IPO love affair with the U.S. stock market means upheaval is near

They come out of the woods. New issues of common stock are pouring in from venture and private equity portfolios, already well-funded American companies, brains on Wall Street and even overseas. Everyone wants to participate in the stock, which is the inflated prices that investors are willing to pay for stocks. And that means all stocks, as long as there is a good story that implies that a potentially quick payoff could occur.

This year’s IPOs reveal the reality

Most 2021 IPOs have now produced losses (see “The ‘hidden’ risk of the stock market is Wall Street IPO failure – realization and fallout are near.

Almost anything can be sold, even indebted and stagnant companies with brand names like Weber and Dole. Some of the IPO money is even used to cash out private equity holders who first used the company’s debt to pay themselves dividends. The other money from the IPO will pay off excessive and undesirable rated debt. In other words, companies do not receive IPO cash to foster growth – such as for innovation or expansion.

Then there are the infallible Wall Street slots of the PSPC funds, all things “biotech” and the technology / software. No gains? No problem. In fact, investors have in mind that a lack of income can lead to a big payday when the dazzling story comes true and the income streams in.

Value investing – say, what?

Oh, and the value investing is dead. Who wants to own something that should grow at, say, only 5% and a more or less similar business strategy? An established company is seen as weighed down by fixed assets, a multitude of employees and products already known.

The very operation of these businesses is seen as slow and outdated. “Kaizen”, the Japanese term for constant improvement, is considered cumbersome and slow.

“Kaizen is a Japanese term meaning” to change for the better “or” continuous improvement “. It is a Japanese business philosophy about processes that continuously improve operations and involve all employees. Kaizen views improving productivity as a gradual and orderly process. “(Investopedia.com)

And not only the value investment is dissected. The same goes for the evaluation process. The “value” is now considered to be an increase in the price of the shares. A high earning is a sign that a business is big. Fast, high payout means it’s really great, so get started now.

Robinhood Markets IPO is a good example

The company’s facts produced a valuation below the Wall Street offering price. Therefore, institutions tended not to participate in the $ 38 IPO. The two-day opening price drop of more than 10% was seen as proof that Wall Street had blundered. Then the crowd rushed in and the action took off – for three days – dropping from $ 35 to a high of $ 85 (+ 143%). Once again the big, rapid rise ended and ended quickly and the stock is now down almost half to $ 44. However, this dramatic surge was seen as proof of success.

So what about all these reversals and losses?

Two attitudes seem to be at work in their acceptance.

First, day trading is popular. Thus, a daily “fleeting” movement may seem long when the minute hand measures time and the movements are important. (Robinhood Markets’ 3-day hike had 300 million shares traded in its hands.)

Second, the crowd flies. So far, there has always been something new that catches the interest of the crowd, making the fate of being-there-made-that stocks intangible.

The bottom line: supply gets too big so late in the demand-side game

Wall Street will continue to create supply whenever there is investor demand, especially when corporate clients clamor to sell their stocks. Professional fund managers will support such a trend as demand continues to dominate supply. However, they get nervous when the growth in demand slows down as new supplies hit, causing prices to fall. This is when the cancellation begins, with the professionals leading the sale.

The extraordinary increase in supply now will be a major test, and demand may not increase. This, combined with the already visible massive sales of discarded “hot” products, could produce a trend reversal.

Will such a change affect the rest of the stock market? Probably. Rampant speculation in one area of ​​the stock market usually seeps into other areas. (For example, an increase in margin buying and options activity.) Additionally, any upheaval in the stock market tends to dampen investor enthusiasm everywhere.

Thus, a good strategy is to hold cash reserves now in order to take advantage of dismantling opportunities later.