- The Washington Times - Saturday, April 12, 2008

Corporate giant General Electric Corp. stunned Wall Street yesterday with a sudden drop in earnings that showed the widening credit crisis and economic slump is reaching even the healthiest U.S. businesses.

GE’s stock plunged the most in 20 years and helped drag the Dow Jones Industrial Average down 256 points after the company reported a 12 percent decline in first-quarter profit — its first in five years — and dim prospects for the rest of the year.

While GE’s international infrastructure-building business was strong, the company encountered unprecedented difficulties selling financial assets in the United States.

“The financial services environment was very difficult and became even more difficult late in the quarter,” said Chief Executive Officer Jeff Immelt, who only weeks earlier had assured investors of earnings growth of at least 10 percent this year. He cited the March 16 collapse of Wall Street giant Bear Stearns Cos. as the reason for the company’s woes.

“Particularly after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales and incurred marks of impairments,” he said.

GE is one of only five AAA-rated corporations worldwide, and its troubles accessing the credit markets underscore how seriously broken the credit system has become.

“It fuels the debate on how deep a slowdown we might be facing,” since even the top-rated corporate credits are now encountering problems, said David Ader, bond strategist with RBS Greenwich Capital. The stock market’s reaction also was “reflective of the ongoing skittishness around near-term economic prospects.”

GE’s sudden trouble selling credit-card assets and its profit drop to $4.36 billion from $4.93 billion a year earlier did not endanger its gold-plated ratings. Standard & Poor’s Corp. said it still expects “GE’s broad business and geographic diversity to allow for continued generous free cash flow alongside a strong financial profile and adequate capital.”

The difficulty of selling assets that were securitized from the GE’s credit-card business shows how the credit challenges have spread from the mortgage market to other consumer sectors. Anticipating trouble, GE was looking to sell the credit-card business but did not get out in time.

“They were not able to foresee the weakness in the U.S. consumer to the extent they should have,” said Richard Hoffman, analyst at CreditSights Inc. GE’s shares plummeted 13 percent to $32.05 in New York trading, wiping out $47 billion in value for shareholders.

Some analysts said the pothole GE hit was caused not only by credit difficulties but the conglomerate’s far-flung businesses on nearly every continent, spanning such industries as entertainment, health care, consumer goods and industrial manufacturing.

“That diversity looks rather like a recipe for mediocrity as declining financial earnings offset infrastructure successes,” said Rob Cox, analyst at Breakingviews.com.

“Immelt’s ability to maintain GE’s model is compromised,” he said.

But others said the unexpected roadblock GE ran into means trouble for stock investors who have assumed that financial troubles will remain concentrated in banks and Wall Street firms most exposed to the credit crisis. They say the depth of the economic woes has been underestimated in many sectors, from retail to recreation.

“There are grounds to believe there’s another drop in the market yet to come,” said Michael Mandel, economist with Business Week. “The reason: a broad decline in consumer spending, which so far has been masked by a quirk in the government’s statistics.”

While consumers themselves have been signaling deep distress — most recently yesterday with a further plunge in the University of Michigan’s consumer sentiment index to a 26-year low — government reports on consumer spending still appear to show growth because they include such things as government spending on Medicare and Medicaid, a form of “consumer spending” that most consumers are not even aware of, Mr. Mandel said.

Taking out such false readings of consumer health, he said, out-of-pocket consumer spending has been in decline since last fall, especially when adjusted for inflation, he said.

“Combine that with a rapidly unraveling job market, high energy prices, and the continuing credit crunch, and you have the recipe for a drop in consumer stocks. A big decline there could take the rest of the market down with it,” Mr. Mandel said.

The financial markets are likely to see turmoil until 2010 as investors struggle to understand its cause, said Blackstone senior managing director John Studzinski at a Reuters summit in London.

“This year is going to be fraught with data and denial,” he said. “Next year a lot of industries are expecting difficulties, particularly more on the consumer side.”

A major reason the market downturn will be prolonged is it will take a long time for banks and financial firms to sort out their losses on the complex structured securities that are behind the credit crisis. Then, the financial sector will take time to consolidate and restructure, he said.

“You’re not going to be looking at any type of restructured market on the financial services side, or the lending side, emerging until maybe 2010,” he said. “This is going to be more protracted than people perhaps wish it to be.”

PROFIT SHOCK

General Electric Co. yesterday reported its first quarterly decline in profits since 2003.

Quarterly net income, in billions of dollars

2007

Q3 $4.603

Q4 5.379

2008

Q15.539

Q26.696

Q34.304

Source: Bloomberg News


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