Archive for May, 2011

IPOs Making A Comeback – For Large Companies

Tuesday, May 31st, 2011

Judging by the LinkedIn IPO, “going public” may be fashionable again.

Investors lucky enough to own LinkedIn shares (i.e., employees and a small number of wealthy, well-connected investors) saw their shares more than double in price in a single day, jumping from the initial offering price of $45 to $94.25 by the end of the day.  Investors who owned private shares, which were being traded on secondary markets, enjoyed even larger gains.

Prices dropped the next day, as some investors cashed in on their profits, but few who own shares are complaining, given that LinkedIn’s debut was the biggest since 2006.

Unfortunately, though, most companies are not LinkedIn.  Companies like LinkedIn, Groupon and Facebook are atypical.

The purpose of an IPO is supposed to be to provide the capital needed for relatively small companies to grow, and the number of small, innovative companies registering for IPOs is still down significantly from past years.

To date, 61 companies have completed IPOs this year, up from 51 at this time last year and only seven in 2009.  In contrast, 83 IPOs took place in the first five months of 2007, which is still far short of the 185 deals that took place through May in 2000.

The number of IPOs has fallen for many reasons, including the cost of compliance with the Sarbanes-Oxley Act; Eliot Spitzer’s global research settlement, which resulted in a lack of research for small company stocks; the dot-com bubble, and the financial crisis.

While the average investor has little chance of obtaining stock in a hot IPO, a resurgence of IPOs would be good news, as it would fuel the growth of the next generation of companies that will create jobs, spur economic growth and give the stock market a much-needed boost.

Housing Market Needs Rehab

Friday, May 27th, 2011

It wasn’t long ago that housing seemed like the best possible investment.  Housing prices just kept going up, up, up.

Now 2011 is on track to become the sixth consecutive year of declines in new home sales and, as a consequence, prices are going down, down, down.  Unless the housing market rebounds, which appears unlikely, 2011 will see the fewest homes sold on record (records have been kept since 1963).

The Wall Street Journal notes that “The 323,000 new homes sold in 2010 was less than 60% of the number of new homes sold in 1963, even though the
population today is nearly two-thirds bigger.”

Even with interest rates at historically low rates for the past couple of years, the market has continued to decline.

Even more discouraging, The Journal notes that housing has increasingly been tied to economic cycles.

T-Bills, Munis Are Hot … Compared With Everything Else

Thursday, May 26th, 2011

You could say that the yield on three-month Treasury bills has quintupled this month, which would explain why they are in demand.

Or you could say that yields on three-month Treasury bills are now at 0.05%, which comes out to just over a penny on every $100 invested.  You could make more than $120,000 on such an investment … if you had $1 billion to invest.

So why are T-Bills and municipal bonds, which likewise offer barely any return, hot today?

One reason is that supply is low and, in an effort to keep national debt below the $14.3 trillion ceiling, new debt is not being issued.  With demand and supply out of balance, prices are rising.  When prices rise, yields drop.

Slow economic growth and new financial regulations are also contributing to low yields.

Steroids Running Out For Stock Market

Wednesday, May 25th, 2011

Lackluster economic performance, continuing concern about debt in both Europe and the U.S., and other factors have been pushing the stock market down in recent weeks.

Another factor receiving less attention is the pending end of quantitative easing.  Quantitative easing had the perverse effect of making stocks look good by making other investments look bad.  Investors, consequently, invested in stocks because there was nowhere else to put their money.

Like steroids, quantitative easing provided artificial performance enhancement to the stock market.  Now that it’s ending, prices are becoming more market based and, as a result, have generally been falling.

Bobby Bonds and Roger Clemens can relate.

Let’s Hear It for Growth … A Little Louder, Please

Thursday, May 5th, 2011

You call this a recovery?

Typically, the rule is this – the bigger the recession, the stronger the recovery.  By any measure, the recent recession was a whopper.  Yet gross domestic product (GDP) grew by only 1.8% for the first quarter of 2011.

In comparison, after the big recession that ended in 1983, GDP grew by at least 7.1% for five consecutive quarters and even grew by 9.3% in one quarter.

Of course, there are major differences between the most recent recession and the recession of the early ’80s:

  • The recovery of the ’80s was marked by The Federal Reserve Board’s emphasis on keeping inflation in check.  This recovery is noteworthy for The Fed’s desire to increase inflation.
  • The recovery of the ’80s benefited from tax reform and free-market solutions.  This recovery follows record government spending, including an $800+ billion economic stimulus program, and major reform of the healthcare and financial services industries.  While Congress extended Bush-era tax breaks, higher taxes are anticipated, given that the federal deficit has soared to more than $14 trillion.

For those who remain jobless or who have seen their standard of living drop, a little more recovery would be appreciated.

Day Traders Returning

Tuesday, May 3rd, 2011

The Wall Street Journal recently noted that day traders are returning to the market.

When speculative traders start betting on the market, it’s typically a sign of trouble ahead.  Their return may add to demand and, short-term, continue to boost stock prices, but investors who “buy high” typically end up selling low and losing a great deal of money.

 Have you ever met a rich day trader?

Pick One: High Risk or Low Returns

Monday, May 2nd, 2011

Here’s your choice: Take on lots of risk and hope for the best or watch your standard of living erode.

The stock market has been soaring, thanks to the Federal Reserve Board’s quantitative easing program, which has continued to hold interest rates at or near record lows for several years now.

Investors came back into the market, not because the market was showing signs of strength, but because it became the least objectionable place for investors to put their money.

A 12-month certificate of deposit (CD) is yielding 1.25% interest today.  The U.S. inflation rate rose to 2.7% in March and is continuing to rise – a deliberate outcome of Fed policy.  So the real rate of return, in exchange for tying up your money for a year, is negative 1.45% (2.7% – 1.25%).

Conversely, The Russell 2000 Index of small-cap stocks recently hit a new high, having jumped 150% since March 2009, including a 9.5% gain so far for 2011.

Small-cap stocks are, of course, the riskiest stocks, representing companies with market capitalizations of $2 billion or less.  And the higher small-cap prices soar, the riskier they become and the more likely it will be that we will see a market correction.

What will happen when quantitative easing ends?  What will happen when market conditions, rather than Fed programs, dictate returns?