General Mills (GIS): What the FDA’s Warning Means for the Market

“The FDA warned General Mills that some health claims made for Cheerios cereals violated the law, heaven help us! I had seen a squib about the FDA’s criticism the day before, didn’t think much of it. Right on the top left. Key area. Fabulous real estate. And I figured, okay, I own General Mills for my charitable trust,, and I am going to be in for a really, really long, brutal day.

I figure the stock opens down at least a buck, as cheerios is a huge product for General Mills and the heart health claim may be one of the biggest differentiators for consumers when it comes to choosing which cereal to buy. When I saw the stock index futures plunging before the opening of trading I started thinking it’s going to be even worse…Thrown to $50.50 from $53.50, where it went out the night and you know what happens? General Mills opens virtually unchanged and then proceeds to rally. To rally. That, ladies and gentlemen is when the alarm bells went off in my head…

… This is an important product. Instead, it received no more than a glancing blow. Down 19 cents at the end of the day but up for much of it. Oh, sure, that’s a triumph for General Mills and the oh, sure, that’s a tragedy for cheerios, but it’s a tragedy for 90% of the market. And it is deeply worrisome you see, if General Mills is holding its own and the rest of its cohorts, the Pepsi and the Mercks and the J&J’s are all up, as they were on this hugely down day, then the market is saying it’s screaming something.” CNBC’s Mad Money Recap on Wednesday, May 13, 2009.

What is Jim Cramer saying here? Well, first of all he was surprised by the lack of an effect the FDA’s warnings had on General Mills (GIS). As he mentioned, after the FDA’s announcement General Mills stock took a huge hit in premarket trading, but as soon as the trading day began General Mills was right back to where it had closed the night before. The stock actually traded the rest of the day around even, as the rest of the market plunged. Furthermore, other generally defensive names such as Pepsi (PEP), Merck (MRK), Johnson & Johnson (JNJ) were all up on Wednesday.

Cramer believes that this is a major signal that the market is turning to more defensive stocks in anticipation of a possible downtrend. Could this be a sign of a reversal from the huge rally over the last ten weeks? The first three days of the week were down, as the economic data has not shown the improvement that many had hoped they would. It is still too early to say that the green shoots of growth have gone away, but there is mounting evidence that the rally has run out of steam.

We will hold back our conclusions until we have more evidence from which to base our opinions, but we were skeptical that this rally was the beginning of a V-rally. We have thought for sometime that the necessary economy wide deleveraging was going to confine corporate earnings to some extent for at least the next few years. Long term performance of the market is driven by earnings, and the pace of the rally seemed unsustainable based on the earnings trends. There is no telling what the future holds, but at least the beginning of the week was a signal that the recent rally had gotten just too hot.

“In the short run the market is a voting machine. In the long run it’s a weighing machine.”–Benjamin Graham

What the FDA’s Warning Means for the Market

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