Yesterday saw a slight bounce off those short-term support levels that I had mentioned, but remember these are NOT a place to get long but rather flat with gamma (and thank GOD for that – because today will be NO picnic!). The pop was on very light volume as well – which is NEVER a good sign of a recovery or that we are moving into bullish territory – rather the opposite. It seems that while people continue to debate whether we are in a recession or not, or how long it will be if we are or will be in one is now falling on deaf ears. Things are just tough all over and it’s time we stop trying to label it and just hedge against those issues.
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GE – bringing bad things to light!
The world’s bell-weather company has taken a serious blow today. The company is involved in lots of market segments, but if we break them down into the two biggest it’s about 40% financial services and 40% construction – the additionally own NBC and have a health care sector as well. The financial services sector is taking it on the chin (with write-downs and drops in revenue) – the construction side is a little more complicated because it is involved in several areas – however their appliance unit has seen drops in sales in the double digits (something they have not seen in over 25 years) – clearly showing a slow-down in consumer spending. I guess buying a new washer-dryer is not on people’s minds if the housing market is not booming.
The bright spot was global growth in emerging markets – and they are strategically working on increases revenue in that vertical space – but it is NOT enough to off-set losses in other construction related areas. Additionally – they had some internal problems in the healthcare unit – as a factory has been shut down for over 18 months – with no signs of revenue. Unfortunately – that is mudding the waters as to how the healthcare would of faired if operating on all cylinders.
The CEO had expected a 10% growth for 2008 and in the conference call (and CNBC interview) lowered estimates to 0-5% for 2008 and said things are slowing down and the US consumer is weak. GE is unique in that it is positioned to expand in the global markets – which is something they will have to focus on – if the US consumer market continues to see little to negative growth. He further stated that in the last couple of weeks (in March) after the Bear Stearns derailment – that they had not expected – has seriously curtailed revenue in the financial unit – that makes up 40% of their business. I personally don’t put too much weight in that statement – I don’t think the slow-down in that last 2 weeks of March (alone) was the reason for serious short falls in revenue. I think it was probably a mounting problem for the whole quarter and while the last 2 weeks and Bear Stearns did create a problem it can NOT be solely blamed for that.
This is a serious story on several fronts.
1st it clearly shows that the credit problem (financials) is still run amok and is looking to continue to have issues.
2nd the U.S. consumer spending has seriously slowed – if GE is seeing double digit drops in revenue in their appliance division.
3rd the $50 billion dollar inventory back-log on equipment has a significant cost of carry – and they need to reposition themselves to move units globally.
4th the CEO is NOT saying things are going to get better – but instead has lowered the entire YEAR forecast by 50%
No doubt this are complicated and difficult times – GE is going to have to take some quick tactical action to expand heavier on the global market side to make up for short-falls in revenue here in the US. Their financials have suffered mark-to-market write downs (but not as bad as others) – the dollar is helping and hurting them. Helping them in overseas sales, hurting them on domestic sales.
If GE (the leader) is facing slow-downs, write-downs, and expecting slower growth in the US economy – what do you think their rivals are facing.
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Washington Mutual – downgraded to FLUSH – by Goldman
WAMU is looking at EXPANDING losses for the entire year for 2008 and we have just gotten out of the first quarter. Goldman went as far as recommending it a SHORT SALE – that is really sticking it to them. This is going to put serious stress on WAMU as they need MORE money to keep positions solvent not LESS money. You can be SURE that people are withdrawing their money at a record pace after the Goldman downgrade to “FLUSH” status. That is going to put MORE stress on the company and also the shares.Expect this to trickle across to other banking sectors that are in similar positions.
This comes on a day when GE is announcing seriously bad news – is not going to be any better for the banking sector. This is a one-two punch for the markets today!
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Futures Pre-Market
The futures took a blow after the GE news but now is really getting the crap knocked out of it in the pre-market with Goldman taking a full-round house swing at WAMU. Several sectors are going to see pressure. The futures are front-running the cash by a wide margin at this point – so expect the ARB to buy in futures and short the basket – which will put even MORE stress on the stocks at the opening.
We might over sell in the morning – but how much can we really bounce today?
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Support / Resistance
Yesterday’s rally off the short-term support was on weak volume and was never a place to get long. We will test and probably break down through the short-term supports today on the back of the seriously bad news .
INDU 12250 / 12500 (While we did close above 12500 and I did say it was short-term support – it is probably going to BE the resistance after the opening. It will be interesting to see if it can close above 12500 – but don’t bet the farm on that. If you did get FLAT at 12500 yesterday and were able to unload more deltas at yesterday’s close (from your gamma) you will have a great day today.)
NDX 1800 / 1850 (We are still at the resistance areas and have big volatility in the over weights – but it’s time to revisit the 1800 level. Get flat there and have gamma.)
SPX 1325 / 1350 (Again we closed above 1350 yesterday – but I think by the end of the day that WILL be the new resistance. Expect to close below 1350 today – mark that as the new resistance.)
RUT 680 / 720 (Watch the broader market for money flow – we will probably close below 700)
I cannot see a reason to close strong today – we had a rally on very light volume yesterday (maybe waiting for GE to be the catalyst for how we move forward – good or bad). Expect downside and a rise in volatility
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Conclusion
We had be living up in the resistance area for over a week. Volatility dropped and people started “hoping” that Bear Stearns was the mark of the end. We put the first quarter behind us – as if that was it and now we can move forward on the road to recovery. But stock prices are not indicative of the economic picture we live in – it is simply a short-term gauge of perception. The fat lady is still singing and nothing has changed. Oil is still above $100, housing prices are still dropping, the jobless are increasing, the dollar is sliding, and commodities are rising – why should Bear be the signal of the end?
The GE news today is bad – there is no way around it and you just cannot spin it into “hope”. The CEO is saying the U.S. consumer growth has seriously dropped and they have lowered expectations from 5-10% to 0-5% - that is 50% drop in expectations no matter how you slice it. Then Goldman comes out and lands the knockout blow to WAMU (which they probably deserve) we could see a run on withdrawals (which I expect will ramp) which will further put them behind the 8-ball. That is exactly what happened to Bear Stearns in the weeks leading up to their demise (they saw withdrawals in the $100s of millions in the weeks leading up) – I would guess that could be the catalyst for a WAMU failure if they can NOT get more needed capital ASAP. We are talking the world’s largest Savings and Loan company – the shocker is that Goldman said “SELL SHORT!!!!” That is like saying FLUSH THEM DOWN THE TOILET!
I don’t think the 1st quarter was the bottom of these problems – we could very quickly revisit the lows.
If we DID see a massive rally out of this – expect it to be short-covering and short lived – do NOT by the hype!
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