General Misery and General Empty

GM and GE have been declining steeply over the last few years. GE dropped already by 60% in 2009 to the level of 1991... And GM? Well, investors who bought the stock in the early 1960-ies have not seen any return yet.

GM has always been a problem child, but GE has been a poster child. The darling of investors, the six sigma icon of US managment skills, the AAA-company that served as an example.

So goes GE so goes the US?

GE is the company with the longest history in the Dow Jones stock index. It has been in the index from the start. It has outlived recessions, wars and stock market crashes. But now it is crumbling.

If GE is in trouble, it is not because of its manufacturing skills. The problems are mostly concentrated in the financing arm. GE is the world's biggest provider of aircraft leasing, and all different kind of financing services. GE Capitals, the financing arm, has given loans to mid-sized companies and investments in commercial real estate. GE had a market capitalisation of almost 600 bn USD one day, which have melted to around 71 bn USD today.

GE is also the biggest US issuer of commercial paper, making it vulnerable for financing. Although GE has been a AAA-company, for what such rating is still worth, it has received a 139 bn USD insurance in debt from the US government in October.

So, the activities of the financing arm are now threatening the stability of the world-class manufacturing activities.

GE is like the story of the US: once a great industrial nation, it diversified away from the 'know how to create' to 'know how to create debt'. This is now turning against the company/nation and ruining its value creating core activities.

GE and the US are now in risk of losing the

ir top quality status. Rating agencies might cut GE's AAA-status, they are unlikely however to ever dare to cut the US-government top status.

Looking at GE Capital's CDS-premium, the picture is frightening (it even increased to 20% today). The insurance premium against a potential default of GE's financing unit is skyrocketing. This looks like Fortis on the eve of its breakdown.

GE being the biggest issuer of commercial paper, this doesn't bode well for the markets.

For those who believe this is just idle speculation, remember that CDS spreads have been rather accurate in pointing to problems, and much quicker than actual reports.