Teddy Bloggie Blog Blogging

How else to explain the gyrations in the prices of shares and bonds issued by Ford Motor Company? Not only were its five-year bonds quoted this week at 89% of their face value but traders marked them down to the point where they were quoted as “junk”—ie, non-investment grade. This was despite reassurances from Moody’s and Standard & Poor’s, two rating agencies, that they had no plans to downgrade the company’s debt to below investment grade. True, Ford has suffered—as have its rivals, General Motors and DaimlerChrysler—from the price war that has dominated the lives of American car makers in recent months. True, too, Ford has $22 billion of outstanding secured debt that it will need to roll over during the next year—a mouthful even for America’s deep debt markets, especially in their current state. Yet neither problem on the face of it justifies the hammering that Ford’s shares and bonds have recently received.

Behind the treatment meted out to Ford, and to other companies in a similar plight, is the pessimism in the credit markets. The average junk bond is now trading at about a thousand basis points (hundredths of a percentage point) above the US Treasury bond of a similar maturity, says Bear Stearns, an investment bank. While $43 billion-worth of new bonds of speculative grade have been issued so far this year, more than twice that amount has been downgraded from investment grade to junk because of worries over the issuers’ ability to pay their way. This is unsettling investors...

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My reaction is a, "Huh?" American equities are still selling for remarkably high price-earnings ratios. I take it that the Economist believes that Ford's bonds are a strong buy--that Ford Motor has a bright future filled with lots of cash flow. As an owner of a Ford car, I assure you that there is substantial reason to disagree.

I can relate because my mom's Ford, which self-destructed after three months and needed a new engine back in 1995, just racked up more than $1200 worth of repair costs. I could've gotten her one of those new Honda Metropolitan scooters with about the same amount of money. One of those may outlast the poor Ford.