Well, where’s there to go when the stocks you thought were safe havens, turn out to be infected with the virus of recession and contracting margins?
That’s what American and other investors are asking themselves after the giant General Electric stunned investors on Friday on both sides of the Atlantic with a very poor profit and US consumer confidence was shown to be at 26 years last seen when Ronald Regan was President.
It was one of the defining moments of the current turmoil in markets: General Electric had been seen as a safe haven, a solid defensive stock, in the wake of difficult times in markets after the rescue of Bear Stearns a month ago.
Investors took heart from GE’s statement in early March that it was looking to a 10% rise in earnings in 2008. Nothing like that will now happen after Friday’s report.
US shares fell 256 points, or 2% on the Dow while the Standard & Poor’s 500 Index had the worst fall for five weeks.
European shares reversed gains after GE’s report while Asian markets look set for a big tumble today after they finished up on Friday for the second day in a row. They had closed before GE’s results were released midway through Friday evening.
GE shares fell 13%, the most in two decades after reporting a 12% drop in first quarter profits because of failed asset sales and a bigger than expected 19% plunge in profits from its finance business, GE Money.
The shares of other industrial giants like Honeywell and United Technologies, which were also seen as safe haven defensive stocks, also dropped sharply: industrial shares had their biggest fall since 2001.
Our market could be down around 80 points, or 1.5% this morning. That’s after a 3.2% fall last week that was softened by a small fall on Friday amid some late optimism.
That optimism will be undone not only by Wall Street’s flop, but by the news that Virgin Blue’s earnings will be sharply lower, while the 62% shareholder, Toll, has decided to hang on because it can’t find a way of realising the value it sees in the airline.
The S&P 500 sank 27.72 points, or 2% 1,332.83 and lost 2.7% over the week, The Dow average tumbled 256.56, or 2%, to 12,325.42 and Nasdaq dropped 61.46, or 2.6% to 2,290.24.
GE’s results capped the first week of an earnings season that is projected to mark the third straight quarter of declining profits. Alcoa was first off for the big groups and it reported earnings that trailed estimates; leading chipmaker, AMD said first-quarter sales fell short of forecasts and announced big job cuts, and then United Parcel Service (UPS) dropped its 2008 earnings estimate because of higher fuel prices and a weakening economy.
Adding to the pressure was the Reuters/University of Michigan preliminary index of confidence among American consumers which fell to a 26-year low of 63.2 in April on the worsening jobs market and high oil and petrol prices.
That was the latest in a number of surveys last week which showed worsening confidence levels in Australia, New Zealand, Britain and several other smaller economies.
GE also cut its previous $US2.42-a-share 2008 profit forecast, which CEO, Jeff Immelt was had called "in the bag” in December and had repeated on March 13, to as little as $US2.20 a share. That cut shocked markets as it means no real growth in earnings this year. That supports the contention of many analysts, including those from the IMF (but possibly not the Fed) that all of 2008 and into 2009 will be a tough, hard slog for the US economy, consumers and government. Some analysts see a first half slowdown and then a rebound in the second half. GE’s earnings forecast says, that’s not going to happen.
Goldman Sachs Group Inc. cut GE to "neutral,” saying the company’s surprise profit decline raises "credibility concerns.”
GE’s tumble wiped out almost $US47 billion in its market cap ad investors realised the underlying message from GE’s figures and forecast was that the US economy is worsening.
Its underperforming NBC Universal TV and movie business actually lifted earnings by around 4% and stood out: the company had been under pressure to get rid of it because it was not performing!
Claims earlier in the week by US banks like Goldman Sachs and Morgan Stanley that the worst was over and things would be picking up, were exposed as the self interest claptrap they seemed by the GE result and a frank admission from the Chief Financial Officer of Lehman Bros, that the global credit crisis worsened last month and the recovery for the sector might not now come until next year.
Bloomberg quoted Erin Callan as saying: "March was a very, very tough month.” I don’t see what the real catalyst for change would be over the next several months. We’ve got to look out to 2009 for where we’re going to change.”
CIT Group Inc, America’s biggest commercial finance company trying to escape a cash squeeze, fell for a fourth day in a row on concern that earnings may be worse than forecast. It has been slashing staff, cutting business and is accessing credit lines to keep in business.
European stockmarkets fell after the GE news, to close lower and end a two week’ advance.
The Dow Jones Stoxx 600 Index fell 2.6% on Friday and is now 22% down on the June 1 high last year.
Bank analysts forecast for the first time that European companies’ earnings will shrink this year.
National benchmarks fell in 16 of the 18 western European markets. Germany’s Dax slipped 2.4%, while France’s CAC lost 2.1% and London’s FTSE 100 dropped 1.2% after being up 0.9% after a strongish day in Asia.
Asian markets will play catch up today in reaction to the GE news and big falls in Europe and the US.
The MSCI Index was little changed for the week following a two-week rally which saw it rise nearly 7%.
Japan’s Nikkei added 0.2%, extending a three-week, 8.6%. Th
