PlexNex

GE Earnings Miss Highlights What?

General Electric's embarrassing earnings miss highlights what? Jeff Immelt's propensity to shift blame?

Digest ...

Francesco Guerrera & Justin Baer | "Shocking GE result ..." | Financial Times | 11 April 2008

The Lex Column | "Electric shock" | Financial Times | 11 April 2008

Francesco Guerrera & Justin Baer |"Embarrassed Immelt faces up..." | Financial Times | 11 April 2008

Yes, there's a weakness for shifting blame. But there's another, special American sickness -- the industry of Managed Earnings. Dialing in a penny or two above the "analyst guidance" is a habit which always comes back to haunt companies. It reduces volatility in the stock but projects a certitude of management control of the business that's an illusion, a lie; particularly in something as complex as an industrial conglomerate.

Note that Jeff Immelt pinpointed GE's inability to close asset sales between the Bear Stearns meltdown and the end of 1Q.

Fielding hostile questions from analysts, Mr Immelt said the collapse of Bear Stearns days after the webcast and subsequent market turmoil prevented GE selling real estate.

Although there were other writedowns attributable to bad financial assets, the remark suggests GE habitually relies on Extraordinary Items (a euphemistic accounting term of art), including asset sales, to hit the "whisper number".

This should be another wake-up call the investor class that NO ONE IS DRIVING THE BUS.

Jeff Immelt gets paid the big bucks to pretend. And this is pandemic across American business. This is so because investors crave the illusion.

ECONOMY: Retail Bankruptcies, Closings

I recently reviewed my electricity & heating bills through this past winter -- noting the imponderable increases (doublings in some periods versus past experience). The fleeting thought occurred that these costs are the same for every household in the North & Northeast. Not only that, energy price increases are percolating throughout the cost structures of the world economies. Prices will not be going down.

For me, heating & electricity bills have crowded out other expenditures -- clothing, food and particularly discretionary items like entertainment. How am I special?

Add to the impact on household consumption the tightening of personal & corporate credit and we have, dare I say, the perfect storm that is only just starting to bash retail as we knew it to bits.

Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.

Michael Barbaro | "Retail Chains Caught..." | The New York Times | 15 April 2008

Other chains, including FootLocker, are closing stores. The news highlights how intensely dependent upon credit are the store chains.

The impact is bound to hurt even the Internet retail segment (Amazon, et al.). But who do you think has the cost structure to weather this Depression? That's right, not bricks & mortar. Goodbye malls -- thank Goodness!

It will be a healthy, if painful, cleansing in which the landscape as well as household spending habits and house prices will normalize. They are being forced to normalize ... which is good. The trouble is the rapidity with which these behavioral changes are coming about ... which is difficult & debilitating.

What should a house cost? Three to seven times salary? Eight to twelve in special places, perhaps?

The crap that's still selling for $1 million shocks the sensibilities inchoate: balsa-wood door jams, vibrating floor joists & amateurish drywall installation. All the real estate agents I regularly speak with -- all of them -- remain in denial. In my area, they have been touting the reduced prices and reporting a flurry of new purchasing activity.

Hope be dashed. Gravity plays no favorites.

Prepare for Bad Earnings

Alcoa -- the third largest aluminum producer in die Welt -- is the first S&P 500 company reporting earnings, and it's bad news. First-quarter profits there are down 54 percent on high energy costs and week pricing from lower prices for commodity metals and the low dollar.

What will be most shocking in the weeks ahead is not just other corporate earnings releases but the more-realistic economic estimates that begin to factor the impact of higher current energy costs. The prices of oil and of rice and of wheat we pay today are largely based on old prices of goods in inventory. Costs of replacement goods have gone up since.

If you fathom what it costs farmers to keep large John Deere and Caterpillar machines running through a harvest and you factor current prices, the realization is scary -- food prices on the shelves up 10 ... 20 ... 30 percent from "normal". We will start to see higher food prices this summer and they will escalate through next Fall.

Save up, America. It's going to be bad.

Hedge Funds & Lemons

Martin Wolf today explicates why the hedge fund industry will not be around much longer.

"Why today's hedge fund industry may not survive" | Financial Times | 19 Mar 2008

In the piece, Wolf explores several important, if not new, market concepts having relevance to the fucked up fee structures of hedge funds:

The Taleb Distribution ...

"At its simplest, a Taleb distribution has a high probability of a modest gain and a low probability of huge losses in any period."

The Clawback ...

When a hedge fund manager must return prior fees to investors for subsequent failure to meet the return benchmark.

The No-Clawback ...

Greed.

Moral Hazzard ...

"...the systems of reward fail to align the interests of managers with those of investors. As a result, the former have an incentive to exploit such distributions for their own benefit."

The Lemons Problem ...

"... in this business it is really hard to distinguish talented managers from untalented ones. For this reason, the business is bound to attract the unscrupulous and unskilled, just as such people are attracted to dealing in used cars (which was the original example of a market in lemons). The lemons theorem states that such markets are likely to disappear."

These are problems which arise when certain activities are unregulated. I think it would be unfortunate if governments view the collapse of the structured finance and private equity sectors as a mandate to regulate the markets, but what alternative is there if in the unregulated spaces it should be impossible to distinguish merit from luck?

In Davos, Cutting the Stench of Fear ...

... as with a hot knife through butter was George Soros.

It was great to read Soros' comment in the FT about the housing bubble cum credit crisis -- hear again his unique & sagacious refrain on the price-reflexivity of markets ...

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral.

"The worst market crisis in 60 years" | Financial Times | George Soros | 22 Jan 2008

In this video, he spoke on 24 Jan to FT's US managing editor, Chrystia Freeland ...

Monoline Insurers

"This hasn't played itself out ... "

The Fed

"... in a panicky way ..."

"... hidden problems that haven't yet surfaced ..."

"... credit default swaps ["CDS"] which are very very large ..."

[What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market.]

Monoline bailout?

"... not feasible ... open-ended situation ..."

" ... the banking system cannot function properly and the longer this delay lasts the more likely it is going to affect the real economy."

"Once you use tax-payers' money you also have to regulate."

Fiscal & Monetary Stimulus

"... I don't think it will really work unless you clean up the system itself."

Moral Hazard

"This whole paradigm on which this global financial system is built -- the idea that financial markets tend toward equilibrium -- has to be abandoned."

[That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

He means that if you expect the markets to function properly, you cannot promise to bail them out every time "innovation" and compensation incentives get the better of common sense.]

Insolvency Problem

"I thought that the financial crisis would be solved by now ... the authorities know how to provide liquidity ... but don't know how to deal with this potential insolvency problem and that has progressed and has extended this financial crisis ... once the financial crisis is resolved, then you have the fallout ..."

FT: Summers' Stimulus | Roach's Motel

Larry Summers advocated a mix of both fiscal (tax policy) stimulus as well as our Greenspan-esque default, monetary (interest-rate policy) stimulus, to right the precipitous US economy in a comment in the pink pages earlier this week.

"Why America must have a fiscal stimulus" | Financial Times | 6 Jan 2008

Yesterday, Stephen Roach, Chairman of Morgan Stanley Asia, (the very best writer with a banking job) explained with mellifluous lucidity why the US dollar's weakness -- and part of our oil price problem -- is attributable to our negative savings habit. His proscription, that Washington should let asset prices (houses and common equities) find their levels (without supporting the banks and other notorious usurers), makes too much sense.

"America's inflated asset prices must fall" | Financial Times | 8 Jan 2008