there is another old saw to be considered here it’s probably: “timing is everything in life” and due to factors way beyond his control Mr. Immelt’s timing in taking the helm could not have been worse.
JE most recent misstep was guaranteeing the safety of the dividend earlier this year and then cutting it by 68% in late February. Implied volatility on GE has closed as high as 149.5268 since its 97.5067 close on February 26th. CDS spreads have also widened during this time moving from 660bps on the benchmark 5-yr on 2/26/2009 to a new all time high of 1037.21 last Thursday. For some perspective realize that in the heady days before August 2007 CDS spreads on Junk were as low as 300bp.
Given the tumult in the world the question becomes not whether Jeff is as good as Jack but whether he is navigating the sea of tsunami’s well enough to get the ship and all its passengers back to port. (Read keep the AAA rating.)
On the dividend front it is safe to say GE is not alone. JPM, DOW, MOT, PFE, TXT, CBS and NYT have all cut dividends recently (apologies if I left anyone out). Howard Silverblatt, an analyst with S&P said recently that dividend payments among companies in the S&P 500 were down 24% from a year ago. Howard went on to say that this years projection for dividend cuts would be 23% which would make it the worst two year span for dividends since 1938.
One of the factors leading up to these cuts, HS believes, is that the market has grown less inclined to punish dividend reductions. “They are not as painful as they were a year ago” he was quoted as saying. (Someone please tell that to Mr. Immelt.)
While investors may not be punishing the “cutters” as harshly they seem even less enamored with the names that pay dividends as a whole. Nicholas Bohnsack of Strategas Research Partners, a New York research firm, recently found that since November 21, 2008 dividend paying stocks have underperformed their non-paying brethren.
“In an environment where there is a massive flight to quality, you would expect companies that are offering yields to do better. That has absolutely not been the case.” Mr. Bohnsack said recently. He goes on to reason that the price declines of the dividend paying stocks reflect the market’s perception of the eventual need for those companies to lower payouts in order to conserve cash flow and bolster the balance sheet. “It is almost the purest read on confidence that we have.”
If that is true it might be pure but it doesn’t seem all that confident.
Enjoy the week.
Jim Delaney
March 10, 2009
If there is any truth to the adage: “It’s not what you know, but who you know”; then you might consider a slight variation on that theme: “It’s not who you are but who you follow”. Jeffrey Immelt stands as testament to this second phrase as coming to the helm of luxury liner General Electric after Capt. “Neutron” Jack was never expected to be an easy voyage.
Investors on the good ship GE, enjoying quarter after quarter of Jack’s “perfectly groomed” earnings were lulled into complacency like those lying on the sun deck of a Caribbean cruise. Unfortunately, it wasn’t long after poor Jeffrey grabbed the wheel that hurricane season started.
If there is another old saw to be considered here it’s probably: “timing is everything in life” and due to factors way beyond his control Mr. Immelt’s timing in taking the helm could not have been worse.
JE most recent misstep was guaranteeing the safety of the dividend earlier this year and then cutting it by 68% in late February. Implied volatility on GE has closed as high as 149.5268 since its 97.5067 close on February 26th. CDS spreads have also widened during this time moving from 660bps on the benchmark 5-yr on 2/26/2009 to a new all time high of 1037.21 last Thursday. For some perspective realize that in the heady days before August 2007 CDS spreads on Junk were as low as 300bp.
Given the tumult in the world the question becomes not whether Jeff is as good as Jack but whether he is navigating the sea of tsunami’s well enough to get the ship and all its passengers back to port. (Read keep the AAA rating.)
On the dividend front it is safe to say GE is not alone. JPM, DOW, MOT, PFE, TXT, CBS and NYT have all cut dividends recently (apologies if I left anyone out). Howard Silverblatt, an analyst with S&P said recently that dividend payments among companies in the S&P 500 were down 24% from a year ago. Howard went on to say that this years projection for dividend cuts would be 23% which would make it the worst two year span for dividends since 1938.
One of the factors leading up to these cuts, HS believes, is that the market has grown less inclined to punish dividend reductions. “They are not as painful as they were a year ago” he was quoted as saying. (Someone please tell that to Mr. Immelt.)
While investors may not be punishing the “cutters” as harshly they seem even less enamored with the names that pay dividends as a whole. Nicholas Bohnsack of Strategas Research Partners, a New York research firm, recently found that since November 21, 2008 dividend paying stocks have underperformed their non-paying brethren.
“In an environment where there is a massive flight to quality, you would expect companies that are offering yields to do better. That has absolutely not been the case.” Mr. Bohnsack said recently. He goes on to reason that the price declines of the dividend paying stocks reflect the market’s perception of the eventual need for those companies to lower payouts in order to conserve cash flow and bolster the balance sheet. “It is almost the purest read on confidence that we have.”
If that is true it might be pure but it doesn’t seem all that confident.
Enjoy the week.
Jim Delaney
Labels: CDS, correlation, credit, equity
posted by Jim Delaney at
4:05 AM
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