If you're content to ride the current market wave without worrying about the quality of corporate earnings that are supposedly fuelling it, more power to you. If you're wondering why some investors are cautious at this point, despite higher reported profits, General Motors and Ford are good examples of what's behind that nervousness. The auto makers reported better-than-expected bottom-line results for the latest quarter -- but beneath the surface their balance sheets are filled with question marks and potholes.

GM's results looked extremely positive at first glance: Profit came in at $425-million (U.S.) or 79 cents a share, a dramatic reversal from the loss of $804-million or $1.42 the car maker turned in for the same quarter of last year. According to Thomson Financial/First Call, analysts were expecting the company to have a profit of just 66 cents for the quarter. GM's global sales climbed 5.4 per cent to $45.9-billion.

GM, the world's largest car company, saw sales rise in almost every one of its operating regions, set new records for shipments of trucks and sport utility vehicles, and its profit came in much higher than expected. So what's to complain about? Well, for one thing, the first part of that good news story has nothing whatsoever to do with the second part. In other words, the profit didn't come from selling more cars and trucks -- in fact, the profit came in spite of GM selling more cars and trucks.

That's because the company's profit was made up entirely of earnings from the auto maker's financial division, General Motors Acceptance Corp. or GMAC, only some of which had anything to do with cars and trucks. Acting like a bank was so lucrative for GM, in fact, that it made up for all the money the company failed to make by acting like a car company. GMAC's profit rose 32 per cent to $630-million for the third quarter.

As it turns out, more than half of the profit GM turned in came from mortgage lending and its insurance business. Despite narrower margins, the car maker managed to make more money because its provisions for bad credit declined. And the auto side of the business? If higher sales are what you're looking for, there's some good news -- but if profitability is what you're interested in, you'll have to take your search elsewhere.

For example, sales in GM's North American unit rose slightly to $26.8-billion, but profit fell by almost 70 per cent to $128-million owing to "intense pricing pressure," and the company admitted it will not make its profit targets for the year. GM Europe saw sales climb by 13 per cent to $6.3-billion, but the unit had a loss of $152-million. Asia was the only region to see higher profit, with sales up 20 per cent and profit doubling to $162-million. Over all, GM made $34-million on its global auto business.

With revenue of more than $39-billion in its automotive division, that amount of profit is smaller than a rounding error -- a return of less than 0.1 per cent. The main reason for this is that GM and the other major auto makers have been beggaring themselves by offering incentives to stimulate demand, which GM first offered in the wake of the Sept. 11, 2001, attacks. In the latest quarter, GM offered $4,219 per vehicle in incentives, compared with about $4,000 for Ford and $2,500 for Toyota.

Ford, meanwhile, also showed better-than-expected results for the quarter, with a loss of $25-million or 1 cent a share, a nice improvement from a loss of $326-million or 18 cents in the same quarter last year. Analysts had been expecting a loss of about 11 cents for the latest quarter. As with GM, Ford's financing arm did most of the heavy lifting, with profit that rose by 71 per cent to $504-million for the quarter, thanks in part to lower reserves for bad credit.

At the same time, however, Ford's auto revenue shrank to $31-billion from $33-billion last year, and the profitability of its operations also continued to slide. The company lost $609-million on its auto business, and said it will have to take another writedown of about $600-million on its problem-plagued European auto operations, which reported a loss of $452-million for the quarter. The company has said it will cut 6,700 jobs.

The auto maker's North American business lost $116-million, compared with a profit of $591-million last year. Production fell 17 per cent, and revenue slid 16 per cent to $17.9-billion, while global shipments dropped to 1.4 million vehicles for the quarter, down from 1.65 million. Still, the company boosted its profit forecast for the coming quarter to between 95 cents and $1.05 from 70 cents, based on future cost cutting.

The bottom line is that neither Ford nor GM can seem to make money at their main business, which is selling cars and trucks. Instead, they are making money off the interest rate spread by lending to home buyers, and hoping that profit from their financial units will make up for the fact that they are selling more vehicles but making less and less doing so.