Wednesday, October 15, 2008

More Evidence of Abrupt Slowdown & GE comments

Retail sales fell off a cliff in September falling 1.2%, the largest drop in 3 years. Yahoo! Finance  Macy's hit a 13 year low last Friday after it slashed its earning outlook.  Yahoo! Finance  Over a month ago, a trucking company YRC Worldwide warned of a loss as economic weakness hurt volume.  This was certainly a sign of an abrupt slowdown starting in July and August.   That company is now trading under 5 after being near 60 in 2005.  Analysts have started to cut earning estimates for trucking companies further due to sluggish demand and the credit crunch.Yahoo! Finance  Fitch cut its rating of YRCW's further into junk yesterday. Yahoo! Finance

Late yesterday, a technology company Linear Technology warned that it sees a 10 to 20% fall in revenue during the next quarter due to a decline in orders. Reuters   Linear (LLTC)  fell almost 20% this morning to a new 52 week low. 

 Alcoa, the first Dow component to report for the September quarter, saw a 52% drop in earnings as the price of aluminum fell by 32%.Yahoo! Finance   After that report Alcoa (AA) fell to a 13 year low around 14 and it continues to fall, hitting 11.5 in early trading today down from a 52 week high of 44.77.  Deja Vu 1995. 

  There was a report from Avery Dennison in early September, another economically sensitive company, warned about its earnings for July and August. Yahoo! Finance 

 With the credit crunch and the massive losses incurred in the stock markets around the world, and the psychological impact that these recent events will have on purchasing decisions by individuals and companies, I would fully expect more bad news on the earnings front in the coming months and well into the first quarter of 2009.

GE may trade below 20 in the weak market today.  Deja VU 1997 on GE's current price.   I would urge everyone to read the recent article in Forbes about GE's last earnings release (October 27th edition at p. 42).  This article points out that GE's cash flow from its non-finance operations fell 20% in the first half of 2008 to 9.3 billion but that figure included 2 billion in dividends from the finance arm of GE.  When GE announced recently it would eliminate  its share buyback and dividend increases, it also announced that it would cut the amount of dividends paid by its finance arm to the parent.  Another large part of the cash flow for the first six months was an acceleration of progress payments made by customers to the tune of 2.9 billion.  The credit default insurance rates for GE debt reached $600,000 a year for every 10 million of debt insured which indicates a market opinion that GE's debt is not AAA but closer to B1.  The insurance cost for GE capital fell on the day of the huge stock market rally to 432 basis points or $432,000 for ten million of debt. Reuters I do not have any recent information on the prices for credit default insurance on GE debt.  Taken together with the ready acceptance of Buffett's onerous terms and the float of 12 billion dollars worth of stock near a 10 year low, all of this sounds disconcerting to me and more than a whiff of desperation by the largest industrial company in the world.  I will not add to my losing position until I have a much better feel about the long term prospects of GE.           see also,

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