I had the pleasure this week of reading General Motors’ preliminary prospectus, all 542 pages of it. The GM public offering will be the second largest initial public offering (IP0) in U.S. history, second only to Visa’s public offering of March 2008.
In my own mind (which is the best way for me to phrase it), here’s how I see the GM story.
GM mismanaged its business. I’m not chastising them; it could happen to any business that’s grown too big. Demand for cars was strong, products kept coming off the production line, customers bought them and, with profits rolling in, in its wisdom GM management decided not to worry or plan for the possible bad times ahead.
GM got into big financial problems as the recession of 2008 and 2009 descended, so they went to the government and asked for money. GM received about $50.0 billion from the U.S. government and top-up money from the Canadian government. The money came in the form of loans and equity. The loans were paid back, but the U.S. government was left owning 61% of GM.
How about all those investors who owned GM stock who couldn’t sell it because the stock was falling so fast, before the company filed for bankruptcy? Well, you know how it goes; the public be damned.
The U.S. government decided to bail out GM, a private company. I don’t see where in the U.S. Constitution says that government can bail out private companies, but it happened. The government wanted to rescue thousands of GM jobs; it wanted to keep the U.S. automotive industry afloat. Although I cannot prove it, I’m sure the idea of keeping blue-collar voters happy was present somewhere in their thinking.
My question is this: why did the government bail out GM while thousands of small businesses across this country went bankrupt, because the government decided not to help them, the backbone of the U.S. economy? Sixty percent to 70% of all U.S. jobs come from small businesses, but the government didn’t help them. The public be damned again.
Now, GM will go public at an anticipated offering of $16.0 billion. I’m sure the government wants this done, because it will take the U.S. government from being the majority owner of GM to the minority owner. The government can say, “Look, we invested money in GM to save it, and we are getting our money out. We didn’t lose anything; we saved American jobs.”
And, as for Wall Street — it just gets rich again. Wall Street brokers made money putting investors’ money into the original GM, because they made brokerage and underwriting fees selling stock. Now, with GM going public again, Wall Street looks forward to repeating huge profits one more time. The way I read the prospectus, Morgan Stanley and J.P. Morgan are the lead brokers, followed by the usual characters: Goldman Sachs, Merrill Lynch, Barclays, Citigroup, et al. Millions and millions of dollars in underwriting fees will now go to these companies.
As for the public, well, you know how it goes: someone always buys the stock that The Street peddles.
Michael’s Personal Notes:
Summer 2010 is fast coming to a close. Kids are getting ready to go back to school. Parents are busy making arrangements to get them organized for that first day. Luckily, so far this year, we’ve missed the hurricanes that traditionally play havoc with the south in late summer.
And, with summer just about over, we realize we are only five months away from Christmas. Most of my friends have already made plans for their Christmas/New Year’s vacations. As crazy as it sounds, some popular spots for the “well-heeled” are already full for the coming winter vacation season.
The stock market crash of 2008 and 2009? The housing crash of 2007 to 2009? While it is a reality for thousands of Americans who continue to suffer because of the Great Recession, unless you worked for Bear Sterns or Lehman Brothers, the Wall Street crowd is doing well again.
Profits at the big brokerage houses are up sharply and I wouldn’t be surprised to see the return of Wall Street’s big Christmas bonuses this year. The other day, a colleague of mine summarized what happened on Wall Street from 2002 to 2009. “They got drunk on their own money, got bailed out by the government when it was hangover time and, having recovered, they are slowly starting to drink again, setting the stage for the next big party.”
Where the Market Stands:
The stock market, as measured by the Dow Jones Industrial Average, opens this morning down 1.5% for 2010. Stocks are basically where they started the week.
I’ve written a few articles now comparing the dividend yield on stocks to the yield on U.S. Treasuries. (You can see those figures daily on our web site at www.profitconfidential.com.) I continue to believe that investment money does not have many places to turn to these days. Investment money is not going into real estate or gold (at least not yet, in the case of gold).
Short-term treasury yields opened this morning at multi-month lows indicating that investors are still running to U.S. T-bills. I believe that the dividend yields on stocks today offer good support and value for the stock market. And my opinion that we are in bear market rally that started in March of last year remains.
What He Said:
“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us that housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in PROFIT CONFIDENTIAL, December 4, 2007. Michael was one of the few analysts who called the severity of the U.S. housing market collapse.