| MARKET ROUNDUP | |
| Dow | -70.48 to 16,912.11 |
| S&P 500 | -8.96 to 1,969.95 |
| Nasdaq | -2.21 to 4,442.70 |
| 10-YR Yield | -0.03 to 2.462% |
| Gold | -$3.10 to $1,300.20 |
| Crude Oil | -$0.79 to $100.88 |
Mike Larson, Money and Markets columnist and editor of the Safe Money Report, is out today. Mark Najarian, the managing editor of Money and Markets, is filling in …
If you’d been living on another planet the past couple of years, you probably wouldn’t be surprised that the U.S. and Russia are involved in a war of words, or that there doesn’t seem to be any peace in sight in the Middle East, or by the recent technological and Internet advances.
But what might have shocked you is the relative health of the U.S. automobile industry. A few years ago, General Motors was forced to take a government bailout to avoid bankruptcy. Ford Motor Co. just barely was able to fight off collapse without taking public money. And Chrysler filed for Chapter 11 and went through a series of owners until Italy’s Fiat took over.
Now to the present. … GM and Ford recently reported second-quarter earnings. While they weren’t spectacular, after having a few days to dig deeper into the data, analysts are seeing the numbers as evidence that the companies appear to be on a solid road to full recovery.
(DISCLOSURE: The author has a small personal holding in Ford shares and has had for more than 20 years.)
Ford in its second-quarter earnings posted a 6 percent rise in net profit to $1.3 billion, or 32 cents a share, up from 30 cents a share in the year-ago period. Excluding some “separation” costs in Europe (mainly layoffs in the U.K. and Greece) and a charge for its unprofitable venture in Russia, it made 40 cents a share, beating the 36 cents forecast by analysts.
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| Stripping out costs related to recalls, GM’s second-quarter earnings met analyst expectations. |
But, in a good sign for its biggest market, Ford said it had a record pretax profit of $2.4 billion in North America. It actually had lower vehicle sales, but lower materials prices and increased parts and accessories sales helped boost the results. Its operating margin in North America rose to 11.6 percent from 10.6 percent a year earlier.
And in an encouraging sign for future growth, it reported strong sales in China. Overall in Asia, its earnings rose 22 percent to $159 million. Not massive but a good rise given the massive potential in the region.
At GM, on the surface, at least, the numbers might sound troubling. It said second-quarter profit fell 85 percent to $190 million. But it also said that costs related to recalls — nearly 30 million vehicles — cut $1.5 billion from the profit number.
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“Dig deeper into the data, analysts are seeing the numbers as evidence that the companies appear to be on a solid road to full recovery.” |
GM said it’s confident those costs will drop to more normal levels going forward. Of course, there have been comments from the company in that vein previously only to later announce more recalls, so caution is key here. Still, without one-time items, GM would have had earnings per share of 58 cents, meeting analyst expectations.
The “underlying strength of GM is quite amazing,” Michelle Krebs, senior auto industry analyst at autotrader.com, told Bloomberg TV. “GM would’ve had an outstanding quarter if not for the recall costs.” She added that consumers were not being frightened off by the media reports of recalls and are still buying GM products.
Mandeep Singh Rai, a senior analyst at Weiss Research, agreed that the U.S. auto industry appears to be on a sustainable uptrend.
“Auto sales have been rising,” he noted. “The automakers have been able to turn around as aging cars — which are less efficient and don’t have updated technologies — are being traded in for newer, more efficient models with better fuel economy and those that are less in need of repairs, as well as cars that have satellite radio, Bluetooth and other higher-tech offerings.
“On the heels of those favorable tailwinds,” he added, “as well as a bankruptcy wakeup call for GM and Chrysler, and low interest rates for buyers, Detroit has been able to repay government money, increase sales, run leaner as a product of cost-cutting efforts, and increase margins and profitability. And, for Ford and GM, distributions have been reinstated — allowing for shareholders to have sizable returns from capital appreciation and dividends.”
To be sure, there are risks going forward — the strength of the U.S. and global economic recovery, the speed of interest-rate rises, the bad will created by recalls, etc. So nothing is certain going forward.
All this brings us to the question of whether the policy of bailing out the auto industry was the right one. GM has repaid the government and now is on its own; Chrysler, now under the arm of Fiat and called Chrysler Fiat Automobiles, has recovered from its near-collapse and could be headed to a U.S. stock-market listing, although it, too, has been hit recently by large recalls; Ford narrowly avoided taking government money but benefited from the implied government promise to help the industry.
What’s your view? Looking back, should the government have stuck to a strict interpretation of capitalism and let the automakers go bust? Or do you see the U.S. industry, and all the jobs it provides, as too big to fail? Would you invest in the automakers or a Chrysler Fiat IPO? Let us know your views by putting your comments here.
| OTHER DEVELOPMENTS OF THE DAY |
 Pay up: A study out today shows that more than one-third of Americans are delinquent on their debt. The Urban Institute, which studied the credit files of 7 million Americans, said that 35 percent of them have debt in the collection process. A debt normally goes into collection after 180 days of nonpayment. Taking the averages out to the full population, it would mean that 77 million Americans have debt in collections, owing $5,200 each.
Check back tomorrow for our editors’ reactions to the GDP figures coming out premarket. Remember, you can comment on these stories or any others by clicking here.
Best wishes,
Mark Najarian
P.S. On June 25, our Top Stocks Under $10 team saw the potential for renewed growth in China and picked out a stock that had been lagging the market. Since then, the stock is up more than 35 percent. To learn more about the Top Stocks Under $10 service, click here.
(Mike Larson’s regular afternoon column will return Friday.)
{ 26 comments }
If the Banks are to big to fail because of what they mean to the US economy, then
US Automakers are just as much too Big to let fail because of what they mean
to the overall US economy, it just made economic sense to preserve this very important
Sector of the US economy.
Bailouts, geez I wish the far reaching arms of a coddling government would reach a bit further and bailout my little co in times of need, but alas I have no one to cajole or offer payola in order to achieve same. Bailouts are anti-capitalist it sustains business models and industries that otherwise would die off through progress! As much as I loves my Cadillac Escalade EXT it has been old faithful for many years, I just saw a new Tesla in the showroom and must say that I hope Tesla wipes the mat with all of them! If you cannot compete you die that was the way I was raised this world has gone cockamaimie! Go gettem all Tesla!!
Before you thunp your chest to hard, please remember that Government Motors recalled something over 22MILLION cars in the past year and a half. Thjis whole group would be down the tubes if it wasn’t for our billions of tax payers money.
I am concerned that you can honestly suggest that the US auto industry is in a fundamental recovery. This analysis is, indeed, superficial, at best and I expect better from the Money and Markets report. All the automakers have done is leverage credit to unimaginable levels – 30-50% of all new auto loans are subprime, no money down and 72 months to repay are the common terms of all new car sales – and you suggest that this gross expansion of credit constitutes a sound business model to invest in? If any of your readers are so inclined to invest in any US automaker, I strongly urge them to consult with the former bond holders of GM who were wiped out in the bail outs. I’m quite sure they have learned the lessons of government largesse done in the name of saving the economy
Hugh: Thanks for this. I was hoping someone would bring this issue up so I wouldn’t have to!!
As a GM bondholder whose bonds were rendered effectively worthless, I’d still buy America as long as the car is made by Ford. The likelihood I’d consider buying GM again is miniscule, particularly since my last car, a Saturn Aura has had two safety recalls GM should have gone thru a real bankruptcy and paid off their obligations as the law provides. The company has engendered a lot of ill will as a result.
We know that the US government had done more bailouts than publicly reported. There is a good chance that Ford also received bailout money, but kept a secret, so that we might not loose too much faith in Capitalism. (i.e. think of how much the “confidence” in Capitalism would be shaken if EVERY major US auto make were know to have needed Taxpayers money to survive.) The truth is, what we are seeing in the US and around the World is more and more “State Capitalism” (i.e. bailouts from taxpayers money) in an attempt to “save Capitalism from itself”. There WILL be more and more bailouts (i.e. State Capitalism) in the future because “true” Capitalism is ultimately an UNSUSTAINABLE economic system and would continue to “rot on it’s feet” in ever part of the globe, while reserve banks desperately trying to prevent a total collapse of the system.
As Socialism is ultimately unsustainable and bitterly disliked by most.
In less than two years…mid 2016…the auto industry will be in turmoil. Why because interest rates will cripple most credit related businesses. Am I wrong…could be..no one has a lock on what will happen, but I’ve been at guessing game for over 80 years..
Granteds, the Big Three made some mistakes in the last 30 years BUT..our nations “Free Trade” policies of allowing ANY CAR MFG in the world to come to this nation, subsidized by states that would and did “Do Anything” to get them contributed to financial problems of Detroit.It was NOT bad cars…it was NOT the UAW…it was our nations political leadership that destroyed the BIG THREE.Every car sold by Honda, Toyota..et al was one less car that Detroit was going to sell. SO…it was only appropriate that in their time of need Washington was there to help…there was no one else or no other entity that could do it. AND in my opinion it would have been a long term disaster for the people of this nation to GIVE the American automotive industry to the Japs on a silver platter..
Well.. “true” capitalism also means “free trade” (no unnecessary protectionism). Just like how the USA wants to have the McDonald’s franchise in EVERY country in the World (and which is obviously to a big benefit to the USA), in the same way the Japanese would like to sell Honda and Toyota in every country in the world (and to the obvious big benefit to Japan) – right? A truth that most people seem not to be aware of is that “true” Capitalism ultimately brings feverish competition – which ultimately brings trade/financial wars – which INEVITABLY brings imperialist (arms) war. IF you are not aware that “Capitalist Imperialism” was the root cause of WW1 and WW2 (i.e. wars forth to gain/control more resource and/or world market share), then you will not be aware that “true” Capitalism will eventually bring about WW3 (because every “national capital” ultimately wants to dominate the World – as this is the only way to “guarantee” survival in a world-wide Capitalist system).
Unfortunately or fortunately, depending on your location on the Pacific Ocean, the Japanese were making better, more fuel efficient and forward-thinking cars.
I have been a GM and Chrysler owner for over 60 yrs. But with this bailout, the Unions and automakers were prevented from taking the necessary decisions necessary to serve the buying public. I never owned their bonds but my father sadly did not listen to me and held on to his GM stock. Of course AIG and other money changes should NOT have been bailed out with our tax money. Why? Look at the economy now! Lowest number of Americans working and almost 50 million on food stamps. Demos and Republics both are to blame. Yes, my next auto or truck will not be GM or Ford or Chrysler.
You know how the American system,( or used to)work,sink or swim.But to let your motor industry go,it would put 40-50,000 with suppliers out of work if not more,and think of the workers taxes to the Gov.Now think of the Bankers, some how I feel we have all been screwed.
The auto industry is not to big to fail? This misinterpretation is that to big to fail means going out of business. There are bankruptcy laws in this country that would allow these companies to continue to operate while they go through the process. Just like every airline in this country has been through bankruptcy and never have missed a flight.
This was completely a political sham to show this administration is for the working people and let the bond holders know laws do not matter because the Obinator says so. Politics and votes are King while laws can be a inconvenient.
why are you so concerned about helping union people to make a living? automakers received peanuts compared to wall street BIG banks. NOBODY seems to remember golden parachutes to execs who almost bankrupted America. What is 25 billion to automakers compared to a trillion to connected wall street and politically connected? automakers PAID BACK.
What is unseen and unacknowledged in all of this is what “could have been” if the law in place had been followed, instead of the bailout path chosen by this lawless President. The bondholders would not have been defrauded, and GM would have reorganized as a new entity without the underlying problems of unaffordable union pensions and health plans. This reorganized GM could have modernized plant, invested heavily in exciting new designs and cost effective, high reliability, high quality construction, and perhaps come out the preeminent auto manufacturer on the planet. Perhaps it could have led a renaissance for the now defunct city of Detroit. The point is, that because of unlawful Government intervention, and Obama choosing his “friends” in what should be a free market, we will never know how good it could have been.
This reeks! First lie is that the auto makers paid the government back, just not so. Next, look who is buying these crappy GM cars, the Federal Government is the single largest purchaser of GM, then you have all the broke people buying cars on flimsy loans, what could go wrong there??? As to saving jobs, GM is building new plants in China, not the US and surprise, Fiat is building Chryslers in Italy and else where.
GM and Chrysler needed a bankruptcy not a bailout! Bond holders needed to be repaid, not union pension and health plans. Believe me, smart people would have snapped up the viable pieces of both GM and Chrysler and life would move forward, leaving the unproductive and failed in the dust, instead of the average tax payer picking up the costs for this mess, which by the way, is still to be paid. GM out of the woods??? No way!!
kcg
Competition is essential for capitalism to work properly.
True capitalism would ensure that competition guarantees that no business could ever reach the stage of being too big to fail.
In a true capitalist world, failure of a supposed TBTF corporation would benefit its competitors, resulting in an eventual trickledown effect to the masses.
The problem is that some large corporations have lobbied (bribed) politicians to regulate
in order to protect their overgrown interests.
It’s a win, win – for TBTF business and corrupt, incompetent or irresponsible politicians.
For every winner someone has to lose – guess who?
Crony capitalism (fascism) is an entirely different scenario and its ill-effects are obvious.
History records that monopolistic capitalism can become exploitative, that is why unfettered competition is essential.
True capitalists thrive on competition and on growth.
Honest growth can only be provided by the masses who see benefit in the produce of true capitalists.
Only governments (regulators) can provide fertile grounds for honest capitalists.
If the playing field is designed to favour one end then blame government.
If representatives elected to government are incompetent, corrupt or irresponsible then blame the electorate.
The electorate gets what it deserves.
If the banks are too big to fail and the car industry is too big to fail, what about steel or chemical or any other industry? Are we saying that only small Mom & Pop businesses should be allowed to fail? If that is true then US Industry is one large government owned, controlled and run business. If we believe that in a Democracy it is the right and responsibility of all citizens to vote (hopefully intelligently), and since all politicians want to be re-elected, who’s job will they agree to eliminate?
If a failing business model exists it should be allowed to fail and be replaced by a better one. The risk of failure made me run my business conservatively so as to protect it and the jobs it provided, including mine. Should there be no penalty for failure? If so, what fosters progress?
Lastly, remember that the US Government bailed out Chrysler in the late 70’s and then Daimler Benz bought them in ‘98, then the US Government bailed them out again in the 2000’s and now finally Fiat bought them. Not a very good track record for this business model.
The United States of America is a Democratic Republic not a Socialist Country!
In my opinion there are no U.S. companies that are “too big to fail”. If a company knows that no matter what they do, whether they are profitable or not, that the government will always bail them out, then where is the incentive to do their best? If you and your co-workers knew that you would always have a job regardless of your performance do you think everyone would still work hard? Where is the incentive for certain companies in the U.S. to make excellent products, take all precautions to see to it that quality of product is their goal, that they are making something that consumers want and need, to handle their finances in a responsible manner? Let the free marketplace determine who will succeed and who will not. Government should not be involved with free enterprise.
The one thing that Obama said that I agree with is that he should not help a bunch of FAT CAT Bankers that have contributed greatly to our countries demise. However that thought process needs to be expanded to big business leaders and big government wasters as well. Let the free marketplace decide the winners and losers.
No business should ever be considered too big to fail. The US government should have let GM fail. Perhaps anti trust laws need to be amended or new laws brought forward to head off the growth of firms to prevent them becoming “too big to fail”, in other words protected from failure at taxpayers’ expense.The market forces would have operated to have the more successful car makers step in to fill the void and rescue many of the auto workers from the ranks of the unemployed. Free unbridled capitalism offers unlimited profits, this freedom should be balanced by the possibility of failure when entrepreneurs mismanage.
Agreed: no business should ever be TBTF.
Unfettered competition including a level playing field should provide sufficient incentive and capability to ensure that NO business ever reaches TBTF status.
TBTF status has to encourage a providential attitude that results in deficiencies and insufficiencies, and ultimately demise.
Agreed; successful (or new) car makers would take up the slack of a failed car manufacturer.
The same applies to any industry.
Healthy competition would ensure that unlimited profits from unbridled capitalism doesn’t last long.
Potential failure offers a great backstop for capitalism.
Failure, and its avoidance, is part of the healthy process of honest capitalism.
Contort those fundamentals and eventually you will have dysfunction.
Honest capitalism is dependent on a fine balance of numerous factors that are ultimately based on the laws of supply and demand.
Interference (usually by regulators) in those basic laws will eventually lead to distortions and crony caused chaos.
Eventhough the bailout loans were repaid, taxpayers still lost billions on the deal. I am of the capitalistic opinion that GM hadn’t shifted their models with the changing times and should have gone into bankruptcy proceedings. Now we see the ugly little secrets they were concealing – very shameful. The Cash for Clunkers program cleared out many used cars, paving the way for increased new car sales in 2013-2014.
The government should have let the auto makers go bust. The government should have let the big banks go bust. The economy would have recovered much quicker and must stronger with new companies entering the markets that were not tied to financial obligations to support the politics in Washington. The government bailed out both the banks and the auto industry to protect the political contribution stream and covered it with a veil of job support.