Why GE Is Still a Good Short

By subtracting the published financial results of the financial holding company (GECS) from the results of consolidated GE, we arrived at fairly detailed figures for what we call "GED "-- GE's collection of diversified non-finance businesses. The virtue of this approach for us is that we were able to tie the two main driving forces of GE, line by line, to full cash flow statements and full balance sheets for the whole enterprise.

The work was laborious and really nothing more than repetitive arithmetic. But the results initially were quite confounding.

Overall, we saw a dangerous trend in climbing total debt, shrinking tangible common equity, rising revenue but falling "free cash flows" from continuing operations, all of which together have sunk companies in past times. But because we also have a strong view that trends in the wider macro world are far more challenging than most believe, we saw GE as heading for a sharp fall and expressed our written recommendation on Aug. 31, 2007, to purchase credit default swaps on GECC debt at 40 basis points, to short GE at $38.87 and to buy long-dated GE puts.

Because we also believed then that unwinding at GE would have wider negative repercussions for the market, we recommended purchasing an option on physical gold at $ 665 per share, shorting insurance companies, shorting regional banks and shorting Moody's.

Below surface level, one entry point for our conviction started with comparing GE's best known finance business (GE Capital) to companies one might deem comparable. To us, a fair potential "peer" seemed to be CIT Group(CIT Quote), and when we found through our work that GE Capital's key ratios actually appeared worse than CIT's, we struggled to understand how rating agencies could hold GE Capital to Triple A ratings.