GE, MCO and other thoughts

GE is not what it was -- actually it never was as good as people thought. Reality is that GE's financial services business has long benefited from the association to the AAA rated industrial side. Perhaps markets have adjusted some but unless I am mistaken they are still able to borrow much cheaper than most financials because of that AAA rating. Its similar to how FNM and FRE are able to borrow cheaper than anyone else because of the implicit government guarantee.

That's why they can't just spin out the financial services part of GE -- it would mean a massive hit to profitability.

Yet anyone who argues that GE is or has been cheap the last few years doesn't understand the math -- figure out what percent of profits comes from financial services and put a 10X PE on that. Then put a high teens multiple on the rest and what do you get? basically what GE has been selling at.

The trouble is their industrial side isn't doing as well as others that are more pure play companies. Pretty sure EMR, UTX, CAT, etc. have done better.

Big question though is what does GE's results mean for the rest of the market? Well the key question is the impact of funding for large cap ex projects. GE's results suggest that the Bear Stearns issues led to problems for anyone trying to get funding for large projects near the end of Q1. That could impact a large part of the economy. What is relatively safe? small dollar purchases, consumables, businesses with large international revenues, almost anything energy/materials related (those that sell the exploration and production equipment could be hurt if their customers couldn't get financing).

Stuff like LH, TECH, PEP, TSRA, UEPS, WWY, MCF, CLB, FDS, CME, ERF, etc should not be affected. ILMN's instrument growth could be impacted but most of its profits come from consumables -- same with BLUD.

Moody's did fall towards $35 but I did not cover the calls I have written on my position. I forgot that as the option moves from way in the money towards at the money the delta is not 1 -- the intrinsic value falls but the time value increases. So the stock has dropped $2.3 since I sold the calls but the calls have only dropped about $1.70. So the stock is in the money by 68 cents but the options are going for $2.90 to buy. thats about $2.2 in time value due to the high volatility of the shares of late.

I'm about to start the sharp decay of time value that occurs in the last month (we are at 5 weeks to expiration). Its true if the stock moves up then time value becomes intrinsic value. My plan is for somewhere between $1 and $2 before covering. Once I have covered then I will start looking at June's (when they start trading) to try to get some more money.

The theory is that this is a great business, selling at a reasonable valuation but that has no near term catalysts and that has options with lots of value embedded. Meaning the stock shouldn't fall too much but also isn't likely to take off either and yet too many don't realize that yet so the options offer good return. If I could make a couple of bucks in option premium every couple of months that would be a great deal on this stock -- that's why I don't think it will happen. Its why you have to take advantage of the situation when its there because good chance in another month the June 35's won't be going for $3 when the stock is $35.70. Maybe its $2 instead.