Why GE's Miss Matters

At this point, everyone knows that General Electric (GE) badly missed its Q1 and revised downward its guidance for 2008. Although the stock's reaction to this miss may seem a bit severe, I think the stock could be the proverbial "canary in a coal mine."

Like many investors, I was attracted to GE when it traded below $40 a while back. My (less-than-foolproof) analysis suggested at the time that $37 was likely to be the low, given where expectations were on earnings. The "high concept" on the stock was easy to accept - weak dollar beneficiary, large global foot print to offset any impact from weak US, history of never missing, and so on. Analysts were even saying that the firm's financial segment was probably going to perform better than your average bank.

Despite all of these apparent positives, I demurred. In part because I could not quite get my hands around the financial services business and in part because "it just did not feel right." I know intuitive feelings about stocks may not be the most objective way to invest, but in the spirit of full disclosure, I think it's important to note that sometimes I just go with my gut feeling. It has served me well over the years.

What about the stock now? Not sure, but I will be reviewing my analysis work and will take a second look at it.

What about the market from here? I think GE's miss, because many thought it to be the "last safe stock" will be a reason for many to sell stocks ("If GE isn't safe, what stock is?" will be the argument). I think the market is likely to trade lower until investors can find a good reason to buy or the market's valuation becomes very attractive.

Although I do not make forecasts, I think the market will either hold the recent lows or fall below them (it's a tautological argument more than a forecast). If the market holds the old lows, we can once again enjoy the debate of whether or not the bear market is over. If the old lows are violated we must all contend with the bear market's continuation.

Comments

[sorgmot]

There is a 2 year period in the typical USA business cycle when many common stocks decline in price. This period usually follows a 4 or 5 year period during which stock prices rise for many stocks causing the stock averages to rise. The Federal Reserve Bank typically raises interest rates as the stock averages rise.

In the current business cycle, we expect the 2 year decline to run from October 2007 to October 2009.

To monitor this decline and see what it does to a diverse portfolio of common stocks, we set up such a portfolio in a spread sheet which measures the short portfolio gain by the amount of declines in the stocks therein.

To see this test portfolio visit our site at
financialtrax.googlepa...
and click the Portfolio (sample) tab
then click the next Portfolio (sample) tab.

This a an academic experiment and not a recommended investment.
See your own investment advice consultant before investing.