Two Important Lessons from GE's Earnings Drop

By: Money_and_Markets

Tony Sagami writes: In 1896, General Electric was one of the original 12 companies listed on the newly-formed Dow Jones Industrial Average. After 112 years, GE is the only original company remaining in the Dow.

So when one of America's most respected — and largest — companies announced that their quarterly profits fell well short of expectations ... and warned that the rest of 2008 wasn't looking so hot ... I perked up.

And you should, too!

Here's why ... after carefully analyzing this multi-national conglomerate's quarterly report, I believe there are two important lessons to be learned.

Lesson #1: GE's Earnings Miss Points to Slowing U.S. Economy

GE has rarely missed its profit targets, but it delivered an unexpected 6% drop in first-quarter profits last week, mainly from sub-prime writedowns at its financial services division, but also from an overall economic malaise.

After 112 years, General Electric is the only original company remaining on the Dow.

Profits were seven cents below expectations. Before you write that off as a small number, keep in mind that GE has almost 10 billion outstanding shares!

7 cents X 10 billion = a mountain of money!

More importantly, GE warned Wall Street to tone down expectations for the rest of 2008. The company now expects to make $2.20 to $2.30 a share this year, well below the $2.43 consensus Wall Street forecast.

Those numbers mean that GE's profits will grow a measly 5% at best. And at worst, they won't grow at all. According to the company's CEO, Jeffrey Immelt,

"We are not counting on the business getting any better, vis-à-vis ... the U.S. consumer. We have actually allowed for a worsening of the U.S. consumer in our GE Money business. So I think that is the way to think about the U.S. and the U.S. economy."

Last week's numbers tend to support Immelt's argument. The University of Michigan consumer confidence index dropped to 63.2 in April, the lowest number since 1982.

If GE and American consumers are right, and I sure as heck think they are, the bulls are dead wrong that the worst is behind us. In other words, there's a lot more downside risk to U.S. stock prices!

All the GE news wasn't horrible though. One very bright spot was the news that orders at GE's infrastructure division increased by 12% and the backlog of business ballooned to $3 billion.

"Demand for our global infrastructure business remained strong," said Immelt.

What he is trying to say is that ...

Lesson #2: Business is Awesome in Asia, Especially in China!

GE hasn't stumbled onto a business secret. Just about every multi-national CEO will sing a similar song — business in the U.S. is decelerating while business in Asia is very, very strong.

The latest economic numbers from China prove it.

China's trade surplus for the first three months of the year grew to $41.6 billion.

 The Chinese number crunchers released their updated, final GDP numbers for 2007, which they revised up from 11.5% to 11.9%, the fastest pace in 13 years. Instead of slowing down, the numbers show that the economy is accelerating ... not slowing down.

 China's trade surplus for the first three months of the year grew to $41.6 billion, pushing its war chest of foreign reserves to $1.68 trillion, a whopping 40% increase from a year earlier.

So while there is plenty of talk about a U.S. recession, there isn't any debate about China and its Asian neighbors continuing to grow like weeds.

With that in mind, you may want to take a look at ...

How to Adjust Your Portfolio Accordingly

I don't know about you, but I'd much rather hitch my investment wagon to a car going 200 miles an hour than a car that is rolling to a slow stop. I think that is exactly the way to evaluate U.S. stocks and international stocks right now.

Of course, that doesn't mean you can blindly throw your money at the Chinese market. For example, I wouldn't touch Chinese banks, the majority of Chinese state-owned-enterprises (SOEs), or any ETF or mutual fund that is loaded with them.

Why not Chinese banks? Their balance sheets are stuffed with non-performing loans that will never get repaid and are ticking time bombs.

Why not Chinese SOEs? They're companies run by Communist Party leaders for the benefit of the Communist Party. Need I say more?

What I would look at instead are Chinese companies that are being run by the new breed of aggressive, industrious, and opportunistic Chinese entrepreneurs who are busting their backs by working 100 hours a week to grow their companies and enrich their shareholders.

If you've been a reader of my Money and Markets column, you've seen me mention those companies over and over again. Companies like English school giant New Oriental Education (EDU), the Century 21 of China, E-House (EJ), and travel king Ctrip.com (CTRP).

Look, GE just gave you a clear summary of what to expect in the coming years — trouble in the U.S. but great opportunities in Asia. It only makes sense to adjust your portfolio accordingly.

Best wishes,

Tony

P.S. I wanted to let you know that, starting this afternoon, we will be sending you another regular weekly edition of Money and Markets . Every Tuesday at 3 PM, my colleague Nilus Mattive will tell you about his favorite investments and strategies, including income opportunities and dividend-paying stocks. It's just another way for us to keep you informed about all corners of the investment universe.

So be sure to watch your e-mail inbox for that new weekly issue every Tuesday afternoon ... starting today!

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