Friday, April 11, 2008

GE: Swing and a Huge Miss/Shocks Wall St.

General Electric shocked Wall St. this morning by reporting a huge drop in earnings. This was the first time GE reported a drop in quartely profit since 2003. CEO Jeffrey Immelt had recently said that earnings were "in the bag" for 2008. A quote from Bloomberg:

"General Electric's miss came without warning as it was forced to reduce the value of some securities in the last two weeks of March as capital markets seized, Immelt said. That also prevented GE from selling some finance assets. GE put its U.S. credit card business and Japanese consumer finance units up for sale last year. The health-care unit also trailed expectations.
Profit from continuing operations dropped to $4.36 billion, or 44 cents a share, from $4.93 billion, or 48 cents, a year ago. Revenue rose 8 percent to $42.2 billion.
The stock dropped in early U.S. trading to as low as $32.81 from yesterday's New York Stock Exchange close of $36.75. The shares had fallen less than 1 percent this year compared with a 7.3 percent decline in the Standard & Poor's 500 index.

``This is one of the biggest misses that GE's had in quite some time,'' said Nicholas Heymann, an analyst with Sterne Agee & Leach Inc. in an interview today. ``The pressure is on like it's never been on before for all senior management at GE.''

My take:

Should we be surprised? Ben Bernanke told everyone this week that we have just gone through the biggest financial crisis in 50 years. People in the financial markets were "shocked" by the news saying that "GE never misses". In a normal market I would be shocked if they missed as well. THESE ARE NOT NORMAL TIMES!

Everyone on Wall St. thinks that the Fed can "save the day" by cutting rates and "bailing out" Bear Stearns. People need to realize that you can't start the debt party again by flushing the financial system with liquidity. Bailing out Bear Stearns does not fix the problem!

Most Americans are in financial distress right now and there is no doubt that the economy is going to suffer because of this. Wages are flat and the consumer is buckling under the pressure of higher gas prices, ridiculous mortgage payments, and inflation that's increasing the costs of all consumer goods.

Everyone needs to put the Fed's moves into perspective. All the Fed did was try to make more money available for people to borrow. The problem is the American consumer has no desire to borrow more money because they are tapped out. The Fed CANNOT make people borrow this money and as a result the economy will suffer.

When you have a once in a generation financial crisis you should expect the unexpected. The credit crunch destroyed GE this quarter and GE "never misses".

Expect the stock market to drop today as everyone begins to realize that the credit crunch is going to take its toll on corporate earnings this quarter. This news will also rattle the confidence of Wall St. going forward into future quarters.

General Electric shocked the street and Wall St. does not like to be surprised.



7 comments:

Avl said...

It's 10:56 am, and I'm listening to CNBC as I write this. What I'm hearing explains why I feel the investor psychology embedded within the DJIA and perhaps S&P500 will make em incredible laggards as trailing indicators of how bad things are and will get. Hard to under-estimate the power of market denial/irrationality. But I'm beating a dead horse.

What's new is data indicating there may be a short-lived and 'spin-able' bump-up in consumer borrowing due to some strategic moves by consumers to do low-cost borrowing to build a cash reserve to help during the down-turn. The data and individual stories are in the April 10, 2008, Page D1, WSJ piece, "Borrowers Keep Piling On Debt. As Lenders' Tighter Standards & Cut Off Some Avenues, People Tap Credit Cards, Equity Lines".

Though WSJ's tone is chiding overall, SOME of the individual stories actually could make sense depending on their overall circumstances, but we are not given all those details (e.g. other HH debt, other HH income sources, credit rating, job security & potential 4 promotion). Maybe I'm biased: I did similar borrowing in 2001-2003, and paid zilch in interest while staying very liquid & creditworthy. But I’m disciplined.

Though these may be wise moves for well-disciplined borrowers, the data bump may, sadly, be spun as others as a sign that ‘Consumer Sentiment Is Improving’, blah blah.

Jeff, I’m seeing this credit crisis also as a psychology test-of-wills as individuals cycle between naiveté & cynicism, realism, and optimism & pessimism. Will low-cost ‘group therapy circles’ make a rebound?

Avl said...

The data I mentioned on a bump-up in consumer borrowing will ultimately get buried in larger data points showing more desperate borrowing simply to buy groceries & live day-2-day by the many who are squeezed by housing, gas, & food costs; and those who are under-employed or laid off. That borrowing is not strategic; it's a reaction to 'survive'.

Jeff said...

avle

I think this credit boom is similiar to what you said in your second post.

I believe this is a crdit run by homeowners that have no cash and are using credit cards to live.

This is the last big credit boom in my opinion and whats sad is most of the people running these credit cards up know they are going to declare BK and never pay them back.

I read somewhere that there is now a credit company that is offering debit cards for people to tap money out of their 401k's. They already have 10k people signed up.

I could be wrong on this. Time will tell!!!

Anonymous said...

Yeah...I tend to agree. People are starting to really hurt. You can feel it in the air. Pacific NW has until recently been sparred the pain but its finally seeping in.

Its becoming "very uncomfortable" around here (to say the least).

Jeff said...

anon

We are finally seeing it here in Baltimore as well.

All I see is people using credit cards when I am out. Restaraunts are empty.

I think the GE news was a reality check today on Wall St.

Anonymous said...

Jeff,

Sorry to hear that.

Jeff said...

anon

I just feel bad for the people in the city. Real estate was a big industry in Baltimore and prices really ran up. Now that its popped many are suffering.

I feel fortunate that I avoided the housing bubble after selling my last house and I look forward to much better affordability down the road.