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Wednesday, September 06, 2006

The Kind of Thing That Gets a CEO Fired

By William Trent, CFA of Stock Market Beat

Even if said CEO is a descendant of the company founder and family members control 40% of the voting stock.

We are of course talking about Ford (F) and the departure of CEO Bill Ford Tuesday. The “Thing” in question is highlighted by the Cover Page article published the same day (though not related by cause and effect) by the St. Louis Federal Reserve National Economic Trends publication. (Aside: We like to read the cover page each month because it seems to indicate the issues that are concerning the Fed at the moment.)

This month’s topic was the effect of sustained high oil prices on consumer spending. According to the article:

Timothy Bresnahan and Valerie Ramey studied the effect of the oil shocks of the 1970s and early 1980s on the automobile industry. Specifically, they examined how changing demand from standard-sized vehicles to smaller, more fuel-efficient cars affected the economy. They found that capacity utilization—the ratio of total cars produced to potential cars produced without using overtime—fell from above 100 percent in 1973 to around 50 percent in 1975. Similarly, capacity utilization fell from 100 percent to around 40 percent in 1982.2 Both instances followed sustained high levels of gasoline prices, which caused such a shift in consumer choices. Today’s high gas prices may do the same. The National Automobile Dealers Association reported that year-to-date SUV sales were down 19 percent in July compared with the same time last year.

Of course, as Barry Ritholtz pointed out, the economists like to exclude oil prices from inflation. Meanwhile, plummeting prices for SUVs make “core” inflation look better than it is.

Of course, there is far more blame to pass around than high oil prices for Ford’s mess. But when a company is already on the ropes, the last thing it needs is for capacity utilization to be cut in half.

It’s the kind of thing that will get a CEO fired.

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