Ford Posts A Profit for First Time Since 2005

In comparison to the other American car companies, Ford has been doing well this past year. While GM and Chrysler have experienced declining revenue, Ford has enjoyed increased sales.

The cherry on the top of this automotive parfait is Ford's announcement today that they have posted their first annual profit since 2005. This profit represents a whopping earnings per share of 43 cents, handily exceeding analyst estimates of 26 cents. And all this without taking bailout money...

Clearly, Ford is doing something right.

More Good News for Ford

Ford Motor Company announced today that new car sales for July increased 2.3%. Most analysts attribute this jump in sales to the Cash For Clunkers program.

This assumption is somewhat dubious. The Cash For Clunkers is the government program that allows consumers to trade in a used car bad fuel efficiency for a new car with better miles-per-gallon and receive a rebate up to $4,500.

It is certainly true that this program has resulted in a binge of new car buying, but it is also reasonable to expect that the program should affect all auto companies in a similar way. It hasn't. While Ford posted a sales increase of 2.3%, rivals GM and Chrysler experienced decreases in sales of 19% and 9.4%, respectively. Even Honda, otherwise considered a healthy company, had its sales drop by 17% during the month in question. Here is a summary of July sales results:

• Ford +2.3% (the ONLY one with an increase!)
• Chrysler -9.4%
• Toyota -11%
• Honda -17%
• GM -19%
• Nissan -25%
  

So why is Ford benefiting so much, while the others aren't? At first blush, there are four possible explanations:

1. American consumers are rewarding Ford for refusing to take bailout money. By taking the high road, Ford has established itself as the last truly American car company, a family business that relies on its customers for its success, not handouts from taxpayers.
2. New car buyers just randomly picked Fords last month, signifying nothing.
3. New car buyers avoided GM and Chrysler because of the "stink of death" surrounding their bankruptcies. If this is the case, then we should see their sales improve as their survival grows more and more likely. Of course, this explanation is contradicted by Honda's poor performance.
4. Some other unobserved factor.
   

My humble opinion is that #1 played a significant role. Keep up the good work, Ford.

Hurray for Ford Motor Company!

Ford is my newest hero. Not only did they refuse to participate in the auto industry bailout, but they just posted a $2.3 billion profit for the second quarter. For the same quarter last year, they posted a $8.67 billion LOSS. Clearly, a big improvement.

Granted, the company is still experiencing problems. Revenue is down and is just now showing signs of recovery. North American operations are still generating losses. Ford expects to be back to permanent profitability next year due to its leaner and meaner organization, as well as consumer excitement over some of its new products.

Ford also appears to be gaining market share over its main US competitors, GM and Chrysler. This is likely the result of consumer uncertainty about the shaky future the bankrupt companies that are now being run by UAW.

It's also possible that many Americans are like me -- impressed by the one company that didn't take bailout money.

Fierce independence is an American value. It's right up there with baseball and apple pie. Americans are right to be impressed with Ford right now, and maybe that will translate directly into purchasing more Ford vehicles.

Throwing off the TARP

J.P. Morgan Chase & Co. recently paid back $25 billion in federal bailout money that it had received via TARP, thus ending its brief stint of indentured servitude to the federal government.

The difference is quite striking. Now free of its vow to "honor and obey," J.P. Morgan Chase has stepped up its criticism of government proposals to impose new regulations on the derivatives market that many in the financial industry see as short-sighted.

A quick primer on derivatives may be helpful. In financial markets, the word "derivative" refers to any financial contract the derives its value from an underlying cash instrument (such as stocks, bonds, currencies, or commodities). There are three basic types of derivatives: 1) Futures and Forwards, 2) Options, and 3) Swaps.

Derivatives have received a bad rap recently because of the collapse of many derivatives constructed from mortgage-backed securities when the real estate bubble burst. The fact remains that derivatives are, for the most part, a good thing. They help reduce risk in financial markets, not increase it. Financial managers of corporations use derivatives to hedge against future uncertainty, which results in smoother earnings over time.

This is the crux of J.P. Morgan Chase's complaint. The Obama administration wants to force ALL derivatives to be traded via a central exchange, similar to a stock market. This would allow regulators to easily monitor the entire derivatives marketplace. The problem with this approach is that a significant portion of derivatives are one-of-a-kind contracts specifically designed to reduce a specific risk in a specific company.

The central exchange approach would be a logistical nightmare. Even if it were technologically possible, it would put a massive damper on the custom derivatives market. The seemingly honorable intent of the Obama administration is to reduce risk in the financial markets, but by damaging the attractiveness of derivatives in this manner, the perverse result could be an increase in risk, not a decrease.

J.P. Morgan Chase holds approximately $81 trillion (yes, trillion) in derivatives contracts. Clearly, they have a dog in this fight. They also have a great deal of expertise, which is demonstrated by the fact that they have paid back their TARP money and will be posting a profit this quarter. They know what they're talking about in this particular area. Maybe we should listen to them.