Monday, April 14, 2008

What to make of GE

Superficially, the "bad" news from GE was quite a "shock", but I am not convinced what GE's "news" really tells us about the rest of the market and the economy. Wall Street is famous, or I should say infamous, for trying to find correlations betweens any and all forms of data, such as which companies are "bellwethers" for the economy. Sometimes those correlations work, sometimes they don't. Worse, sometimes they work really well for extended periods of time and then simply stop working with no advance notice. That is what is so maddening about correlations and attempts to use them as substitutes or surrogates for causality.

You didn't need to be a rocket scientist to realize that GE's finance business would be at risk due to Wall Street's "credit crisis." Nor that its home appliance business would suffer from the housing downturn. As the New York Times put it in an article by Reed Abelson and Louise Story entitled "G.E. Earnings Drop, Raising Broader Fears":

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.

There was good news there as well: "the company continued to post strong results in areas like its global infrastructure business, aircraft engines and energy equipment."

The Times alerts us to another distinction of GE from typical industrial companies:

G.E. was once a large subprime mortgage lender but sold that business in October.

As the Times also tells us, GE's results were also somewhat of a surprise even to GE itself:

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.

The real bottom line is that understanding conglomerates is very tricky business, and the very notion that any single company is a reliable indicator of the rest of the entire U.S. economy is preposterous on its face.

I personally have not done a detailed breakdown of GE's revenues and profits, so I do not know what GE's results tell us about even any single sector of the economy.

So, for now, GE's results really only tell us... how GE did in its most recent quarter. End of story, even if Wall Street wants to stretch it out beyond its rational limits.

-- Jack Krupansky


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