US Economy

Care to Dance?

By, 07/10/2008

Story Highlights:

  • IPOs have slowed significantly this year.
  • Many view this as another sign of worsening conditions.
  • But stock prices are driven by supply and demand. Fewer IPOs means less supply—ultimately bullish for prices.


Everyone wants to go to the prom. Will he ask? Will she go? Teen angst at its finest. Thankfully the awkward moments and skin blemishes fade away with time. But they're replaced with adult psychoses of self-doubt. Why doesn't anyone want my company?

IPOs Fall to Five-Year Low as Global Economy Slows
By Elizabeth Hester and Edgar Ortega, Bloomberg

An IPO, or initial public offering, occurs when a company issues shares of stock to the public for the first time. By offering shares to the public, sellers trade outright ownership of their company for the cash needed to finance what they hope will be ever-expanding operations. But to do this they typically need an underwriter, such as an investment bank or venture capital firm, to bring them to the dance, ahem, market.

It's a mutually beneficial relationship, with the newly public company getting the cash it needs, and the VC firm or investment bank getting a cut for their trouble. What a charming couple. Not long ago, they seemed to be everywhere. At this time last year, over 700 companies had gone public worldwide.* But so far this year less than half this amount have, and for the first time in 30 years, a quarter went by without a single VC-backed IPO in the US. Where'd everybody go?

Speculation abounds, most of it with dark intonations. The most common explanation is investors are fearful now and not interested in taking the risk of investing in (or bringing to market) IPOs, which tend to be more risky than more established companies. Seems plausible. Regardless, they're missing the point: Stock prices are ultimately driven by supply and demand.

"So?" you might ask. New shares brought to market through IPOs increase supply and, all else being equal, bring down stock prices. If you're one of those trying to sell your SUV, you understand the affect excess supply can have on prices. Or think back to the recent tech bubble—a barrage of IPOs led to a glut of supply for tech stocks back then, helping create the precipice from which they fell.

So the nuts-and-bolts upshot is that fewer IPOs mean less new supply—bullish for stock prices.

Why aren't folks talking about this? Who knows, but the fact that many are misinterpreting a bullish feature as bearish is doubly bullish! Misinterpretations like this are eventually discovered, and when they are, there is usually some nice ground to make up. So just like back in your teens, no matter what side of the phone call you were on, don't worry so much. Things will work out fine.

*Source: Bloomberg

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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