GE – What Are People Expecting?
July 19, 2009 · Posted in Business
GE’s dismal results seemed to take people by surprise last week, as Reuters writes GE results slam market:
NEW YORK (Reuters) – Wall Street stocks skidded on Friday after disappointing earnings at General Electric Co jolted investors who had hoped a U.S. slowdown would be mild and sent them scurrying to the safety of government debt.
The slide pulled European shares down as well, though Asian markets closed higher before the U.S. news hit.
The dollar fell broadly as GE’s results and lowered outlook for 2008 — along with a worse-than-expected slide in consumer confidence — undermined a view that the worst of a credit crisis that has battered markets for months might be over.
Oil steadied after an earlier decline as supply concerns and the weak dollar countered expectations that slowing economic growth will reduce global demand this year.
GE shares slumped more than 13 percent, their worst decline since the stock market crash of October 1987. The conglomerate, viewed as an economic bellwether because of the range of its businesses, reported an unexpected 6 percent decline in first-quarter earnings and lowered its forecast for 2008.
…let’s remind everyone about GE’s predicament, in March I referenced:
For more than a decade General Electric Co. could easily avoid disclosing the value of its real estate and business loans. Not any more.
Since Jan. 2, GE has lost 45 percent on the New York Stock Exchange, mostly because shareholders are no longer willing to accept whatever the Fairfield, Connecticut-based company tells them about its finance subsidiary unless it’s based on so-called mark-to-market accounting rules.
The world’s biggest maker of jet engines and power turbines told shareholders last week that 2 percent of GE Capital Corp.’s assets are being valued based on market prices. The remaining $624 billion is being carried at levels that GE, the last original member of the Dow Jones Industrial Average, established in many cases years ago, according to CreditSights Inc.
“The notion of having 98 percent opaque and 2 percent valued with clarity is something that by its very nature would make investors nervous,” said Robert Arnott, founder of Research Affiliates LLC, which oversees $30 billion in Newport Beach, California and owned 481,201 GE shares as of Dec. 31. “Having some clarity on what the other 98 percent is worth is valuable.”
The simple conclusion that one has to draw when applying simple math is precisely what I wrote back then:
98% valued at fantasy prices, 2% at real world prices means that there is nothing but trouble down the road for GE.