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.