Trader’s Narrative

I know that the IPO market activity is a contrarian indicator for the stock market but this is ridiculous! The present public issuance market is the worst we’ve seen since the vicious bear market of the 1970’s.

The last IPO to grace us was Grand Canyon Education (LOPE) back in November 20th, 2008. Before that, we had Rackspace Hosting (RAX) on August 8th, 2008 and China Mass Media (CMM) on August 4th, 2008. Can you believe for the whole year, we only had 20 IPOs?

According to the National Venture Capital Association (NVCA), venture capitalists are bracing themselves for a very tough year in 2009. Please join me in a moment of silence for the poor Patek-Philippe wearing, Veuve-Clicquot sipping VC who won’t be able to flip his holdings to Mom’n'Pop for the usual 10 bagger. Most of them expect the IPO market to thaw sometime next year; but 92% of VC’s surveyed said they expect a slowdown in investments with 61% believing that the slow down would be more than 10% compared to last year, and cause funding to fall to $27 billion for the year.

The Obama adiministration’s stimulus package may become the main theme of IPOs for the remainder of the year as investment banks try to ride the wave of infrastructure plays. But right now, there are a couple of IPOs coming down the pipeline already, hinting that we may be starting to see some action soon:

• O’Gara (OGAR) - a homeland security play
• Mead Johnson (MJN) - infant nutrition [spin-off from Bristol-Myers Squibb (BMS)]
• Medidata Solutions (MDSO) - biotech consulting firm

Believe it or not, I can still remember a time when traders had the luxury of predominantly trading IPOs and spin-offs!

Here’s an interactive chart (use the slider to zoom in) showing historical annual data for the number of IPOs :


Source: Prof. J. R. Ritter - University of Florida

Data Integrity
A note of caution is needed because even today, it is almost impossible to come up with a definitive answer to what should be counted as an IPO: closed end funds? ADRs? sub $5/share offerings? OTC:BB? REITs? limited partnersips? So you can imagine if we have such difficulty in defining what to count as an IPO today, how difficult it would be to go back in time and try to come up with a definition to give us a consistent historical data series. For example, during the 1970’s NASDAQ didn’t have a minimum per share requirement but it does now. So do you exclude IPOs from the 1970’s that were what we now consider “penny stocks”?

The chart (above) shows the most restrictive method to ascertain an IPO: operating company only, AMEX or NYSE or NASDAQ, excludes sub $5 per share offers, ADRs, closed end funds, etc. So don’t be surprised to find other data that doesn’t match what you see here.

Some Thoughts
Anyone else surprised to see 1996 with such a high number? I thought for sure 1999 or 2000 would be the highest.

The US financial markets are larger than they were in the 1970’s by several magnitudes. So in a sense, if we adjust for capitalization or number of issues trading or some other similar metric, the relative number of IPOs (or their lack thereof) is most definitely the lowest level of activity we’ve seen. Something to ponder.