Saturday, April 12, 2008

General Electric (GE) gets hit by an earnings miss

From GE investor relation: GE announced first quarter 2008 earnings from continuing operations of $4.4 billion with $.44 per share, down 8% from first quarter 2007.

As they say, "the market has a paddle big enough to give anyone a spanking". Nothing could be more fitting when the second largest company in the world by market capitalization (eclipsed by XOM due to the recent rise in crude). GE is down a whopping 14.66% or 4.70 to 32.05.

Not long ago, Jeff Immelt all but promised 15% growth this year. GE hasn't missed a quarter in years and even when it did in 2003, the miss was a penny. A 7 cent miss is huge for GE.

This is another example of the long tail of equity pricing. Stock prices do not follow a normal distribution; they have long tails. This is also known as Taleb's Black swan theory. Every options trader should be very comfortable with the idea that substantial moves happen more often than predicted by models. Such rare events is what makes naked options more dangerous than the statistics would predict.

Now back to GE. Industrials were strong due to currency and rest of world demand. Appliances down due to housing crisis. Financials down due to mark downs. Healthcare down due to lower demand for capital diagnostic equipment. None of this is surprising, per se. I don't know why analysts didn't bring down estimates.

I was slightly long GE before this (long the stock, selling calls against). I see this as an opportunity for me to pick up for shares for a great price, 15x trough earnings. I am selling at the money puts for June and September. The options markets are not increasing the implied volatility. This is bad since it means I get less time premium. This is good because it says that options traders are optimistic. Either way, I am reserving extra capital to handle a dip (since I am at the money) and in case of a volatility spike (since IV is low).

No comments: