Thinking to buy Ford Motor Company (NYSE:F) stock on its recent strength, think again.
– Non-OPEC Countries joining the party have to be bullish for energy prices. Gasoline prices will follow crude eventually.
– November US sales were impressive but these numbers are only really off the back of investment in previous quarters.
– Huge investment has been earmarked for autonomous. Does Ford really have the balance sheet to compete over the long term?
Ford Motor Company (NYSE:F) is a stock that is affected meaningfully by macro events especially within the US which is by far its biggest market. Last week Fed announced that it will not only raise interest rates for the first time in 2016 but also is planning to hike 3 times instead of 2 next year. This resulted in the S&P 500 (INDX:SPAL) dropping 18 handles as well as the bond market continuing its upward trajectory. However, the real asset class that caught a bid yesterday was the U.S dollar which now is approaching parity with the euro. In my opinion, many investors are going to take this sustained upward movement in the dollar as a sign of US economic strength. However, the only reason why rates are expected to rise so quickly is because inflation has really spiked in the US since the summer. Currently, the consumer price index stands at 1.7% in November up by 0.2%. Ford stock is up over $1 since its November lows mainly because of its impressive November numbers and a perceived strength in the US economy. Furthermore, as we enter the final week of 2016 many investment banks and hedge funds will be closing out their existing positions and moving their capital into stocks that are perceived strong and which also pay a high yield. Ford looks like it will be a major beneficiary. However, I believe it will be a false dawn and here are three reasons why.
Energy Prices Are Going Higher
Firstly, with non-OPEC countries now teaming up with OPEC for a production cut in 2017, this has to be bullish for crude oil prices going forward and bearish for Ford. Gasoline prices always sooner rather than later follow crude oil prices which have to be bearish for Ford’s high margin models such as its F-series Super Duty trucks and Lincoln models. Besides the inflation trend, I believe the main reason why Ford stock is down 11% year-to-date is because commodities have rallied meaningfully this year. In fact, the CRB index which is a commodity futures price index representing a basket of commodities such as gasoline, crude oil, and aluminum looks like it is about to break out to new 2016 highs. Higher commodity prices will mean that Ford’s raw materials which it uses to make its products are going to be more expensive. Moreover, the cheap gas that has fuelled Ford’s huge sales growth in recent years is going to become much more expensive at the pumps in the near term. (See Also: Why Ford Motor Company Is Not A Buy Going Into 2017 )