Uncategorized, Weekly Update

The IPO Frenzy to Come

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Published February 15, 2019


Investors often forget that markets are finite in their resources available, and investors must choose where to place their money. Sometimes the money flows into stocks, sometimes into bonds, etc. It’s simple supply and demand. We noted recently how much money was flowing INTO bonds despite a strong stock market rebound. This substantial move of money INTO bonds is inconsistent with a rosy outlook on economic growth and is one reason to be at least a touch cautious on stocks. Another comes from CNBC market commentator Jim Cramer, reminding us that resources are finite and investors have decisions to make every day where to allocate their money. We thought it was an interesting idea. So we share.

“With all of the investors fretting about the trade war with China and the Federal Reserve’s plans for interest rates, what CNBC’s Jim Cramer is really worried about here is jeans.

“Yep, I think the biggest threat to this bull market is denim,” he said Wednesday as stocks rose on hopes of a U.S.-China trade deal. “I, right now, at this very moment, am more worried about jeans than I am about China.”

Cramer was referring — somewhat jokingly — to Wednesday’s news that denim company Levi Strauss filed the paperwork for an initial public offering. While he admitted that “it’s an exciting deal,” he said it will likely cause investors to sell shares of market stalwarts like PVH and Ralph Lauren so they can get in on the IPO.

“Now, maybe you think I’m being small-minded here — it’s just jeans, right? Wrong. See, it’s not just jeans,” he said. “We’re about to get a tsunami of new initial public offerings that will flood this stock market with new supply, and there simply isn’t enough money coming into the stock market to be able to handle all of this merchandise.”
Just consider some of the biggest upcoming deals: Slack, Uber, Palantir, Airbnb, Lyft, Pinterest, Postmates, Doordash and Reddit all plan to go public to the tune of billions of dollars — in Uber’s case, $120 billion.

When Slack, for example, goes public, money managers will probably sell shares of competing work collaboration platform Atlassian to make the money to buy Slack shares, since “they most likely won’t have much new money coming in to fund those purchases, so they need to sell something if they want to do any buying,” Cramer explained.
This effect will play out over and over with each IPO, the “Mad Money” host warned. When cyber security firm Palantir goes public, people will sell Palo Alto Networks or Proofpoint. When Postmates or Doordash IPO, Grubhub will get sold. When Uber shares finally hit the public market, hedge funds could even sell Facebook, Amazon, Apple, or Alphabet.

“These will be natural sources of funds,” Cramer said. “Historically speaking, nothing slaughters a bull market as effectively as a burst of new IPOs and secondary offerings. Whenever this has happened in recent years, we’ve seen whole sectors crushed by a cascade of selling. It’s just the nature of the beast.”

And while he acknowledged that most of the upcoming deals are from companies that have great track records, Cramer worried that the market simply won’t be able to sustain the IPO tidal wave.

“My worry has to do with supply and demand. When you get a surge of new supply without any increase in demand — meaning without much new money coming into the market — that’s going to be bad for prices of all stocks,” he said.

“The bottom line? We are about to get hit with a perfect storm of IPOs, and regardless of how good this new merchandise might be, I’m concerned that the market won’t be able to handle it all without taking, maybe, all stocks lower,” Cramer concluded. “More than anything else — China, the Fed, the possibility of another government shutdown — it’s this deluge of deals you should be worrying about because nobody else is.”

Market Update

Stocks added an eighth straight weekly advance this week as optimism over a trade deal with China continued to bolster the bulls. Monday brought a quiet flat session with some strength in cyclical transport, energy, and industrial stocks. A tentative agreement to avoid another government shutdown fueled gains Tuesday. The +1.3% lift was broad based and pushed the S&P 500 above its closely-watched long-term trendline, the 200-day moving average. The index recovered above this line in both November and December. However, those previous boosts were quickly met by heavy selling. Another flattish day Wednesday with a +0.3% move as sellers were unable to make much of a push. Interest rates rose for the third straight day with the 10-year U.S. Treasury note hitting a yield of 2.7%, after bottoming at 2.55% at the beginning of the year. The inflation report offered no concern with “core” inflation running a stable 2% for the third consecutive month. A surprisingly weak retail sales report undermined stocks Thursday sending the indexes down in the early going. Coca-Cola (KO) provided a disappointing outlook while Cisco Systems (CSCO) offered cheerful news. President Trump signed a bill funding the government and avoiding another shutdown Friday while news of progress on trade talks with China further emboldened buyers. Stocks rose +1.1% with investors ignoring a decline in domestic manufacturing, which a few weeks ago would have been further confirmation of a slowing U.S. economy.

Another solid week for stocks with the S&P 500 (SPY) rising +2.55% while the Nasdaq 100 (QQQ) gained +2.01%. The small-cap Russell 2000 (IWM) popped +4.23%.

Warm wishes and until next week.