Friday, April 11, 2008

Consumer sentiment, GE profit warnings send DOW down 250 points

Looks like today was not a good day for Wall Street with the DOW dropping over 250 points. From MSNBC News:

NEW YORK - Wall Street stumbled Friday after a disappointing first-quarter report from General Electric Co. surprised the market and stoked concern about the health of both corporate profits and the wider economy. The major indexes fell more than 2 percent, with the Dow Jones industrials giving up more than 250 points.

A weaker-than-expected reading showing consumer confidence at a 26-year low subdued any positive sentiment.

GE, which is regarded as a bellwether of big business, said its financial-services divisions have been challenged by the slowing U.S. economy and difficult capital markets. The company, whose orbit extends into entertainment, consumer and industrial manufacturing, finance and health care, also lowered its projections for the entire year.

The conglomerate is one of the early companies to post first-quarter results and its shortfall stirred worries that others still to report will paint a similarly dreary picture. The smaller-than-expected profits from GE injected anxiety into a market that earlier this week saw disappointing results from aluminum producer Alcoa Inc. and a warning from chip maker Advanced Micro Devices Inc.

“The market really is focusing on the extent to which problems in the credit markets are spilling over into the real economy,” said Brian Gendreau, investment strategist for ING Investment Management in New York.

The Dow fell 256.56, or 2.04 percent, to 12,325.42. GE was by far the steepest decliner among the 30 stocks that comprise the Dow. Its shares dropped $4.70, or 13 percent, to $32.05.

Broader stock indicators also registered sizable losses. The Standard & Poor’s 500 index fell 27.72, or 2.04 percent, to 1,332.83, and the Nasdaq composite index fell 61.46, or 2.6 percent, to 2,290.24.

The Russell 2000 index of smaller companies fell 19.26, or 2.72 percent, to 688.16.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 1.26 billion shares compared with 1.28 billion shares traded Thursday.

So what exactly happened here? General Electric got caught in the housing and financial meltdown. The bean counters at GE were projecting earnings of around $2.42 a share from its operations for 2008. However, they did not expect a 5 to 10 percent decline in the financial services department, which ended up lowering GE's outlook for earnings to between $2.20 to $2.30 a share. Wall Street analysts were expecting GE earnings to come in at $2.43 a share. General Electric CEO Jeff Immelt claimed that the financial services deteriorated due to a combination of "the near-collapse of Bear Stearns," and a "continued shutdown of a Salt Lake City medical manufacturer that contributed to a 17 percent decline in its health care business." Immelt also blamed these financial disruptions late in the quarter for GE's inability "to advise Wall Street in advance about the deterioration in its earnings." The issue here is that General Electric was caught with their pants down. GE didn't know how much of a hit they were going to take due to the financial meltdown--a meltdown caused by the subprime mortgage crisis and the housing collapse. And as a result, General Electric lost almost $47 billion in market value.

Wall Street investors were not just shocked at GE's less-than-stellar earnings report. They also had to deal with more eroding consumer confidence as well. From MSNBC News:

U.S. consumer confidence fell to its lowest in more than a quarter century in early April, diving deeper into recessionary territory on heightened worries over inflation and jobs, a survey showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said its preliminary index of confidence fell to 63.2 in April from 69.5 in March. This was well below economists' median expectation of a reading of 69.0, according to a Reuters poll.

The April result is the lowest since March 1982's level of 62.0, when the "stagflationary" period of low growth and high inflation was still fresh in the memory of many Americans.

"There have only been a dozen other surveys that have recorded a lower level of consumer sentiment in the more than 50-year history of the survey," The Reuters/University of Michigan Surveys of Consumers said in a statement.

"Persistently high food and fuel prices as well as rising unemployment have caused consumers to view their future financial prospect more negatively (than) any other time since 1980."

The report showed its reading on one-year inflation expectations jumped to 4.8 percent -- the highest since a similar reading in October 1990 -- from 4.3 percent in March.

Five-year inflation expectations rose to 3.1 percent -- the highest since December 2007 -- from 2.9 percent in March.

The index of expectations for personal finances fell to 97, its lowest since April 1980 when it was 94, from 112 in March.

The index of current personal finances fell to 87, its lowest since November 1982, when it was 85, from 93 in March.

Consumers are expecting very bad economic times to hit the U.S. for this year. The consumer confidence level fell to almost the level of March 1982, when Americans were feeling the effects of stagflation during the late 70s to early 80s. What are Americans feeling today? High food and gas prices, increasing unemployment, and a slowing U.S. economy--stagflation!

Now a good economy to have during an election year, with the GOP under Bush controlling the White House. No wonder the Bush administration is praying for Americans to happily spend their tax stimulus checks so that the economic day of reckoning takes place after Bush leaves office.

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