Ford Still Financially Troubled Despite Q1 Earnings

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Debt ridden Ford Motor earned $2.1 billion in the first quarter or 50 cents a share. Mainstream media reported this as "another sign the economy is improving as people spend more on big-ticket items like cars". Unstated was which economy was improving or that those people were in China. Nor did any report mention that Ford stock has a negative book value of minus $2.32 per share.

What struck me immediately about Ford's 2010 Q1 earnings report was a major inconsistency with the Q1 earnings report for 2009. Ford lost $1.4 billion, or 60 cents per share in the same period last year. This implies that there were 2.3 billion shares outstanding twelve months ago. Based on today's earnings numbers there appear to be 4.2 billion shares outstanding. Ford did issue an additional 300 million plus shares of stock last May and exchanged $4.3 billion in convertible debt for 468 million shares of common stock in the first half of 2009. News reports in May 2009 indicated it had 2.9 billion shares outstanding before the new stock was sold. Today, Ford supposedly has 3.4 billion shares of stock. Off hand, I would say these numbers don't appear to match up.

It is quite amazing that Ford did not sink into bankruptcy, as did General Motors and Chrysler. From 2006 to the first quarter of 2009, the company lost $31.4 billion. Actions taken by Ford in 2009 though are helping the bottom line today. The new shares it issued at the time were used to fund VEBA, the UAW run health car trust, and this saved the company from using real money for this purpose. Ford also worked out an agreement with the UAW that allowed it to lower its labor costs by $500 million annually. At the same time, Ford managed to lower its interest payments on its substantial debt by $500 million a year with its debt to stock conversion. Fortunately for the company, Ford is making a good share of its profits from its credit unit (not from selling cars), which earned a net profit of $528 million in the first quarter of 2010. Ford has the Fed's zero interest rate policy to thank for that.

As for sales, there was a huge increase - in China. Ford reported an 84 percent improvement there. As for North America, U.S. sales did climb 37 percent over last years exceptionally low levels. Part of this is due to Ford's market share rising nearly three percentage points thanks to problems at Toyota. Total U.S. auto sales in 2009 came in at 10.4 million, down from over 16 million before the recession began. Ford still sees sales in the 11.5 to 12.5 million range for 2010. This is still substantially below pre-recession levels. Investors should also ask themselves how much of those extra sales are due to federal government policy. If this is a recovery, it's not much of one. 

Ford (F) stock was down more that 9% on its earnings announcement in morning trade. It fell as low as $13.15. That's still a pretty high stock price for a company with a negative book value.

Disclosure: None relevant.

Daryl Montgomery
Organizer, New York Investing meetup
 http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Cash From Clunk-Heads Program

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. Cash for Clunkers program seems to be working quite well in reviving the economy - not the U.S. economy, but the Japanese economy. The U.S. government program that uses taxpayer money to let people who foolishly bought gas-guzzling cars trade them in for newer energy efficient models is just another reward the losers, from the losers Credit Crisis program. Yesterday's trade deficit figures tell the story. The July deficit widened by a whopping 16.3% in one month. The reason for this huge increase? Auto and auto part imports increased by 21.5%.

A widening trade deficit is negative for GDP. Yesterday's figures knock down one of the three pillars of economic recovery that mainstream economists have cited for their prediction that the U.S. recession is over (almost 100% agree that the economy is recovering). Actually, they specifically said exports were increasing, which indeed was the case in yesterday's report (thanks to highly volatile civilian aircraft shipments). Unfortunately, imports increased much more. Even though this subtracts from GDP, the press managed to put a positive spin on it. One well known economist stated "This was a positive report in that it provides further evidence that both the U.S. and foreign economies are coming back." Something that makes GDP decline is good news for the U.S. economy? Since when? There is obviously no absurdity that the mainstream media won't publish.

Of course the stock market went up on this 'good' news. Cash for Clunkers is indeed reviving manufacturing activity within the U.S (manufacturing is only 20% of the commercial economy versus 80% for services). You can see the figures have improved the most in industries related to automobiles. What one hand giveth, the other is taking away however (as seems typical of Obama administration initiatives). Toyota and Honda have been the two biggest beneficiaries of the program. Once the program stops though, you can expect manufacturing to decline again until the U.S. government comes up with another stimulus program (and another ... and another). The third pillar of the economic recovery, rising homes sales and prices, is just not believable. Foreclosures keep rising, housing inventory keeps rising, consumer credit and income keep falling, yet people are rushing to buy homes and paying more for them? It's only likely in the fantasy land known as manipulated statistics.

The U.S. is not the only country engaging in economic stimulus, it's a global phenomenon (the British also have something they call a 'Car Scrappage Scheme' by the way - at least they used the word scheme so people know what is actually going on). The Chinese market had a big rally last night after China said industrial output, investment, loans and retail sales remained strong in August, "supported by colossal stimulus measures" (a quote from one of the news services). The world's economies seem to be following the Japanese model. In the last two decades, Japan tried to repeatedly revive its economy through stimulus programs. In some cases, quarterly GDP growth exceeded 10% on an annual basis (an enormous number). However, every time the stimulus was removed, the economy sooner or later sank back into recession. There is one major difference however. Japan entered its stimulus period in a strong financial condition, whereas the U.S. and Britain were extremely overextended at the beginning of the Credit Crisis. Our stimulus plans will have to be paid for by printing money.

NEXT: Gold Closes at Record High

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bailouts: It's Not Just Banks, It's Not Just the U.S.

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Videos Related to this Blog:
http://www.youtube.com/watch?v=h2f4XUpVINs
http://www.youtube.com/watch?v=UQieE8Ryvk0

While Ireland had to inject more capital into its major banks this morning to keep their financial system afloat (Ireland has a bigger subprime mortgage problem than the U.S.), today's bailout news concerns mostly non-financial institutions. Mega memory chip maker Infineon's mostly owned subsidiary Qimonda received government assistance so it could keep operating. Tata Motors had to inject money into its Jaguar Land Rover unit and is looking for bailout money from the UK. On our side of the pond, commercial property developers are requesting bailout money from the federal government. As for the bailout money that the U.S. has already provided to failing financial institutions, a just released AP survey finds many banks don't know where the money went.

The need for a bailout of a memory chip maker in Europe should come as no surprise. This industry has suffered from chronic overcapacity for years. Started in the U.S., the Japanese then dominated the business and they were followed by the South Koreans (and you should assume that China will be the major player sometime in the future). The German state of Saxony, a Portuguese bank and Infineon itself injected money into Qimonda. This is an attempt to save jobs in Saxony and Portugal of course. More money will be needed to keep this uneconomical operation going.

Uneconomical operation would be a good watchword for Jaguar Land Rover as well. Indian car company, Tata Motors, acquired Jaguar from Ford in March (what a brilliant purchase that was) and according to reports has pumped hundreds of millions of working capital into the company. It is now injecting 'tens of millions' to keep Jaguar operating and is looking to the U.K. government for bailout money to save the jobs of British auto workers. President Bush after all has just grudgingly provided U.S. auto makers with minimal bailout money to tide them over to the beginning of next year (when another bailout will be needed). How the inefficient auto producers can survive when even the best operations are struggling - Toyota announced its first loss since World War II last night - is a good question.

Trying to get in on the bailout gravy train, U.S. commercial property developers have sent a letter to Henry Paulson requesting assistance. The industry wants to be included in the government loan program created to prop up the the market for student loans, car loans, and credit card debt. The letter warns of a dire collapse in the commercial real estate market. Indeed this is likely to happen. Why the developers should be saved from their own greed and stupidity is not clear however. Perhaps the need to cancel their country club memberships and sell their private jets would just be too burdensome.

As for the money that has been spent so far in the 700 billion Wall Street welfare program known as TARP, the AP sent out a request to the banks that were recipients of the funds so far and asked them what they did with them. Some banks didn't know, none provided any answers. Should we be surprised? Congress attached nearly no strings on the $700 billion bailout in October and the Treasury Department, which doles out the money, never asked banks how it would be spent. Our stalwart representatives on Capitol Hill did summon bank executives last month and implored them to lend the money — not to hoard it or spend it on corporate bonuses, junkets or to buy other banks. But AP admits that there is no process in place to make sure that's happening and there are no consequences for banks who don't comply. New York Investing said all of this would happen before the bailout bill passed. Please see the videos listed at the top of this blog.

NEXT: East Meets West, The Trimuph of Communo-Capitalism

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Auto-Asphyxiation - GM, Ford Gasp for Bailout

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

No industry better symbolizes 20th century American commerce and culture than does autos. It was in the U.S. that mass production of cars were perfected by Henry Ford and the idea that the average person could own their own vehicle first took hold. It was widespread ownership of automobiles that allowed the post-World War II U.S. to become a suburban chain store nation. Now, the three remaining major U.S. auto companies no longer seem to be viable businesses and the implications are not just economic, but social and political as well .

The problems with the auto companies didn't just happen overnight, but first became evident in the 1970s. When oil prices started to soar, the American consumer turned away from the huge gas guzzlers that Detroit manufactured and the Japanese car companies with their fuel-efficient products gained major footholds in the U.S. market. Chrysler eventually needed a $675 million bailout in 1980 to continue operating. Detroit failed to heed the warning however and the lesson it learned from the events of the 1970s was that the government would bail it out if it messed up and it should try harder to get government restrictions and limitations on foreign imports. Auto industry lobbyists also subsequently did everything possible to overturn federal laws that mandated Detroit produce fuel efficient cars. So in the last ten years, this allowed them to saturate the U.S. market with low gas mileage SUV behemoths and pickup trucks. Now another completely predictable surge in fuel prices has taken place and the Japanese along with Korean auto manufacturers are there to pick up the pieces. An industry that has repeatedly lambasted government interference in its operations and used its political power to undo government programs that could have preserved its economic viability, now is begging the government to interfere by bailing it out.

This is not to imply that auto sales aren't hurting all around because of the economy - they are. Year over year industry sales were down 32% last month and while Ford was in line with a 30% drop, GM had a much worse 45% fall. Similar figures can be found for 1930, the first year of the Great Depression by the way (read that sentence again). GM has has been bleeding red ink since the end of 2004 with a total loss of $73 billion. Ford hasn't been much better off, but managed to report a surprise profit in the second quarter of this year. At that time the New York Investing meetup pointed out that this supposed profit was completely bogus, although the financial media trumpeted it with blaring good-news headlines. For a few days Ford's stock surged, but within weeks began to collapse. The low in Monday's trading was a $1.90 and GM had fallen to a new 50 plus year low of $3.02. GM stock dropped almost 25% on the day because it had announced that its 49% owned GMAC credit arm was likely to go under and its spun off part's supplier Delphi might not emerge from bankruptcy.

Bad earnings are not what forces companies into bankruptcy though. Running out of cash is what pushes them over the edge. By this criteria, GM is likely to go under sometime next spring and Ford might last a little longer. A massive government bailout for the entire industry is of course inevitable. The bailout actually started last year with $25 billion in loans in the 2007 energy bill and an additional $25 billion loan attached to a bill for funding for the Iraq and Afghanistan wars this September. Detroit now wants part of the Wall Street bailout bill money, although the Bush administration is hostile to this suggestion, so Detroit may have to wait until early 2009 to be saved from itself by the federal government.

NEXT: AIG - Bailing Out the Bail Out ... Again

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.