WASHINGTON, September 19, 2014 – The staid precincts of Wall Street today might more closely resemble Dodge City or Tombstone back in the days of the old West. That’s because Friday’s trading will have to digest an unusual trifecta of major events, including the momentous “No” vote in Thursday’s Scottish referendum, the opening day of trading in Alibaba’s (BABA’s) brand new IPO shares, plus the tried and true “quadruple witching day,” which happens once a quarter.
Although market action looked positive Thursday, any veteran trader could sense the nervousness as the uncertain consequences of the Scottish referendum—a vote by the Scots as to whether to maintain their 300+ year union with England, Northern Ireland and Wales in a still United Kingdom.
Uncertainty was banished Thursday night and early Friday morning as Scottish voters rejected the UK exit motion by an impressively wide margin of 10%. The final tally is estimated to be 55% against and 45% in favor of splitting from the UK.
Markets across the globe have reacted positively to the vote. Not only would a “Yes” majority have roiled both Scotland and the remainder of the UK for years. It almost certainly would have inspired budding secession movements throughout Europe, including rebellious citizens of Eurozone provinces like Flanders, Catalonia, Sardinia, Corsica, Venice, and the Basque region spanning parts of Spain and France.
There’s a growing sense in the Eurozone that the government elites who created the Euro, eliminating national control over Europe’s old but autonomous currencies, were all in it for themselves—oligarchs vs. the people. It’s a complex notion as most voters tended to vote for the socialistas anyway. But the peoples’ sense that they were losing whatever control they still had to the elite politicians, snobs and oligarchs has been growing and is getting ugly.
Ditto here in the U.S., lest we forget. Many states on this side of the pond would likely vote today in massive numbers to secede from the U.S., or at least its corrupt central government.
So despite the fact that the Scottish secessionists lost the vote count this morning, it’s clear that a generalized disgust with central governments is rising fast in Western so-called democracies and is likely to be a growing force in coming years. History may eventually show that the Scots were a very large flock of canaries in a collapsing coal mine.
What all this means to today’s market and in the months to come is that for now, at least, the specter of never-ending world monetary chaos is off the table. Obviously, other key problems remain, but that’s for another column or perhaps for CDN’s “Politics” pages.
The other big shoe that dropped yesterday was the final pricing of the Alibaba IPO. BABA priced at $68 per share on the offer, a number that must have been firmly settled upon over the last couple of days but not disclosed—except to the usual insiders.
Pricing took place not long after New York markets closed at 4 p.m., a rather unusual occurrence in IPOs whose pricing is often debated well into the evening before the morning open. The Maven has been involved in many, many IPOs and is accustomed to staying up late at night—10 p.m. or later to be precise—to catch the price and finalize or reject his share requests.
Trading in BABA will open this morning most likely at 10 a.m. or later rather than at 9:30 a.m. EDT when U.S. markets traditionally open. That’s because the managers of this immense deal will have to match expected huge quantities of buy and sell orders to establish the initial price at which the stock will actually trade.
Of course, the moment the gates open, that initial price will likely be left in the dust one way or another as bids and asks flood into trading systems. Hopefully, this apparently better managed offer will not suffer the amateur hour antics and outright greed that turned the Facebook (FB) IPO into a notorious debacle.
Where will BABA shares head and where will they close today? We’ll give you some guesses, but declaring a final outcome is a fool’s errand in this one.
In the best of all possible worlds, an offer is priced to give IPO investors a half-decent “pop,” or jump upward in price, say 2-6 points. That’s because most IPO shares are allocated as gifts to elite investors, allowing them to quickly flip the shares for a ridiculously easy profit for the 10 minutes they owned the shares, before they head off for their next big power lunch.
On the other hand, the brokerage/investment bank managers and syndicate members placing the deal are actually working for their own customer, in this case Alibaba. While keeping the deal sweet for the elite day-flippers they court, they also need to get the maximum amount of capital to their real client, the IPO company.
So the final pricing must be high enough and fair enough that the new company doesn’t feel screwed by the deal’s managers. And that can happen when that “pop” is 10, 20, 30 points or more. When that happens, the new company can’t help but think that their temporary investment bank “employees” have damaged them by leaving a large amount of money on the table to be raked in instead by the IPO flippers.
It’s a delicate game, actually, complicated by the fact that more often than one might think, the managers and syndicate overprice the deal so the stock takes a dive and the IPO investors actually lose money. That’s what happened to a lot of retail purchasers of the Facebook IPO.
Overpriced and over-allocated, after about a 10-minute, very modest pop, the shares closed flat to down before taking a slow and sickening swan dive over the next several weeks, infuriating people who got in on the deal.
There were some sniffs of this in the Alibaba deal—the same increased allocation of shares and the same last-minute up-pricing. But we suspect that, given the huge size of this deal, the managers were far more realistic on the pricing front in the end.
That said, another disturbing thing about this deal is the fact that select insiders will be dumping many of their own shares on the market once trading begins. That’s something that is rarely allowed in today’s IPOs as all insiders generally are subjected to “lockups” of their shares, often 180 days or longer. It’s all meant to limit this kind of dumping on the opening, which can damage the investments of the new IPO investors.
Word is that this trade in BABA shares should not be damaging to the IPO price. But we shall see.
Optimists are estimating these shares could jump from the opening price of $68 to a lofty $95 or so, although we have no idea what this number is based upon.
The only thing the Maven will “guarantee”—and he uses that word loosely here—is that today’s trading in BABA shares is likely to resemble our Wild West metaphor in that volume and gyrations will be huge, perhaps historically so.
Today’s final wild card, of course, is an old one, the quadruple witching phenomenon in which seemingly every option and future contract under the sun is closed out. Quadruple witching Fridays, and their bastard cousins, triple witching Fridays, are historically volatile trading days, often with an up bias.
Adding quadruple witching to the Scottish “No” vote, plus the extra-added attraction of the Alibaba IPO action should make this Friday a fun one however the market ultimately closes. Early indications are that the bulls will love this one, big time.
But again, with Mr. Market, you never know.
One thing we would NOT recommend is chasing those Alibaba shares you didn’t get on the IPO. This is one risky bet. As the Maven has mentioned before, he played a simple 100 shares of Facebook purchased after it opened, just as an experiment. That experiment confirmed what the Maven already knew, namely that chasing an IPO that seems poised for upward trajectory often ends in weeping and the gnashing of teeth. Don’t do this.
In spite of the high risk of Chinese investments in general, given opaque accounting and the likely interference of Chi-com oligarchs, Alibaba is one humongous company and could ultimately prove a good investment.
But unless you actually got in on the IPO—highly unlikely unless you’re George Soros—lay off this one until it settles down for a few weeks or months. Too dangerous for the average investor.
There could be some good action in Yahoo! (YHOO) stock or Yahoo! options today. Indeed, we slipped back into a little Yahoo! yesterday after selling off our original spec investment for a nice profit. But again, this is a dice roll, at least today, so don’t use money you might need next week if you want to play.
Otherwise, it’s in our out as you wish. It’s hard to say what anything will do today, although we expect the action to be positive across the boards.
Monday could be another story, of course. But today, at least, could be fun if you’re a bull and tragic if you’re a bear.
Have a good weekend.