Trader’s Narrative

Although I’ve previously touched on the predictive quality of the IPO market, I wanted to bring it up again because what last year was a slow trickle has now dried up to an outright drought.

So far in the first quarter of 2008 we’ve had only 12 IPOs: 5 in January, 4 in February and 3 in March. The last one being the high profile initial public offering of Visa (V). It added an enormous $18 billion to the quarterly value number, leaving less than a billion for the other 11 IPOs.

Visa has also provided the best IPO performance this year with a 50% rise from its $44/share offer price. BioHeat (BHRT) has been the worst performer, with a return of -24%.

Although this lack of activity can be interpreted by some as being negative because it means less business for Wall Street, less money for companies that are growing, and less opportunity for investors to fund new enterprises, in actuality it is a sign of good things to come.

To understand why, we’d have to put on our contrarian goggles: a drought of IPOs mean that there is a total lack of ‘froth’ in the market; it means that VC’s are holding off selling their equity because they know that it won’t get a bid; it means that most investors are in a retrenchment mode and are in no mood to put new money in unproven companies, instead preferring to hold more conservative securities.

When you restrict the supply of something, demand being equal or growing, prices go up. Economics 101. So as public companies continue to buy up their shares and private ones refuse to go public, the ‘float’ of equity decreases… pushing up average aggregate share prices.

Also, historically periods of IPO drought have not meant that new companies do not grow or find funding. Instead they have denoted incredibly opportune times to invest in the stock market.

As the maxim goes, “Be bold when others are fearful and fearful when others are bold.” And right now it doesn’t take a genius to see that with a lack of IPO filings, nervous companies pulling their filings and an empty roster of secondary offerings… that fear is rampant on Wall Street.

I remember learning the predictive power of IPO trends during the height of the bubble. It was one of the most powerful arguments that convinced me we were indeed in a bubble and would soon see a bear market correction.

But right now its message is the opposite. Just as it was in early 2003.

Here are some IPO resources:

• Hoovers IPO Central
• Marketwatch IPO Overview
• CNN Money IPO
• Yahoo! Finance IPOs
• MSN Money IPO Center
• IPO Home by Renaissance Capital the managers of the IPO Mutual Fund

Amid all the wailing and gnashing of teeth, we had a successful IPO: Visa (V) went public yesterday and made history.

Not only was it a resounding success for the investment bankers in a very difficult time, it was also the biggest IPO ever at $18 billion. And it managed to jump +30% from its $44 per share pricing.

But perhaps it was because of the financial and credit market turmoil that Visa did so well. Unlike many financial companies it carries no consumer debt but instead relies on small commissions on transactions.

Leadership
Each bull market has its leaders. A few years ago, Google (GOOG) and Baidu (BIDU) debuted on the stock exchange and quickly became the darling of momentum investors. Now they both lie broken, not only below their long term moving averages but also with the sword of Democles” (overhead resistance) hanging persistently above price.

So, if we are in the painful process of putting in another bottom here, as I’ve endlessly argued for the past little while, it is wise to look for the next leadership that will breath new life into the “new” bull market.

If Visa does as well as its competitor, MasterCard (MA), I’ll be a happy camper.

IPO Market? What IPO Market?
So far this year, we’ve had only 22 IPOS. Last year, by this time, we had 47. That is a greater than 50% drop off in activity.

If you’ll recall, the IPO market has predictive abilities.

The other way that the IPO market can help us time the market, or at least understand where we are in terms of market cycles, is by being a contrarian indicator of sorts. A bountiful harvest of IPOs has almost always preceded dramatic and sustained market downturns while a barren IPO market has historically meant the opposite.