First quarter earnings season is in full swing and the landmines are already going off left and right. Expect more volatility in the days and weeks ahead as S&P 500 firms report how well they’re dealing with the ongoing credit crunch, and the recession that’s likely begun.
How the market and individual stocks respond to this tumult should be very telling about the near-term trend in share prices.
Of course blue-chip General Electric (GE) disappointed investors Friday, missing its first-quarter mark by a few cents. That triggered a cascading end of week sell-off that pulled the entire market lower.
Strong Emerging Market Results Can’t Save GE From the Clutches of the Credit Crunch
General Electric triggered Friday’s stock market rout, when it disclosed first quarter profits that fell a nickel short of expectations. The company blamed the short fall on unexpected losses in its financial service operations.
GE’s overall sales and profits rose, highlighted by a 22% jump in global sales, and robust emerging markets where the top-line soared 38%. However, GE’s finance-related businesses made up 44% of net income and 53% of operating profits last year.
As if GE weren't enough bad news, today, we got just the first of what’s likely to be many dismal reports from the bombed-out financial sector.
Wachovia (WB), the nation’s 4th largest commercial bank, reported a $350 million first-quarter loss. The bank also set aside another $2.8 billion in loan loss reserves
against more mortgage loan defaults.
That’s on top of the $1.5 billion in reserves Wachovia set aside last quarter.
The bank also slashed its dividend 40% and is looking to raise another $8 billion in equity capital... sovereign wealth funds and other distressed investors, please inquire!
NOT a Very Auspicious Start to Earnings Season
A report out from Goldman Sachs today says that corporate earnings are off to an “awful” start so far... no kidding! Goldman expects “generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower.”
As the credit crunch continues a familiar pattern is taking place. Wall Street is slow to recognize the obvious danger to corporate profits, and is failing to reduce forecasts accordingly.
This of course leads to the inevitable disappointment (see GE, WB) when actual results miss forecasts – sometimes by a very wide margin. The key financial sector is retreating again... testing the March lows. Stay tuned.
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