IPO Madness & The Lesson Of History

Tyler Durden's picture

Via Jim Quinn's Burning Platform blog,

Have you noticed the avalanche of IPOs in recent weeks? Remember the avalanche of IPOs in early 2000 and early 2007? John Hussman points out the inconvenient fact that 75% of the shitty recent IPOs lose money. Wall Street is dumping this crap on the muppets as fast as possible. They know it is late in the game and the party is just about over, but they will be dancing until the punchbowl is empty and everyone is puking in the bathroom. The lesson of history is that people never learn the lessons of history. Profits and cash flow matter in the long run. Accounting fraud and currency debasement have never sustained an economic system before and they won’t this time. Keep dancing if you choose, but you know the game is rigged and you aren’t part of the privileged rigger class.  

As John Hussman explains in his latest note,

Fed-induced yield seeking is alive and well, but the desire for new “product” is being satisfied not with mortgage debt, but with low quality covenant lite debt and equity market speculation.With regard to the debt markets, leveraged loan issuance (loans to already highly indebted borrowers) reached $1.08 trillion in 2013, eclipsing the 2007 peak of $899 billion. The Financial Times reports that two-thirds of new leveraged loans are now covenant lite (lacking the normal protections that protect investors against a total loss in the event of default), compared with 29% at the 2007 peak. European covenant lite loan issuance has also increased above the 2007 bubble peak. This is an important area for regulatory oversight.

Meanwhile, almost as if to put a time-stamp on the euphoria of the equity markets, IPO investors placed a $6 billion value on a video game app last week. Granted, IPO speculation is nowhere near what it was in the dot-com bubble, when one could issue an IPO worth more than the GDP of a small country even without any assets or operating history, as long as you called the company an “incubator.” Still, three-quarters of recent IPOs are companies with zero or negative earnings (the highest ratio since the 2000 bubble peak), and investors have long forgotten that neither positive earnings, rapid recent growth, or a seemingly “reasonable” price/earnings ratio are enough to properly value a long-lived security. As I warned at the 2000 and 2007 peaks, P/E multiples – taken at face value –implicitly assume that current earnings are representative of a very long-term stream of future cash flows. One can only imagine that recording artist Carl Douglas wishes he could have issued an IPO based his 1974 earnings from the song Kung Fu Fighting, or one-hit-wonder Lipps Inc. based on Q2 1980 revenues from their double-platinum release Funkytown.

The same representativeness problem is evident in the equity market generally, where investors are (as in 2000 and 2007) valuing equities based on record earnings at cyclically extreme profit margins, without considering the likely long-term stream of more representative cash flows.


Corporate profits appear likely to contract over the next few years from a mean-reversion perspective. The chart below shows corporate profits relative to GDP, against subsequent 4-year growth in corporate profits (right scale inverted). While relationship is not exact, there is little reason to believe that the current near-record share of profits will be sustained indefinitely. A high share of profits relative to GDP is related, even in recent economic cycles, to weak subsequent profit growth over the next several years. Arguments that the economy that has “changed” in a way that invalidates this regularity had better identify something that has permanently invalidated all of economic history prior to about 2010.

Read the rest of John Hussman’s Weekly Letter.

And while some have thrown cold-water on Hussman's chart suggesting it is missing the key Foreign vs Domestic difference in corporate profits... as he additionally explains, here is the 'domestic profits only' version...


On the subject of profit margins, there’s no question that the difference between CPATAX/GDP and domestic profits/GDP (one can use GNP almost identically) is driven by foreign profits, which have increased as a share of U.S. profits in recent years (just as profits earned in the U.S. by foreign companies have increased). But even if we exclude foreign profits and focus strictly on domestic profits, we find their GDP share at a record high, and can still explain that outcome as the result of mirror-image deficits in combined government and household savings.

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starman's picture

"same as it ever was"


Vampyroteuthis infernalis's picture

Some did and someone will end up holding the bag. Suckers!!!

ILLILLILLI's picture

"It's a big club, and you ain't in it!"

- George Carlin

Comte d'herblay's picture

That was Then (pre-2008 FED action) and this is Now (FED quadrillions printing).

You read it here first:

No stock market collapse, regardless of Corporate profit shrinkage. Because it's not about profits anymore.  (Has Amazon EVER made a profit?)

This is not an auction market, per se, any longer.  

It is now the province of a few and one very powerful force to assure that pensions, funded by buying shares, in the past, are able to be paid to the boomers. 

Very convenient, don't you thnk, that just as the boomers begin to retire in earnest, and continuing for at least 20 more years, that the FED steps in and backstops the market under the disguise of Q.E.

Sorry but those counting on shorting this market and for a very long time to come, will be just as disappointed as they have been for the last 5 years. 

And then there's the glaring fact that if I paid attention to 'history' and shorted this market and it in fact did collapse, I'd be in clover for two generations, minimum after my timely demise at 5 score and ten. 

And god will never, ever want me to be that happy. 


NOTaREALmerican's picture

Re:   are able to be paid to the boomers

Gotta hand it to them boomers, they sure knew how to setup some amazing Big-Gov scams.  

Harbanger's picture

I blamed my boomer father for years before I realized that a change in direction was up to me.

NOTaREALmerican's picture

Re:  I blamed my boomer father for years before I realized that a change in direction was up to me.

Change is fine if you aren't already winning.  Going to be tough to get people to change what is working so well for them personally.

Harbanger's picture

"And god will never, ever want me to be that happy."

Not true, "God is Great."

Sometimes the devil allows people to live a life free of trouble because he doesn't want them turning to God,
Their sin is like a jail cell, except it is all nice
and comfy and there doesn't seem to be any
reason to leave. The door's wide open.
Till one day, time runs out, and the cell door slams shut, and suddenly it's too late. -quote

SmilinJoeFizzion's picture

Pets.com was a former dot-com enterprise that sold pet supplies to retail customers. It began operations in August 1998 and closed in November 2000. A high-profile marketing campaign gave it a widely recognized public presence, including an appearance in the 1999 Macy's Thanksgiving Day Parade and an advertisement in the 2000 Super Bowl. Its popular sock puppet advertising mascot was interviewed by People magazine and appeared on Good Morning America.

yogibear's picture

Another Pets.com IPO offering now would be sold out now.  It is IPO fever right now.

disabledvet's picture

in my dreams. "the globe.com" was really amazing too.

"channel stuffing paper."
and they said it was unpossible! that it was incrediboy!
lucifer speed Captain! Fully steamed ahead!

Omen IV's picture

i would buy it today if it was offered

what do they do?

vote_libertarian_party's picture

sooooooo is that profits before or after 'adjustments'?

bjfish's picture

But ... is it safe to short with Old Yeller barkin up all the trees?

TheRideNeverEnds's picture

Why would you short here?  You know we are going to at least 2000 in the ES this year.


In a few years when we are testing the 5000 level sure maybe throw on some shorts but until then there is a dramatic amount of upside left, thousands of points with maybe 100 points of risk to the downside MAYBE.  


To go down 100 points from here we may need global thermonuclear war, that would still probably be pretty bullish long term for the markets so buy the dip.    


NOTaREALmerican's picture

Revision to the mean again.    

Would be embarrasing if the mean wasn't adjusted for the two separate economies in the USofA.

Harbanger's picture

There's only one economy in the USofA and it's centrally planned by the best elitists our corrupt institutions can produce.

NOTaREALmerican's picture

Re; There's only one economy in the USofA and it's centrally planned by the best elitists our institutions can produce.

Well, there's an economy (and society) for the top 10 or 20% and there's another completely different society AND economy for the Trash Class.   

Much of the past data reflected having a single economy.     We don't blend Canada with the US economy,  we shouldn't blend the Trash Class with those who matter.    Not sure we can separate out the past, but the new economy (and society) is for approximately 30 to 50 million people.     I don't have a problem with that, but much of the past data doesn't apply.

Harbanger's picture

If you haven't noticed, this new progressive economy and new society is a dismal failure.  Past data applies, of course, especially if you look at pre-Fed or pre centrallly planned keynesian economic data.

NOTaREALmerican's picture

Re:   Past data applies, of course, especially if you look at pre-Fed or pre centrallly planned keynesian economic data.

Only IF you're going back to that form of society or economic system.   

I'm not saying the data is worthless, but "Keynesianism" has changed what data is relevent right now. 

Harbanger's picture

"Only IF you're going back to that form of society or economic system."

I'll let you judge whether we will be moving moving backward or forward, but change is inevitable.

NOTaREALmerican's picture

Re:  I'll let you judge whether we will be moving moving backward or forward, but change is inevitable.

Nobody goes "back" to anything.   

Besides,  how far "back" you planning on going and how many steps are required to get there?   The more steps involved the more likely you won't end-up where you thought you were going.    And, then worse, when you arrive...   it's the same sociopaths who were running things before (and the same sociopaths confusing the dumbasses at each step of the journey). 

The sociopaths always win,  and always have.  The bullshit used to manipulate the dumbasses changes, but not the purpose of the bullshit. 

LordAarioc's picture

The better way to say it is " The only thing we learn from history is that we don't learn anything from history"


squid427's picture

@Comte d'herblay

How depressing to think this BS could go on for 20 moar years. Gonna start drinking now, bye.

cmb's picture

so are you saying we dont BUY the fucking dip this time?  Nope I am buying the dip tomorrow.. TQQQ calls my friends, it works until it doesnt! 

Seasmoke's picture

I don't remember 2007 but I remember 2000 IPO like it was yesterday. It was as good as printing money in my basement. Still 2001 made me afraid to ever swim with the sharks again. (Although with housing bubble I was swimming with them but not of my own decision. )

SameAsItEverWas's picture

"The only lesson of history is that it's ignored."

Usually attributed to Hegel who likely used German.  Brevity is soul of wit.

401K of Dooom's picture

I remember the IPO of Netscape waaaay back in 1994.  I thought to myself at the time, where the heck would someone get the money to buy that stuff?  Just wait until the "stuff" hits the fan.  I can hardly wait until the Hoovervilles and bread lines show up in NYC, Frisco and Redmond WA.