Tag Archives: Wall Street

What’s the Wall Street View of GE?

The Street is falling out of love with GE.  About 40% of analysts give GE a Market Perform – a “Gentleman’s C” – with an equal number above and below that ranking.  Since there’s little reason to buy a stock rated average by the street (buy an index fund instead and get the same resutl with less risk) GE is treading water.

Paraphrasing JP Morgan at Barron’s

Try as it might, General Electric (GE) just can’t get anything going. Don’t expect that to change in 2015, say the folks at JPMorgan.

We began our investment career working with GE employees and retirees.  We once worked for GE.  We remember how well the stock did under the leadership of Jack Welch.

We also have a well-founded skepticism of Wall Street analysis.  That said, we are not better than anyone else in predicting the future.  We don’t know when (or if) GE will regain its footing and begin to grow at a rate that will make it more attractive.  In the meantime, the main thing GE has going for it is a dividend yield over 3.5%.

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The use and abuse of securities based lending

According to a recent article in Fortune magazine, the latest push by the big investment firms is to get as many of their clients as possible to borrow against the value of their portfolios.  Clients can borrow from 50% to 95% of their portfolio’s value.

Securities-based lending, also known as non-purpose lending, is Wall Street’s hottest business. From UBS to Bank of America Merrill Lynch to JPMorgan, high net worth investors are being enticed to take out loans against their brokerage accounts at a blistering pace. A May 2014 article in The Wall Street Journal told the story of Jason Katz, a UBS broker who has arranged portfolio loans for 21 of his clients in the prior year, a four-fold jump from the year before. The Journal reported that portfolio lending jumped by 28% at UBS between 2011 and 2013.

The loan has an interest rate, which may be either higher or lower than a bank loan.  But what many borrowers may not realize is that their portfolio can be sold out without their approval.

Supposed someone “has” to have $100,000 for a new boat.  With a stock portfolio worth $200,000, that individual can get a quick loan without a single transaction taking place.   But if the value of the portfolio drops, the firm has the right to sell the portfolio instantly, without notice.

Should market volatility result in a capital call, securities held directly by wealth management customers can be liquidated instantly with very little risk to the brokerages who’ve extended the credit. In essence, we’re seeing re-leveraging amongst the 10% of America that owns 80% of the stock market, while the other 90% of the country has been forced to deleverage in recent years.

As a fiduciary, it is our job to advise our clients on risks.  While taking an occasional short-term loan may be the right thing to do in special circumstances, borrowing against a portfolio, especially near the limits is very, very dangerous.  Wall Street is pushing these loans to fatten it’s bottom line.  Don’t get hooked.

 

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