Tharp's Thoughts Weekly Newsletter (View On-Line)

• Article Does IPO Activity Signal An IPO Bubble by D. R. Barton, Jr.
• Workshops Discount on Swing Trading Systems Ends Today
• Trading Tip Responses to It's All Made Up by Various Readers
• Matrix Contest New Contest Has Begun

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Article

Does IPO Activity Signal An IPO Bubble —

Or An Equity Market Turn?

by D. R. Barton, Jr.

View On-line

Could it be time for IPOs (Initial Public Offerings) to suffer from the dreaded magazine cover indicator? As I have written before, Paul Macrae Montgomery's "Time Magazine Indicator" often indicates the top for a stock, sector, asset class or the market as a whole. Montgomery noticed that when mainstream media puts a trending topic on a major magazine cover, that level of coverage almost always signals that the trend is about ready to reverse.  His initial observations have since been supported by several academic papers as well.

The indicator will certainly get a test after the September 19th IPO of Chinese e-commerce conglomerate Alibaba Group Holding (BABA). That IPO squarely cornered the market in all media facets while also raising a world-record $25 billion.  

IPOs, A Good Investment Strategy?

As QE “infinity” stimulus has investors believing that central bankers will always have their backs, those same investors still have an appetite for higher risk offerings and continue to turn successfully to IPOs for higher rates of return. According to Renaissance Capital, the average U.S. IPO since the Great Recession has returned 12.7% from its offer price. Will the trend continue? Year to date, the S&P 500 Index has returned an average of 6.3%, compared to 4.73% for the Renaissance IPO ETF (IPO)  through the October 6th close.  In the chart below, you can track the 2014 performance of the S&P (black line) against Renaissance’s ETF (in blue).

Renaissance’s ETF performance aside, how well does the strategy of buying companies at their IPO perform?  Looking back just a bit further, research firm Wilmer Hale notes in 2012 only 55% of 102 IPOs were profitable and in 2013 only 43% of the 178 IPOs profitable as investors search for growth. The firm notes that signs of economic growth, stable capital market conditions, abundant venture capital and private equity will continue to bolster the momentum of IPOs as long as interest rates remain low.

IPOs Today vs. The Internet Bubble Heydays

The IPO market seems to have settled out to a happy medium of sorts over the last 15 years. In the dot-com heyday, there were 972 IPOs across 1999-2000. In the Real Estate bubble implosion of 2008-09, there were only 81 IPOs.

In 2014, the filing process for initial offerings in the US has experienced a rejuvenation with 305 — the most since 2007 when there were 300 filings. This year, 215 of those filings have come to fruition with IPOs that raised $70.6 billion so far with another 138 in the active pipeline targeting $28 billion more. Globally this year, 287 IPOs have raised over $157 billion.

According to PwC US (pwc.com), in the third quarter alone there were 68 U.S. public company debuts that raised $38 billion.  Healthcare led the way in quantity with 31 new companies priced for $2.8 billion. Contrast that with the fewer technology and biotech issues but the much higher amount raised—$23.5 billion. Investors in the short run clearly remain hungry for high-tech companies.

As good as 2014 has been for IPOs, they still have never gotten anywhere near the levels of the 1999-2000 internet bubble heyday.  Why is that?  Dr. Jay R. Ridder of the University of Florida offers an interesting hypothesis.  Simplifying his theory somewhat from his paper “Initial Public Offering, Updated Statistics”, Ridder explains that start-ups and smaller companies have found IPOs to be expensive and to require a lot of effort.  Rather than going through an IPO, many companies in need of capital for growth have more recently been seeking out an equity suitor or a large company to purchase it (or some part of it).  We won’t go into the extensive data here but Ridder supports his argument with some compelling statistics.

What’s Next? 

Small companies and successful start-ups seem to be turning less and less to the IPO market as they become much more savvy about seeking partners and capital. For now, the Alibaba mega-IPO may signal an intermediate or even long-term top, so don’t look for traditional data like number of IPOs per years to guide your analysis. 

Given the magazine cover indicator and the other data, should savvy investors shy away from IPOs for now?  A plausible approach might be to let the IPO market shake out a bit. After Alibaba's record-setting third quarter launch, there are no Facebooks or the like on the fourth quarter launching pad but the pipeline for more modest launches will remain steady. In addition, the Congressional results from the looming November elections may tell the tale of head winds or tail winds for the economy. In the meantime, the Federal Reserve Board has stuck to the message it has been telegraphing – an orderly raise in nominal rates for '15, '16 & '17 which will affect yields.

While the IPO balloon doesn't seem like it will pop itself, it does seem to be exhaling and waiting upon a new wind of equity.

God bless you,
D. R.

P.S. Thanks to Douglas Barton, a commercial banking VP at Wells Fargo for help in researching and writing this article.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".

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Trading Tip

Responses to "It's All Made Up"

From Various Readers

A few weeks ago we ran an article by Dr. Tharp titled, It’s All Made Up. We received a lot of thought provoking feedback from readers and will share some of that with you today. If you missed the article, click here.

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Thank You Van.

I needed this newsletter, God has spoken to me through it, through you. I have been angry at God, knowing that I have not heard "HIM" speak. I needed that. 

I have been a Christian since the age of 11, and I am 38. I have wanted an embrace from God my entire life, and this article has helped me to see that I have been in God's arms the entire time.

I needed to feel God's arms, and they are mine..... I am crying as I write this, the knowledge that God is in me is something that I have heard in sermons, but I haven't felt since I was a child.

You have given me a true gift tonight, Thank you.

I know that this is the beginning of truth…

Thank you again, still working with my new realization. It has only been less than 24 hours, but an interesting 24 hours it has been.

As a Christian, which I still see myself as, I have realized that there are some verses in the Bible  that speak to this. One being,

"1 Corinthians 13:12 The Message (MSG)
12 We don’t yet see things clearly. We’re squinting in a fog, peering through a mist. But it won’t be long before the weather clears and the sun shines bright! We’ll see it all then, see it all as clearly as God sees us, knowing him directly just as he knows us!"

My past, and my interpretation of God, has affected my view of everything around me.

Perception is Reality.

My intention is to speak to God within me, to pray, in Christian terms, and wait patiently listening for an answer. I want to see God, and get a glimpse of the reality that I am missing, which I do not see yet.
Thanks again,

J. Osborn

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Dear Van,

I was going to tell you this in-person when I see you soon at the workshop, but couldn't hold it in. I keep rereading your latest article "It's All Made Up". This is an absolute masterpiece. The reflexivity part with examples and the Super Trader's dialog with IG connected many things that I have learned from your books and workshops. Finally, a deep understanding of how all kinds of gibberish have been running, and ruining, my life hit me with such a raw intensity so I started crying (sorry, sometimes I surrender to self-pity). I think that reflexivity not only develops new beliefs for me but it also gives life, energy and power to all useless beliefs stored in my sub consciousness and they start to act. Emmet Fox has repeated throughout all his books that thoughts we frequently entertain always make manifestations in our life. How true it is. Yesterday I was lying in bed all day long mentally going over various periods of my life. At some point I figured out that I have never lived my life — I have been busy building nominalizations! The realization of that was painful.

Thank you for your article, Van!

P.S.
Cypher from the Matrix movie said "Ignorance is bliss". Nope, I don't think so. Ignorance is not bliss. I have hope now.

Anonymous

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Hey Van,

Being a longtime student of both "The Course [in Miracles]" and of trading I enjoyed your article "It’s All Made Up".  Being a student of both areas (and with B.S. degrees with honors in Psychology and Physical Therapy) it has been very helpful for my ability to take responsibility for all my experience, which then includes not being a victim in trading. I know that you and others realize this is so very important to the possibility of being successful with trading.  I would take it further and say that the most productive and empowered life comes from knowing that you are the dreamer of your reality and you are therefore completely responsible for EVERYTHING in and about it.  Not a victim at all, with no one to blame to escape being guilty and hence letting go of the guilt (and all the other Ego beliefs of not being God).  As I like to kid with my friends, "It's all your fault and that's where all your power lies".

I have long put these ideas together for myself in regards to trading, but it's fun to see it put out there by others with real existing credibility to their work.  So thanks for having the gumption to share these unusual understandings publicly.  I also heard your interview with Michael Covel and your comments about Dr. Hawkins and putting out the consciousness/spiritual side of things in your work and again I'm so glad to see you doing that and hearing how it works.  Not only am I very familiar with Dr. Hawkins and his books and work but I have been deeply involved in muscle testing for over 35 years now myself.  I started out by specializing in Applied Kinesiology (mostly a very involved chiropractic technique which I learned on my own) as a Physical Therapist and was able to own and operate my own practice within 18 months of getting my license way back in 1980.  Because it works so well I was able to help fix lots of injury and chronic pain problems that no other more traditional therapies could resolve.  It was so powerful using the unconscious nervous system/mind to find out what was wrong and exactly what to do to fix it that I eventually dropped my P.T. license to do alternative health work.  Over the decades I have helped resolve many previously unresolvable problems for people and animals, although I stopped doing it as a business long ago, I still use muscle testing to help many people/animals with it to this day (just keeps getting more and more effective over time).  And yes, it is my main "IG" connection.

I have recently taken your Trader Type test (Strategic for me), am reading a couple of your books and really appreciating them (knew I wanted to learn more on the money management side and the position sizing strategy is perfect) and will be playing the position sizing game soon.  Will then see which of your other resources feels right after that.

Anyway, keep up all your great work and especially the wonderful promotion of consciousness and of what "reality" is and how it works.

Here's to the red pill and remembering our Godness.

Cheers and all the best,

M. Smead

Matrix Contest

Our Next Matrix Insight Contest Has Begun!

We want to hear about the one most profound insight that you got from reading Van's newest book, Trading Beyond the Matrix, and how it has impacted your life.

We have updated some of the rules since the last contest, so please read them carefully before entering:

• Each essay should be around 1200 words.
• The ideal entries will focus more on a single transformative insight as opposed to “the whole book was transformational”.
• Dr. Tharp and the VTI team will pick the top 5 best entries from the submissions and our newsletter readers will vote to choose the top winner.
• The winner receives one free VTI foundation workshop; (*foundation workshops include the Peak Performance 101 workshop, How to Develop A Winning Trading System That Fits You, and the Blueprint for Trading Success workshop.)  The winner may choose one of these workshops (valued at $2,995) or substitute any single VTI product priced at $795 (or below) of your choice.
• Over the duration of the contest, we will choose our favorite entries and publish them in our weekly newsletter, Tharp’s Thoughts. All entries appearing in the newsletter will receive a $50 coupon (increased from $20) which can be used on any VTI product or service.

If you would like to enter, send an email with your essay to [email protected].

If you haven't purchased Trading Beyond the Matrix yet, click here.

For more information about the contest, click here.

Missed the last contest? Click here to see all of the submissions which were picked to run in Tharp's Thoughts as well as the winning entry!

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