Naeem Mohaiemen on Sat, 12 Apr 2008 12:26:09 +0200 (CEST)

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<nettime> "Violence to profit performance"

An interesting phrase used in reportage about this day of extreme bad
news for Wall Street:

"There's a violence to profit performance."

Also, as the world ever connects...

"At Tiffany & Company, for example, half of all sales are in stores
abroad, and 14 percent of all sales within the United States come from
foreign tourists...But United States companies may not be able to
count on the rest of the world for all their earnings growth. About
two-thirds of the money earned abroad by American companies is made in
Europe, and the housing market in several European countries has
started to suffer."

New York Times
G.E. Earnings Drop, Raising Broader Fears
Published: April 12, 2008

General Electric, which is widely viewed as a bellwether for the
economy because of its diverse operations, stunned Wall Street on
Friday by reporting sharply disappointing results for the first
quarter and creating widespread concern about the outlook for other

The inability of G.E. to sidestep current market forces underscores
just how broadly the credit crisis is spreading through the economy.
The company, which has businesses as varied as finance and jet
engines, has normally been able to manage weakness in any given
sector, making its surprise all the more worrisome.

The weakening outlook for company profits and a poor consumer
confidence report pushed the Dow Jones industrial average down by 256
points, about 2 percent, and the other major indexes had similar
declines. G.E.'s stock fell 13 percent, its biggest one-day loss in
two decades.

"G.E.'s results are telling us that we may have more bad news and
worse than expected in the economy," said Richard Tortoriello, an
analyst who follows G.E. for Standard & Poor's Equity Research. G.E.
also reduced its full-year profit projections, telling investors to
expect little or no earnings growth in 2008.

Investors have already seen an average profit decline of 20 percent
from the 32 companies in the Standard & Poor's 500-stock index that
have reported their first-quarter earnings, and they are particularly
worried about more unpleasant news from the financial industry.
Companies like Citigroup and JPMorgan Chase will report their results
next week, followed by numerous other companies.

The financial sector, which makes up nearly 20 percent of the
companies in the S.& P. 500, is dragging down the overall market,
analysts say, and the credit crisis now threatens other types of

About 160 companies from the index are expected to report over the
next two weeks, and analysts say that with the exception of the energy
sector, investors should be braced for more bad news.

"If you think of all the banks that were in trouble last quarter,
that's likely to move into the real economy now," said Tobias M.
Levkovich, chief United States equity strategist at Citi Investment

Financial stocks are likely to be among the biggest disappointments.
Analysts are predicting they will report sharply lower first-quarter
earnings, an estimated 64 percent below the same period of 2007,
according to Thomson Financial Services. Lehman Brothers, Goldman
Sachs and Morgan Stanley have already reported their earnings, and
they all took write-downs on their investments. In total, financial
institutions have written down more than $230 billion in mortgage
loans and other assets since the credit crisis began.

But defaults on other sorts of consumer loans, like credit card and
auto debt, have been soaring since late last year, and those loan
losses may surprise investors, analysts said.

If G.E. is any guide, even the unsuspecting may be caught up in the
credit crisis. G.E. was once a large subprime mortgage lender but sold
that business in October.

On Friday, the company reported net income of $4.3 billion for the
quarter, or 43 cents a share, down from $4.57 billion, or 44 cents a
share, in the period a year earlier. Analysts had been expecting about
51 cents a share in net earnings, and the company had projected profit
of 50 to 53 cents a share. Its stock finished down $4.70, at $32.05.

While the company continued to post strong results in areas like its
global infrastructure business, aircraft engines and energy equipment,
the performance of its financial services business pulled down
profits. The company also had difficulty smoothing its results through
various asset sales, including real estate, and consumers were buying
fewer of its famous appliances.

"It does show how the credit turmoil extends out to very well-managed
companies like G.E.," said Deane M. Dray, an analyst with Goldman
Sachs who downgraded the stock to neutral on Friday because of the
sizable earnings miss.

While some of the weakness in demand was predictable, analysts say
what particularly troubled them was management's admission that it had
been surprised by the severity of the credit crisis, having reassured
analysts just a few weeks ago that it expected to meet earnings
expectations for the quarter.

"We had planned for a difficult environment," Jeffrey R. Immelt, the
chairman and chief executive, told investors Friday morning. "We had
planned for an environment that was going to be challenging, but what
I would say is kind of late in the quarter, particularly after the
Bear Stearns event, we experienced an extraordinary disruption in our
ability to complete asset sales and incurred marks of impairments."

Other companies, especially those with financial units that have not
been in the public eye, may similarly startle investors, analysts

"What other companies might have the same financial issues that the
market hasn't recognized yet?" asked Timothy M. Ghriskey, who oversees
investments at Solaris Asset Management, an investment management
group in Bedford Hills, N.Y., that does not own shares in G.E.

Wall Street has, in general, been overly optimistic about earnings
over the last two quarters, although analysts have lowered their
estimates in the last three months. But there is a growing divergence
between what analysts think will happen with company earnings and the
more negative outlook by economists, says a recent Goldman Sachs

The Goldman report predicted that many companies will lower their
earnings estimates for the year during their coming first-quarter
earnings calls — saying this would be a "profit recession" along with
an "economic recession."

In fact, companies' earnings typically drop more than the gross
domestic product during recessions, said Robert Barbera, chief
economist at ITG, an investment and research firm.

"Corporate profits exaggerate economic momentum," Mr. Barbera said.
"There's a violence to profit performance."

Consumer discretionary spending is already weakening. While retail
companies report their earnings later than other industries, spending
at discount stores like TJ Maxx and Aéropostale will be closely
watched. Luxury retailers have benefited from foreign sales. At
Tiffany & Company, for example, half of all sales are in stores
abroad, and 14 percent of all sales within the United States come from
foreign tourists, said Brian J. Tunick, a retail analyst at JPMorgan

But United States companies may not be able to count on the rest of
the world for all their earnings growth. About two-thirds of the money
earned abroad by American companies is made in Europe, said Mr.
Levkovich, the Citi analyst, and the housing market in several
European countries has started to suffer.

It is not only the consumer spending cutback that is expected to hurt
profits. As companies produce fewer products, many of the goods they
create will become more expensive per unit. Companies are already
reducing the amount of goods they keep in inventories, which adds to
expenses. And, of course, rising fuel costs harm all companies that
ship goods.

While analysts say they were surprised by G.E.'s earnings
announcement, some say the company's difficulties are not all that
shocking, given its range of businesses that tend to mirror the ups
and downs of the economy.

"G.E. isn't immune from that," said Daniel Rosenblatt of Marble Harbor
Investment Counsel in Boston, which owns the stock. "It's hard to get
away from the really big macrotrends."

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