Vince Farrell of Scotsman Capital-Verbatim

I thought this worth sharing with you. Used with permission.

From: vince farrell
Sent: Friday, April 11, 2008 1:17 PM

Let's deal with some other news before we get back to a GE discussion.

The International Energy Agency (IEA) lowered its forecast for 2008 oil demand by 460,000 barrels a day to a growth of 1.3 million barrels compared to last year. The reduction is due to falling demand in the U.S. due to the economic slowdown. They expect demand in China/India to be such that the price of oil will not come down. While I am a long term bull on the price of oil, weakness in the U.S. will spread to the emerging markets and to think otherwise is naive.

Import prices rose 2.8% last month which is the biggest increase in a long time. Much of it is due to the high and rising price of oil (of which we import a lot), but rising food costs and the seeming insatiable demand for imports in the U.S. will make it difficult for the dollar to strengthen.

Good news came in the form of bad news yesterday. The Fed had one of its periodic auctions that was recently introduced. They offered $50 billion in liquid assets for $50 billion in illiquid stuff owned by the banks. Only $34 billion was taken. The auction "failed", which is really good. It means that liquidity is returning to the marketplace without herculean efforts by the Fed.

The punishment being handed to GE common stock goes beyond a miss in earnings. The company fell short of estimates by .07 cents and it looks like .05 of that came from financial services. Without delving too deeply into the details, this is an area that has sunk many companies recently. (Appliances and health care accounted for the rest of the miss.) It's ok to miss estimates. Well, maybe not ok, but it happens. The big issue here is that management affirmed earnings guidance in early March. The Bear Stearns debacle then hit and the planned sale of some financial assets didn't occur due to the markets being frozen for financial transactions.Thus the nickel shortfall. Again, that can be ok, but management needed to get the news out right away. Don't ever surprise and embarass the Street. Credibility has taken a big hit.

I believe this is an exceptionally well managed company, but they are going to need to prove that. GE's stock is down since Jeff Immelt took over while the S&P is up some 20%. A lot of executives who live for stock options are going to be recruitable.

Also, management lowered their estimate for the full year by more than the first quarter miss. It could be they are being ultra conservative and will under-promise but over-deliver. Or, it could be that business is weak beyond this quarters issues. I like the price of GE for new investment (I already own it) but I don't like the timing. There are questions that will take some time to be answered.