As major averages ground out modest gains this week, largely ignoring the
fifth rate hike of the year, the new-issues market was booming. In the busiest week since August 2000, 21 initial public offerings were priced, led by
Las Vegas Sands
The quickening of IPO activity has some wondering if another market top is upon us, but the current crop of new issues compares quite favorably with the class of 2000.
Dow Jones Industrial Average
added 1.2% on the week to finish at 10,669.87, pulled down a bit by flagging drug stock
, which was down 5% on the week. The company's Celebrex was linked to heart attacks, the company said on Friday, but won't be pulled from the market as
gained 0.7% to 1196.83, and the
gained 0.5% for the week to 2139.32. The Nasdaq finally cleared its January 2004 high but didn't make much progress after that. Materials, consumer goods and utilities led while tech and telecom lagged.
, bolstered by the weak dollar, gained 5% for the week.
, losing out on
, was about unchanged, and
No Bubble in the Offerings
The IPO gurus at Renaissance Capital, whose
IPO Plus fund is up 10% year to date, are making the case that the revived market for new offerings is hardly approaching the frothy levels of 1999 and 2000, and they've got the stats to back up their view. Through Thursday's close, 216 new issues were priced in 2004, raising $43 billion. That's the busiest since 2000, when 406 deals raised $97 billion, according to Renaissance.
But the kinds of companies going public now are more financially solid and have been in business longer, Renaissance noted in its annual wrap-up issued on Friday.
The percentage of companies that went public in 2004 while already profitable, 63%, is more than double the 26% level seen in 1999 and 2000. Just look at
, which had over $1 billion in revenue and $143 million of net income in the two quarters before it went public. Back in 2000, offerings like Pets.com and Snowball.com were more ideas for businesses than viable corporations.
Also, tech issues didn't dominate the way they did a few years ago. Of all IPOs, 22% were tech firms, down from 66% in 1999 and 47% in 2000. By contrast, 19% were financial firms, up from 4% in 99 and 1% in 2000. Other sectors more active than four years ago, though still small overall, were business service firms and consumer goods. Communications dropped from 21% of all deals in 2000 to 4% this year.
This year's IPO class also averaged 17 years in business, compared with an average of 10 years for IPOs back in the late bubble years. Some huge spin-offs, like
deal back in May, the biggest IPO of the year, helped solidify the class. Genworth is up about 33% since its IPO.
IPO performance this year was tremendous, but again not bubblicious. IPOs for 2004 rose an average of 29% through Dec. 16, the best performance since 1999 and far ahead of the major averages. Still, the gain in 1999 for IPOs on average was 276%.
Among the best-performing sectors in 2004 were energy companies -- no surprise -- and Internet plays -- somewhat surprising. Successful energy offerings like
helped the sector's IPOs score an average return of 71%. But it was Internet IPOs with the best average return, 80%, as
and Google each more than doubled and were among the best performers of the year's entire class.
For next year, Renaissance sees promising deals in the offing from mattress maker THL Bedding, coal miner Alpha Natural Resources and antivirus software vendor Sybari Labs.
Slow Drain, Take It Easy
Even as investors gobbled up the week's new issues, Alan Greenspan continued to slowly drain the economy's punchbowl. The
Open Market Committee raised the fed funds rate another quarter point to 2.25% on Tuesday. The committee's statement indicated that inflation remained under control and that the economy was still growing. There was no sign that the "measured" pace of rate hikes would be either sped up or slowed down.
Initially, the bond market was thrilled to hear that inflation wasn't getting worse in the Fed's view. The yield on the 10-year Treasury dropped as low as 4.07% on Wednesday. That could be either because traders bought into the Fed's view that no inflation was on the horizon, or simply because, by implication, the sanguine view indicated that the pace of rate hikes wouldn't be accelerated.
Either way, the consensus didn't hold long after data showed foreign investors might be losing their appetite for financing the huge U.S. budget and current-account deficits. The 10-year yield ended at 4.21%, up from 4.16% a week ago.
Another consequence of the Fed's continued, measured campaign will be to keep the squeeze on banks that have profited from the historically large gap between short and long rates. The difference between the yield on the Treasury's two-year and 10-year notes, for example, has shrunk from over 2.3% a year ago to about 1.2% this week.
The change has come virtually on from the short end, which is up from 1.83% a year ago to almost 3% now, while the 10-year is about the same as it was a year ago. As Greenspan ratchets up the pressure on short rates, the so-called yield spread with longer rates shrinks.
While some banks have gotten their balance sheets
ready for the change, many have not or simply cannot do so fast enough.
The independent analysts at BCA Research in Montreal think the Fed's hikes are just one of several reasons to avoid U.S. bank stocks. The relative performance of banks to the S&P 500 index dropped below its 40-week moving average, and "there is more downside ahead," the firm warns.
The firm found that when the yield spread shrinks, it takes a toll on the earnings growth of banks, and the presently shrinking spread is likely to result in reduced earnings growth projections followed by negative analyst calls.
In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send