January 16, 2004

More "Stealth Financials"

Hat-tip to August Cole at CBS.marketwatch for this story showing that two big industrial giants are making most of their money as financial companies, not as manufacturers. It's a point I made in the Housing Report I just finished. A lot of economic activity in corporate America is now leveraged to low interest rates and the huge market in Freddie Mac and Fannie Mae bonds. Cole says (emphasis added), "The finance operations at both companies have been a cornerstone of their profitability. Fueled by the housing boom, General Motors Acceptance Corp. and Ford Credit can be expected to be the most profitable units. In the prior quarter when GM beat Wall Street's profit expectations, the finance operations of more than $600 million. The worldwide auto operations earned just $34 million." In a page from the playbook of the bizarre, GM's Q3 earnings were 79 cents a share, down from $1.57 from the previous quarter. Yet shortly thereafter, the stock rallied from $43.55 to $53.90--largely on the strength of the news that GM had cleaned up its underfunded pension mess. Wall Street is looking for GM to come in with EPS at $1.26 per share. That sure WOULD be an improvement over 79 cents. But it doesn't really bother anyone that the finance arm is making 17 TIMES MORE MONEY than auto operations? If you think GM is bad, check out Ford's most recent quarterly filling. I've excerpted a piece of it and posted it, with highlights. You can find it here. But if you want just the facts, try this on for size...in the nine months ended September 30, 2003...97% of Ford's pre-tax income came from its financing operations NOT its automotive operations. Here is a company borrowing money to lend to its customers so they can buy its cars. It counts those loans as assets...but it must borrow money to extend the credit in the first place. That...or buy a mortgage-backed bond and use the proceeds from American homeowners to lend to American car buyers.....does it get any more bizarre? If a rise in interest rates precpitates a default on mortages...GM and Ford lose income on their bond portfolios...and probably lose monthly payments from car buyers (after all car buyers and homeowners are the same person...the American consumer.) It's all come down to interest rates now.... Do either of these dogs deserve to be taken out back and put out of their financial misery? Well....Wall Street has taken them both out to the woodshed in the last few years. But on a shorter-term basis, you can see from the chart below that when GM cleaned up its pension mess....investors sent it well above its 50-day moving average. At $55, it may have run out of gas...


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