ipo description

PUBLIC OFFERINGS

Initial Public Offerings Secondary Offerings

APPLICABLE TIME FRAME(S):

LONG

UPDATE SCHEDULE:

Monthly

EXPLANATION:

One of the easiest way to hear about sentiment is by watching the excitement over companies issuing stock to the public for the first time. Anyone who lived through the late 1990's can attest to that fact.

When the public is receptive to buying shares in new companies (and have the means to do so), investment banks get as many deals to market as they possibly can - the deals mean lucrative consulting and trading fees, and potential new long-term clients for all kinds of add-on services.

So when the stock market is doing well, we often see a large number (and dollar value) of initial public offerings (secondary offerings, too). Conversely, when the market has done very poorly and the banks are nervous that the public demand might not support a new offering, we see few, if any, new stock issuance.

By the time we reach one extreme or the other, it's usually better served for investors to go the other way. There are exceptions, of course, such as the mid-1990's when we saw a surge in new offerings and stocks continued to power higher.

There are other external factors that influence the number and size of offerings, such as prevailing interest rates, competition from other investments, etc. but the most important factor is how the stock market has performed during the past six months to a year.

GUIDELINES:

Like most other sentiment indicators, we use this in a contrary manner. When the number and/or dollar value of new (and/or secondary) offerings surges, we generally consider that to be a bearish factor for the market going forward, both because it adds new supply and is a reflection of overly optimistic attitudes.

When we see no IPOs or secondaries, however, we tend to become more bullish, as the market has had a tendency to rise from such pessimistic conditions.

Source: Bloomberg