Friday, April 11, 2008

Et Tu, General Electric?

You know things are bad when even General Electric, the epitome of a stable and safe company, reports falling profits. Although this decline has occurred mainly in its financial unit, it is noteworthy that even its non-financial units are doing surprisingly bad. This is particularly true as more than half of General Electric's profits come from operations outside the United States, profits that is boosted by currency effects. For example, as the euro is up 16% compared to year ago levels, the dollar profits of General Electric's European operations will be up 16% even if the profits in terms of euros are unchanged. With that in mind, the weakness of General Electric's profits is ominous.

This bearish report comes after several other similar reports, from for example Alcoa and AMD. This indicates in turn that coming profit reports during the rest of the reporting could come in weak too, which of course would be bearish for stocks.

6 Comments:

Blogger Wille said...

You have a point, although I would object to the point of any conglomerate being a "stable and safe" company in the long run - the big conglomeratisation of the 60'ies and 70'ies was soon reversed, as businesses became unfocused and unwieldly.

The fact that GE hasn't gone the same way can be put down to a large extent to it's aggressive internal culture of accountability nurtured under Jack Welch, but I am generally suspicious of the long term sustainability of large, diversified conglomerates, so it remains to be seen for how long GE will be able to defy the gravity that brought so many of it's 60'ies and 70'ies peers back to ground with a loud noise.

5:44 PM  
Anonymous newson said...

have you any comment on this comment, appearing on your "monetary reserves..." blogpost at mises.org? (ge doesn't enter into it, sorry).

fusgerm says:
"By the same reasoning, MZM should also include all lines of credit extended by a bank, since they too grant a claim to money from the bank on demand. They too reduce the beneficiary's demand for cash-holding. The only difference is that, when exercised, they give rise to a loan incurring interest, rather than to a reduced deposit earning interest. Examples are the undrawn balance on a home equity account, demand-deposit overdraft, or bank credit-card. (Credit from a non-bank credit-card is included indirectly via the card-company's line of credit with its own bank.)"

6:15 PM  
Blogger stefankarlsson said...

Wille: historically General Electric has seen its profits rise steadily with declines in profits happening only rarely, which is why it is significant (Or actually there is another reason why it is significant, namely the fact that GE has the second biggest market capitalization of American companies, after only Exxon Mobil).

Newson: I agree that credit lines (the unused part of it) should be regarded as money. A credit line means in effect that have borrowed the entire amount up to the credit limit, only that you keep some of it in a bank account. The unused part should be regarded as money for the same reason as you would regard cash held by a borrower as money if he withdrew the entire amount available through his credit line and held it as cash.

That they should be regarded as money is thus clear to me. I am however unsure to what extent they are regarded as money in current monetary statistics. At least some of them probably are. I personally hold a credit line which in effect functions as a regular banking account only it has two sums. One indicating my net debt or net holdings to the bank, the other indicating the disposable amount. It seems likely to me that monetary statistics would treat the disposable amount as money.

8:34 AM  
Anonymous newson said...

to be clear on this: you believe that mzm may already be calculated to incorporate undrawn lines of credit?

8:57 AM  
Blogger stefankarlsson said...

Yes.

9:44 AM  
Blogger flute said...

Since the first reports of this period were bad, it could also mean that expectations for coming reports are lowered, so even if the coming reports are bad too, it might not sink the stock markets very much, since the damage is already done. E.g. GE's bad report pulled down most stocks worldwide on Friday, which I assume means lowered profit expectations.

10:13 PM  

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