Reader Mail!

We have a lot to cover. First and foremost, there are your
replies to yesterday’s question about the coming GM IPO. Daily Profit readers
absolutely flooded my inbox with responses. And it’s probably no surprise
that you are not happy about how the GM IPO is being handled.

Many of you said you would never buy a GM product again. I
wonder if GM considered how angry potential customers might be over this IPO?
If not, they should have.

I’ll include a few of your letters at the end of today’s
letter.

It’s beennearly 3
years since the stock market topped and began selling off in anticipation of
what would become a banking crisis and housing disaster. Economic recovery is
a process of de-leveraging, which basically means getting debt in order.

For many companies, this meant firing workers to lower
costs. For the banks, it meant changing the accounting rules to under-report
debt. For the average citizen, it’s meant saving more and spending less. And
for citizens who have become unemployed or own house with an underwater
mortgage, well, it’s been very rough.

Investors have been fixated on employment data for signs
that the economy is getting healthy. So far, they have gone wanting as the
jobs market has been stubborn.

But employment isn’t the only sign of health. The New York
Fed released a report yesterday that showed consumer indebtedness fell 1.5%
in the Second Quarter.

In particular, credit-card debt has fallen to the lowest
level since October 2005. the number of open credit cards has fallen 23% over
the last two years.

Mortgage originations are up 20% from their lows at the end
of 2008. Last week, home refinancing loan demand hit the highest levels in
over a year. And auto loans are up 32% from their lows in early 2009.

American households are getting back on their feet. And as
I’ve said in the past, rising employment will be one of the last things to
improve.

The government is
looking at new options to help the housing market and deal with Fannie Mae
and Freddie Mac. Normally, this would be a good time for a “we’re from the
government, we’re here to help” joke. But the conference on housing reform
featured a panel that included institutional investors and banking
executives, so there’s hope.

I found the comments from PIMCO’s Bill Gross particularly
interesting.

“To suggest that there’s a large place for private
financing in the future of American housing finance is unrealistic. The only
way to bring housing back and to create liquid, financeable mortgage finance
going forward would be to provide a government guarantee. It would be
provided for by adequate insurance, by sufficient down payments, and over
encompassing regulatory environment that instead of allowing no docs and liar
loans provides adequate supervision for any mortgage going
forward.”

“PIMCO would not buy a private or a privately insured
mortgage pool unless it was accompanied by a 30 percent down payment, too
high in today’s market to permit new housing or even secondary market
purchase. Without government guarantees, mortgages rates would be hundreds,
hundreds of basis points higher, resulting in a moribund housing market for
years.”

“Policymakers should quickly re-engineer a refinancing
opportunity for all mortgagees that are current on payments and are included
in GSE securitized mortgages. The
American economy is approaching a cul-de-sac of stimulus, both monetarily and
fiscally, which will slow it to a snails’ pace incapable of providing
sufficient job growth going forward. Unemployment rates will approach and
remain at double digits unless a positive fiscal stimulus is provided in the
next six months. This home financing to my way of thinking, and to PIMCO’s
way of thinking, where you take 5, 6, and 7 percent mortgages and turn them
into 4 percent mortgages, basically will provide a crucial stimulus of $50-60
billion in consumption, as well as potential lift of 5-10 percent in terms of
housing prices.”

It may be unlikely, because refinancing mortgage loans that
are current would hit the banks pretty hard, but this is a good solution.

To bring up de-leveraging again, between (approximately)
2004 and 2007, the U.S. economy was
leveraged to consistent growth and rising asset values, like homes and
stocks. That means that our spending and investments were all made based on
certain assumptions, like “houses will appreciate 10% a year” or “stock will
rise 8% a year”.

Unfortunately, real debt accrued on the basis of an
assumption can be crippling when those assumptions are proved
false.

When valuations fall, the owners must be able to adjust.
Bill Gross’ suggestion would help the de-leveraging process by restoring some
balance to debt and income.

OK, let’sget to
your responses.

PV wrote : Actually, I’m suffering as a previous owner
of GM stock, which is now somewhere .40 I think. I’ve not looked in the last
few days. And I don’t even know what the future of owning that is. So
again, we as taxpayers get, because I don’t want to use the language it
deserves to be called, garbage in our faces and there’s nobody out there that
even cares. The GREED in this nation is deplorable.

Normally, in a bankruptcy proceeding, the old stock will be
cancelled after new shares are issued.

Frank wrote: I think the stock holders of the previous
GM Stock should be offered the same opportunity as the banks to purchase the
IPO shares before the market demand affects the price. They were the ones
that supported GM while GM management ran the company into the
ground.

I agree wholeheartedly.

Glen: I believe GM IPO should be available to all
without need for special relationship with a broker to acquire it. How did
google do it?

Google IPO’d in a Dutch Auction format. This would be a very
good idea for the GM IPO.

Webb wrote: Your idea of taxpayers getting a few shares
is brilliant. What better way to lower the government’s rule in our lives and
give us back some of what we lost. (This is irrespective of whether you or I
would buy the new GM stock or not.)

Just plain common sense shows us that any money we send
to Washington gets laundered and reduced in value before any of it gets to intended
parties. In this case the intended parties should have been the ordinary
American taxpayer, but the benefactors will be the cronies of the big
financial firms that fraternize with their cronies in the government. Trickle
down doesn’t work this way.

Dale wrote: What about all the share holders who got
left with nothing when GM stock went under? Why should the company be able to
start taking money again? It had how many billion of share outstanding that
went to $0 and now it wants people to trust GM with their investment! Not me,
I would rather invest somewhere else, anywhere else, than give money to GM
again.

What happen to honoring your debts, first? What a
rip-off.

Unfortunately, bankruptcy laws allow individuals and
corporations to write off debt. Donald Trump has done it, and he’s forced his
bondholders to restructure by threatening to do it. Global Crossing built out
huge portions of undersea fiber optic lines and then shafted shareholders and
bondholders by declaring bankruptcy.

Poorly invested money often gets lost. If there’s one thing
individual investors need to get better at, it’s understanding that the
financial markets are about money. Your money.

Eileen wrote: We should all be able to benefit from this
GM IPO. If only GM and the banks profit, then why did we help them out at
all? Yes, I agree that as taxpayers, we should all be entitled, if not to a
few shares in our Tax Return, but to be able to partake in the IPO. It’s not
free; we still have to pay for the shares.

As an employee of formerly AIG
now Chartis Insurance, we all lost all of
our AIG Stock, etc, and will never be
able to regain any of the money that we as individuals lost. I am very
resentful of companies that were bailed out and do nothing to repay their
loyal employees, only the important Executives.

The GM IPO should be open to all investors, not to a
select clientele of the ‘Big Brokerages”. Those are not the people who need
the money. This money will just be added to their existing wealth, to make
them richer. Our system is not fair