I have a big problem with the whole General Motors Corporation (NYSE/GM) government-assisted bankruptcy and yesterday’s new public offering.

GM originally listed on the NYSE back in 1916. Through its roughly 100-year history, the storied automaker had its ups and downs like every other business. But the buffoon management of the early 2000s ruined the company. Unlike Ford, which prepared for and weathered the downturn in the economy, GM lost over $80.0 billion between 2006 and 2008.

When GM came calling on Washington, the same administration that let Lehman Brothers fail (and that witnessed the credit market freeze after the Lehman failure) was concerned that GM was “too big to fail.”

I liked GM’s argument at the time: if GM failed, not only would over 200,000 jobs be lost right at GM, but other car-makers like Ford would go under, because GM would put the same part suppliers that feed both GM and Ford out of business. Ford even wanted the government to bail out GM!

So, the government invested about $50.0 billion in GM. When the company went public (again) yesterday, GM sold $20.0 billion of stock in the second largest IPO in American history. The offering valued GM at just under eight times 2010’s earnings.

The U.S. Treasury got back about $14.0 billion of its money. But if my calculations are right, unless GM stock goes up 75% to 80%, the government will lose money on its investment in GM.

So, what’s my beef with how the GM bailout was handled?

It’s quite simple. I don’t see where in the U.S. Constitution it states that the government can use public money to bail out private companies. GM was mismanaged. And, ultimately, the government bailed out GM because of poor decisions made by bad company management.

How many hard-working companies in America go out of business daily, not because of bad management, but simply because they do not have the cash flow to sustain their business…to pay their bills while they wait for their customers to pay them? Sure, they might have 200,000 employees. However, small businesses in America, those with less than 50 employees, account for over two-thirds of all jobs.

Collectively, thousands of small businesses in this country went bankrupt during the Great Recession, causing hundreds of thousands of job losses, and the government did absolutely nothing to help them. Nothing. I guess we can’t all be winners like GM.

Michael’s Personal Notes:

Slowly, interest rates are rising. And I’m very surprised that more is not being written about the new trend in the financial media.

Yesterday, the popular U.S. 30-year fixed mortgage hit a new three-month high of 4.39%. Rates for mortgages are rising in spite of the housing crisis. In fact, according to the Mortgage Bankers Association, the number of applications for mortgages in the U.S. fell 14% last week.

Similarly, the yields on government securities are also rising. The yield on five-year U.S. Treasuries hit 1.54% yesterday, up from 1.44% on Monday. Here, rates are rising despite the Fed’s QE2 program.

I’ve been warning of higher interest rates for months…and we are starting to see them now. However, the rate hikes to date have been very subtle; nothing to shock the stock market.

I’m looking more for the establishment of a clear indication that the new cycle of higher interest rates has begun, and we might just be getting that indication now. Interest rate cycles tend to run in 20-to-25-year trends of either up or down.

Where the Market Stands; Where it’s Headed:

The stock market came back to life yesterday with a rally that the media blamed on a resolution to the crisis in Ireland and a report from the Federal Reserve Bank of Philadelphia that said manufacturing in Philly was at its highest level of 2010.

Forget what the media is saying about why stocks are rallying. The truth of the matter is that demand for stock is outweighing the supply of stock in the marketplace. Depending on which report you read yesterday, and which you believed, the GM offering was highly oversubscribed…the demand for stock is rising.

The economy continues to turn the corner. Corporate America continues to deliver solid profits (while stashing their cash in the bank) and there are few investment alternatives to good, quality stocks at this time in the economic cycle.

The bear market rally in stocks that started in March of 2009 is alive and well.

What He Said:

“I’ve been writing to my readers for the past two years claiming the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.

— “Ahead of the Street” Column, by Mitchell Clark, B. Comm.

With the broader market ticking higher, the number of new companies to hit the market is increasing. There have been a lot of initial public offering (IPO) deals sitting on the shelves waiting for better stock market conditions. Now those conditions are here and, while companies aren’t able to sell their shares at the top end of the price range, new listings are hitting the market quite frequently now.

A number of these new listings are U.S.-listed Chinese stocks and small- and mid-cap domestic technology companies. For quite some time, I’ve been advocating that risk-capital investors concentrate on U.S.-listed Chinese stocks and the mining industry. I would add technology opportunities to this list and, for non-speculative investors, you can just own the market now. In fact, you might as well consider just owning the Dow, because the biggest companies stand to gain the most from economic recovery.

The price of oil is still strong in this market and it’s a sign that speculators believe that the economy will be stronger in six months’ time. In my view, oil over $80.00 a barrel is a definite bullish call. And gold, too. The spot price of gold hasn’t been doing much lately, because investors have been focused on monetary policy. Just like oil over $80.00 a barrel, as long as gold stays over $1,000, then mining investments make sense.

Again, I think the single biggest story this year will be corporate earnings and the performance of the Dow. There’s still the possibility that the current trading action in stocks represents a right shoulder formation to the market’s recent high set in 2007. Only the economy will be able to determine where the Industrial Average goes. I would say, however, that the Dow Transports are confirming the market’s strength and that index moved strongly higher over the last four weeks.

So, we’re back in the peculiar situation where we have another stealth rally. We are getting better economic news that is confirming the stock market’s optimism. With first-quarter earnings season just around the corner, you might have noticed that there have been virtually no earnings preannouncements from companies. This is a very positive signal for stocks overall.

— “The Financial World According to Inya” Column,
by Inya Ivkovic, MA

The smell of money is fresh again. Wall Street watering holes are seeing more traffic, giants among banks still left standing are raking in decent profits, even some in the battered manufacturing sector are showing signs of life, while trading revenues are skyrocketing and new corporate bond IPOs are burning through dealers’ books faster than papyrus in a blast furnace. If there is such a state as “normal” on Wall Street, its players and pundits seem to be right back in it.

Granted, some of the responsibility for such exuberance lies with the real economy, too. Although the labor market is still wrapped up in all kinds of doom and gloom, the U.S. housing market has finally started showing signs of intelligent life. Also, the U.S. Conference Board’s index of leading economic indicators has hit the highest levels not seen in the past two years. All of these green shoots have
prompted some of the analysts and economists to go as far as to proclaim that the pendulum has swung deep into bullish territory.

Which begs the question: has the economic expansion really achieved self-sustainability?

Personally, I don’t think so, although there are quite a few respected voices out there who may disagree. Unlike some, I cannot forget how miserable the beginning of this year truly was. I cannot forget how dismally underpriced the market was, as if preparing for the End of the World. And, while the current upbeat market pricing indicates to me that its participants must be suffering from some form of collective amnesia, and while I seem to be reasonably in possession of all my faculties, I cannot possibly join in on the chant, “The crisis is over! The crisis is over!” I believe there are still quite a few punches left in the old Great Recession that could inflict serious injury.

However, for those among our readers itching to get back into the game, or those who may already have ventured back, I have a single piece of advice: make sure to get your premiums for the risks you may be taking. In my view, those premiums are too few and too far between, which should tell you how the market really “feels” about this whole bullishness business.

At the onset of this year, the market was priced as if Armageddon was just around the corner. However, by the end of the first quarter, even as the economy was still struggling, there were signs that near-term recovery was a distinct possibility and that we could reasonably expect to enjoy anywhere from three to five years of decent returns. Instead, what actually happened was that those forecasted three to five years of wonderful returns have been compressed into the period of the past eight months. Whoever had the guts during the second and third quarters to take on additional risks in exchange for those wonderful returns, kudos to them. Whoever didn’t, don’t expect to find the same high premiums for the amount of risk taken going forward.

I may be a coward or I may be a conservative in my approach to investing, it will depend on who is asking the question, but my view of the current market prevents me from jumping onto the bulls’ bandwagon just yet. Of course, this doesn’t mean it also prevents me from going back to the races altogether, because I’m one of those analysts who believe that money can be made in any market. It just means that the risk analysis and risk management have become the main components of my investment process.

If you find a stock that’s doing better than the broader market, it’s always worthy of further investigation.

One recent IPO that looks very interesting is VanceInfo Technologies, Inc. (NYSE/VIT). This small-cap company listed just as the stock market began its correction late last year. Recently, the stock broke out of its rut after the company reported excellent financial growth. The stock has gone up, but it is still reasonably valued by any measure.

VanceInfo is an information technology (IT) service provider and software development company located in China. According to the company, it is ranked among the top three Chinese offshore software development service providers for the North American and European markets as measured by 2006 revenues.

The company sells a range of IT services that include research and development services, enterprise software solutions, application development and maintenance, quality assurance and testing, as well as globalization and localization.

VanceInfo provides these services primarily to corporations headquartered in the United States, Europe, Japan and China. The company’s customers are often in the technology, telecommunications, financial services, manufacturing, and retail industries.

According to VanceInfo, its revenues in the first quarter of 2008 grew to twenty and a half million dollars, representing growth of 97% from revenues of just over ten million dollars generated in the first quarter of 2007.

Company management cited that, during the quarter, it won a number of new customers, a lot of which were referrals from existing clients.

VanceInfo reported that the U.S. market continued to be its largest geographic market, accounting for more than twelve and a half million, or about 62% of revenues, in the first quarter of 2008. This was followed by 13% for Europe, 13% for China, and almost 13% for Japan.

Revenues from the company’s two largest clients, Microsoft and IBM, accounted for 31% of total revenues in the first quarter of 2008, down significantly from 46% in the first quarter of 2007. Revenues from VanceInfo’s top five customers came to 51%, down from 66% in the first quarter of 2007.

Net income was $3.1 million, representing a large gain of 138% from net income of $1.3 million generated in the first quarter of 2007.

Currently, VanceInfo expects its total 2008 revenues to be between ninety-two million dollars and ninety-six million dollars, representing a 47% to 53% increase over 2007 revenues. One hundred million dollars a year in sales is always an important barrier for a small company. Once the company breaks this level, it has the critical mass to really go after big accounts. It also makes the company much more attractive as a takeover candidate.