Well the futures were off to a good start until GE lowered guidance.
GE lowered its earnings guidance for the third quarter and the full year on Thursday and suspended its stock buyback plan, saying "unprecedented" weakness and volatility in the financial services markets has weighed on its GE Capital segment. We already knew they were going to cut back commercial lending (thanks Cap) and steps they are taking, including suspending the stock buybacks, are aimed at maintianing the company's golden AAA credit rating.
The company is maintaining the dividend of $1.24 per year, which is about 5% on the current stock price but Q3 profits have been guided down more than 10% as has the full-year guidance, down from $2.25 to $2 in the middle of the range. "Given the recent dramatic developments in the financial markets, we have made some tough decisions to further reduce risk and strengthen our balance sheet while maintaining our dividend," said GE Chairman and CEO Jeff Immelt in a statement.
A company retooling in difficult times is no reason to tank the markets and, as we were just discussing yesterday in member chat, GE is 50% a financial company and they are projecting to make 85% of the profits they anticipated, not taking losses like most of the sector but, in this environment, investors are prone to sell first and ask questions later, which is a good opportunity for the brave long-term investor. At the beginning of this quarter, with guidance at $2.22 for the year, the stock was trading at $30. With guidance now confirmed at $2 it seems that a $23 price on the stock may be a little oversold (the same price it last was in 1997 and just after 9/11). The December $26 calls I liked on Monday at $2.75 can be rolled down to the $23s for just over $1 and those or the Jan $23s are a great way to play for progress on the bailout package.
Speaking of the bailout, things seem to be going well and we are told to expect something to be signed this weekend, which would be an amazing accomplishment considering the vast scope of the plan. As we discussed in last night's post, the issue is so important that McCain and Obama issued a joint statement saying: "Now is a time to come together – Democrats and Republicans – in a spirit of cooperation for the sake of the American people. The plan that has been submitted to Congress by the Bush Administration is flawed, but the effort to protect the American economy must not fail."
Meanwhile, the SEC is investigating more than two dozen hedge funds as it ramps up its investigation into whether traders were spreading rumors to manipulate shares. The broad investigation, which was announced Friday, is part of an effort to crack down on rumor mongering and abusive short selling, which some believe contributed to the collapse of Bear Stearns. The new order requested detailed and extensive information about transactions conducted between Sept. 1 and Sept. 19, when certain financial markets came close to freezing up, threatening the broader economy. The requests include details of funds' positions in stocks, derivatives, swaps and other financial instruments, as well as when trades were initiated and settled and whom they involved. This could get very interesting…
Internationally, the Nikkei opened 250 points down but finished the day down "just" 100 points while the Hang Seng drifted slightly lower despite the fact that the Shanghai gained 3.6%, fueled by State-owned China Unicom buying up shares of it's China Untited Telecom on the exchange as well as continued expectations of government support for the market. Several brokerages went 10% limit up on rumors that China will likely launch margin trading and short selling soon but many doubt they would take that risk in such a volatile market.
Japan had a very shocking trade deficit for August, the first non-holiday deficit since November 1982, when there was a brief trade war between Japan and the US. "The reason for the deficit is quite clear: the global economic slowdown — particularly the U.S.'s — curbed demand for Japanese exports," Economy Minister Kaoru Yosano said at a press conference. "So that doesn't mean the Japanese economy is gravely ill…I can't tell right now if more economic stimulus steps will be necessary by the end of this year." During August, U.S.-bound shipments fell 21.8% from a year earlier on weaker demand for cars, automobile parts and fuel, the data showed.
Despite very poor Business Confidence numbers, the Dax is trading up 1.7% (8:30) and the FTSE and the CAC have turned sharply higher as well as word seems to be spreading that Congress does indeed intend to pass a bailout package by the weekend. Criticism of the US is rampant across the globe. "This crisis shows that markets need rules and somebody responsible to watch over them," said a German Social Democrat legislator. "We were right to keep certain things, such as mortgage loans, more tightly regulated."
Back in the US, the fallout continues as 493,000 Jobless Claims were filed last week but those too were affected by the hurricanes (perhaps 50,000 claims were storm-related). Overall, claims were up 32,000 for the week vs. expectations of a 5,000 job improvement. The tally of continuing claims, those drawn by workers collecting benefits for more than one week in the week ended Sept. 13, jumped by 63,000 to 3,542,000. That's the highest since October 2003, suggesting it is getting even harder for the unemployed to find new work.
Durable Goods were off 4.5% from July's surprisingly good number, which itself was revised down from up 1.3% to up 0.8%. Analysts were expecting down 2% so this is disappointing to say the least. Stripping the number down to non-defense and non-aircraft, we did come right in at down 2% and it's possible the government shifted some spending patterns as the financial crisis snowballed. Overall, it was a terrible report though and shows how quickly a lack of financing can begin to hit other parts of the economy.
It's all about what Congress does this week. We may indeed have had our Buffett Bottom this week at 10,800 on the Dow and 20 on the XLF but it's going to be tough to go too long into the weekend without something signed, sealed and delivered that makes some serious progress towards improving the outlook of the financial sector. So far, every rally has been sold into as the inability to take offsetting short positions has turned everybody into day traders.
