The Death of the IPO

Posted On Nov 22, 2017 By Dave Gonigam

  • What’s this? An IPO that’s not skinning investors alive?
  • The eye-opening reasons fewer companies bother going public
  • The boom before the bust: Still more solid economic numbers
  • Power elites issue Janet Yellen a warning
  • Reader calls out The 5 for abstaining from the Oxford comma (Oh, no!)

For no obvious reason, the hottest IPO of 2017 is up 9% as we write this morning.

Roku Inc. (NASDAQ:ROKU) — maker of the little Roku streaming-video boxes that millions of us have attached to our TVs — is trading at $40.62.

That’s still down from its peak last week — the price action has been volatile, to say the least — but a fine improvement on its IPO price of $14 two months ago.

It’s about time there was a big-name IPO that didn’t stink up the joint.

In March, Snap Inc. (NYSE:SNAP) — developer of the Snapchat app — went public at $17. This morning it’s well below $13. Turns out whatever Snapchat can do, Facebook can do better.

In June, the “meal-kit” company Blue Apron Holdings (NYSE:APRN) was planning to go public around $16 — until Amazon threw a spanner in the works by acquiring Whole Foods. The firm cut its IPO range to $10–11. This morning it clings to the $3 level by closely cropped fingernails.

So Roku is the exception that proves the Catch-22 rule laid out for us years ago by our own Jonas Elmerraji: The best time to buy shares of a company is before it goes public.

“Investors buy initial public offerings for one simple reason,” he said here in The 5 in June 2014. “They want to get in on a big idea at the ground floor.”

Of course, the real ground floor came years earlier, when the IPO company was still private… and big-bucks investors acquired shares at prices far below the IPO price.

It’s old news if you’re a longer-term reader. But now there’s a new wrinkle…

“High-profile private companies are waiting longer than ever before to take their shares public,” Jonas explains.

Back in the day, Wall Street and Main Street investors counted on piling into a startup as soon as it became publicly traded        — generally, for a decent return on investment. All of that’s changed as private companies wait.and wait… to go public.

Jonas reasons: “Going public is a nightmare for management teams. Dealing with roadshows, the high cost of filing requirements and fielding investor concerns are huge distractions from actually running a fast-growing business.”

Thus “unicorn” sightings are becoming more and more (yawn) common.

Used to be a private company with a valuation more than $1 billion — known in the biz as a unicorn — was a much sought-after anomaly. But “the number of private companies that have achieved unicorn status has risen from one in 2,000 decades ago to one in 200 today,” Jonas tells us.

Some more startling stats Jonas compiled:

  • During the 1990s, the average number of IPOs in a year was 406. In the 21st century, that number has been slashed to 108. That’s according to research from the University of Florida and the National Venture Capital Association
  • Not coincidentally, Credit Suisse estimates the number of publicly traded companies has tumbled by half over the last 20 years — from 7,300 to 3,700.

The resulting proliferation of unicorn companies is one of Wall Street’s closely guarded secrets: Insiders know “by the time a company is big and successful enough to issue a public offering, the early investors have already made their money,” Jonas goes on.

“The Wall Street crowd gets the chance to sell their shares… And the bankers walk away rich with underwriting fees when the company goes public.” Meanwhile, Main Street investors are shut out from the real action that happens before the IPO.

And why not? There’s no shortage of early-stage investors ready to plunk down their money these days.

“Venture capital firms,” says Jonas, “are investing in an average of 3,500 companies per year. They’re competing with corporate acquisitions — with a record $2.2 trillion on corporate balance sheets, large firms are simply acquiring innovative upstarts rather than competing with them.”

Indeed: Put together the “Big 5” stocks of Apple, Alphabet (Google), Microsoft, Facebook and Amazon… and throw in IBM, Oracle and Cisco… and those eight companies have dropped $170 billion over the last six years on 480 acquisitions.

“Between those two forces — VC funds and corporate M&A money — regular investors don’t have a chance,” says Jonas.

Then again, you don’t need “a chance” if you have access to the proprietary trading platform Jonas has developed over the last five years. On Monday his Kinetic Profits readers will get a “2018 Profit Map” — anticipating the new year’s most lucrative trades up to 12 months in advance.

The powerful system behind this profit map was nearly stolen from Agora Financial’s Baltimore offices last spring. While we can’t prove it, we suspect Wall Street might be behind it… because the system gives you, the regular investor, so much profit power.

See for yourself at this link. Fair warning: This link comes down once Thanksgiving weekend is over. Give it a look now, while it’s fresh in your mind.

On this day of thin trading before a holiday weekend, the major U.S. stock indexes are oscillating around the record closes they reached yesterday.

The Dow and the S&P 500 are down a tad; the Nasdaq is up a tad. Overseas, Hong Kong’s Hang Seng index has crossed the 30,000 milestone for the first time in a decade.

Gold is back within striking distance of its highs last week at $1,290.

The few traders on duty are surely chattering about the latest black eye for Uber — a ransom of $100,000 the company paid to hackers who got their hands on the data of 57 million customers and drivers.

Heh… Does the new CEO still plan to take Uber public as early as 2019? Or will it be only venture capital that continues to get suckered?

The big economic number of the day is subject to misinterpretation: Durable goods orders fell 1.2% in October, way off the “expert consensus” calling for a 0.4% increase.

But this is a notoriously “noisy” number — skewed by orders for military goods and aircraft, which swing wildly month to month. So a more reliable indicator — “core capital goods” — excludes those two volatile categories.

Here too, the number surprised on the downside — a 0.5% drop. Certain websites that engage in what we call “doom porn” were quick to point out this is the biggest monthly drop since September 2016.

Which is true. It is equally true that year over year, core capital goods orders are up 8.1%. That’s not so bad, is it?

We’re starting to sound like a broken record… but one-month blips in the data notwithstanding, we’re in the boom phase of the boom-bust cycle.

Affirmation of that assessment comes this morning from the latest “Philadelphia Fed State Coincident Index.”

If you’re an unusually attentive reader, you know this number has a history of calling every recession going back to Jimmy Carter. It goes from a range of plus 100 to minus 100. Sustained readings of plus 50 and below have foreshadowed every recession of the last 40 years.

The October number rings in at plus 68 — a respectable recovery from a scary plus-20 reading in August. It appears we’ve dodged a bullet.

The power elite is warning off Federal Reserve chair Janet Yellen from raising interest rates next month.

This morning, traders in fed funds futures are pricing in a 91.5% probability the Fed will jack up its benchmark interest rate a quarter percentage point during the next Fed meeting, on Dec. 13. As you might know, our macro maven Jim Rickards is taking the other side of the trade; he says the Fed’s preferred measure of inflation is too weak to justify an increase now.

Jim says several influential names are now warning Yellen that an increase would be a blunder. “These voices include Martin Wolf writing in the Financial Times, James Mackintosh writing in The Wall Street Journal and Larry Fink, head of BlackRock, in an interview on CNBC.

“Prominent economist Benn Steil wrote a highly influential column last week that likewise warned Yellen not to raise rates. Steil made the point that the Fed has no experience with raising rates and reducing its balance sheet at the same time. He estimates that balance sheet reduction over the next year will be the equivalent of a 1% hike in the fed funds rate on an annual basis. That is significantly higher than other estimates, which were closer to a 0.25% impact.

“Bear in mind that Benn Steil speaks for the Council on Foreign Relations, whose chairman is Bob Rubin, the godfather of the financial power elite. His comments would not have gone unnoticed inside the Fed.”

Jim says the final “tell” will be the next release of the Fed’s preferred inflation figure. That comes one week from tomorrow.

Meanwhile, as Yellen counts down the days to her retirement, she’s trying out her hand at comedy.

From The Associated Press: “Federal Reserve Chair Janet Yellen said Tuesday that the biggest challenge facing the central bank in coming years will be to craft an interest rate policy that avoids putting the economy through a ‘boom-bust’ cycle.”

Hey, we have an idea for that: Dissolve the Fed. Let the free market set interest rates instead of a bunch of pointy-headed academics. Ditch “the Ph.D. standard,” to borrow Jim Grant’s delicious turn of phrase, in favor of a contemporary gold standard.

Well, we can dream…

By the way, how many other people spotted the “Audit the Fed” sign in the crowd last Saturday during ESPN’s College GameDay?

Game day photo

Bonus points: GameDay was in Madison, Wisconsin — aka “the Berkeley of the Midwest.”

“Great one today,” a reader writes in reply to a parenthetical remark we made yesterday.

“Hammer the MSM for not reporting the whole story on Yemen — omission of important facts is tantamount to lying. Keep up the great work!”

The 5: It’s a steep climb. The omissions are legion, and not just with the Yemen story.

Did you know the number of U.S. troops and Pentagon civilians in the Middle East has grown by one-third in just the past four months? It’s now 54,180 people spread across 14 countries — not including Afghanistan, where yet another president has committed to a “surge” in troop levels.

These are official, publicly available numbers. And they belie the president’s campaign rhetoric about “dumb wars” and military adventurism in that part of the world. But aside from one foreign policy wonk on Twitter and an article at Newsweek’s website, the reaction has been crickets.

Our readers’ recent musings about grammar and usage in The 5 prompted the following entry in today’s mailbag, which takes us to a very dark place:

“OK, Pandora, you brought up the grammar issue with your ‘till’ versus ‘’til’, so now it’s my turn to jump all over your wrong usage of being too lazy to put that comma in just before the ‘and’ in a list. Every time I read it, it’s like fingernails on a chalkboard and you all do it, even Stockman and Rickards.

“So here’s the classic sentence of why you always put a comma before the ‘and’: ‘‘We invited two strippers, Kennedy and Stalin.’ And here’s one I created: ‘I’ve enjoyed many comedians over the years, Laurel and Hardy, Abbott and Costello, Pryor and Chaplin.’

“Yes, I’ve seen it’s optional, but that’s wrong. And it’s also wrong to lie down after a big meal, as it allows gastric juices to damage your throat. Happy Turkey Day. And put the damn comma in.”

The 5: Really? You’re gonna drag us into the “Oxford comma” debate on the day before Thanksgiving? That’s cold.

For the most part, our copy editors follow The Associated Press Stylebook, which has long eschewed the practice…

AP Stylebook tweet

“I think not including them shows that we trust our readers don’t need to be spoon-fed,” says our senior copy editor. [Disclosure: He used to work for the AP!]

We’ll wind down the short week by recounting the story, likely apocryphal, of some stuffy individual challenging Winston Churchill when he ended a sentence with a preposition. His rejoinder: “That is arrant nonsense up with which I will not put.”

Happy Thanksgiving,

Dave Gonigam
The 5 Min. Forecast

P.S. U.S. markets are closed tomorrow and will trade for an abbreviated session on Friday.

Per custom, the Agora Financial offices will be closed both days. The 5 will publish our Saturday wrap-up called 5 Things You Need to Know, but otherwise the weekday edition of The 5 returns on Monday.


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