WASHINGTON, April 4, 2014 – A lot has been going on in markets this week as averages performed a seesaw routine. But this morning’s market action has witnessed the tech- and spec-heavy NASDAQ take a sickening swan dive.
Unlike our exuberant river divers pictured above, however, this morning’s dive, which is persisting through lunch hour today, is beginning to more closely resemble Wile E. Coyote’s standard cliff diving routine. (But we used that graphic last week).
CNBC’s controversial Jim Cramer—himself an expert in vocal as well as market volatility—hit this move on the head this morning on that network’s “Squawk Box” feature, blaming the increasingly wobbly NASDAQ action on the cumulative effect of just too many high-spec, non-moneymaking high tech IPOs hitting the market since the first trading day of 2014. It’s increasingly reminding him of the Wild West atmosphere of the dot.bomb ascent and crash that unfolded circa 1999-2001 and ended with a NASDAQ crash of epic proportions.
NASDAQ averages have yet to approach those turn-of-century numbers again, even over the long, roughly 14-year period that’s followed. We’d tend to agree with Cramer on the face of it. Clown prince that he increasingly is, he once made a living as a savvy, high-flying hedge fund manager and he knows how this works.
The worrisome point about many of these latest tech and tech-oriented IPOs is that few if any of them happen to be making any money. Sure, you say, it’s always that way with tech. But look again. Some of these IPOs are actually raising little if any working capital. They’re merely providing a handsome payoff for the vulture capitalists who’ve provided initial funding for these ventures. That’s legal, of course, but what’s in it for you and me?
In addition, some of these tech IPOs have already borrowed substantial chunks of coin to pay the vulture capitalists an additional stratospheric “dividend” as they take their next flight out of private ownership land. Meanwhile, the remaining new more or less independent company is now out on its own, handicapped by a heavy debt load that’s going to make achieving a real profit all the more difficult for both it and its new investors in the public.
Such might be the case with an issue like today’s IPO of IMS Health Holdings (IMS). IMS is actually an older company, founded in the 1950s, that’s been in and out of public ownership for decades and is coming out for another round as of this morning. Typically, the vulture capitalists have stripped a good bit of cash out of IMS on its partial way out of captivity. Even though this company actually makes money, the big bucks were just scooped out, for now anyway, by the company’s previous ownership cadre, leaving it somewhat weakened to say the least in its battle against 2014’s ominous fiscal headwinds.
Another problem with the current batch of IPOs, particularly of the NASDAQ variety, is the additional burden placed upon their balance sheets by the high salaries many current corporate startup officers are enjoying. An additional IPO hitting the tape today, Arlington Virginia-based Opower (OPWR), pays its pair of top officers several million dollars in salary annually. That’s not exceptional in today’s grossly overcompensated CEO-COO-CFO stratosphere, of course. But, like many other tech IPOs, Opower as of yet makes no money. So why the astronomical salaries? Aren’t you supposed to earn this money, presumably after you achieve profitability? (Maybe the Maven is just an envious old fossil, the relic of a bygone era. But still—how do people do this?)
Cramer’s point—and the Maven’s—is this: why buy any of this iffy stuff? When we do so, when we pile in like a bunch of lemmings, the elites get richer and the market gets overstuffed with shares of overstuffed new companies that may never achieve profitability. And what’s the first thing that’s going to get dumped in the next stock market correction, flash-crash, market crash, or bear market? You’ve got it—highly unprofitable companies that either can’t make real money or were foolish concepts to begin with. Obviously, there’s too much of this going on now, so surprise! It’s getting dumped today, and who knows for how long?
Small investors, as usual, will get left holding the bag, often foolishly chasing this stuff after the IPO as they did with Facebook (FB), perturbed that they were unable to get any on the offering but still wanting in anyway. It’s a scenario that’s played out endless times in the decades before and since the Maven got into and back out of trading as a professional. 99 percent of the time, it’s a loser’s game.
Well, in the time it’s taken to generate this mini-rant (it’s now 1:05 p.m. EDT), the NAZZ is off a cool 90 points, the S&P is down 15.50, and the Dow Jones Industrials—“window dressing for the tourists” as Dave Fry, one of our favorite investment gurus often observes—is off a bit over 75 points. Gee, if this is Freaky Friday, a very Blue Monday can’t be far behind.
Today’s trading, more or less:
Frankly, if we’d seen this downdraft coming today—even though it was inevitable at some point—we’d have put on some of our favorite short ETFs yesterday like SH (short S&P) and SDS (double-short S&P). Too late now, most likely. It is what it is, and the Maven was caught with his shorts down.
Damaging to the Maven’s position this morning is a fairly large holding in the so far really nice “high volatility put-write” ETF (HVPW, get it?). This heretofore-swell investment buys high volatility (read “wacky”) stocks, sells puts on them and then pockets the money when the puts expire worthless in the hands of others.
Unfortunately, today’s action is killing that ETF because stocks similar to the ones we’re talking about will be getting “put” back at the fund. In other words, this is a strategy that works really well unless you have a snarling bear market on your hands. That said, the objective of this ETF is to give you a dividend-like one-year return of about 9 percent, which it faithfully has done in its first year of existence. Dividends are issued bi-monthly, which is also nice. But the upcoming dividend could soon become a little wobbly, which is why this ETF has gotten hit all week, particularly today, with a wave of selling.
We’ll hang on for now. We actually bought another 100 shares today though we could regret it. But you can’t get scared out of an investment like this after a short, if violent downdraft like the one we’re experiencing now. It’s what the hedge funds and permabears hope you will do, so we won’t.
Believe it or not, we also attempted to get shares of the two companies we were dissing above, Opower (OPWR) and IMS. Opower proved to be the hotter of the two issues, so, like many of you, the Maven didn’t get any because he isn’t rich enough.
When an issue goes “hot,” all brokerages save most of their allocated stock to allocate as presents for their “whale” retail clients. If you’re not a “whale,” you don’t get any. Ever wonder why the 1% always manages to remain the 1%? This is one reason why. “So it goes,” as Vonnegut was fond of writing.
We did pick up a bit of IMS, however. But perhaps you’re asking, why did you go after either of these, dude, if you didn’t really like the way the stars were aligning?
Good question. Here’s the answer:
Opower, asinine management salaries and lack of current profitability aside, is in a sweet spot in today’s energy environment, primarily the business of offering software products and packages to utilities and consumers to help get and keep energy costs down.
As long as we continue to live in an Obamanation ruled by radical environmentalists and the rogue
SS EPA, energy costs will continue to rise for us as Washington continues to discriminate against potentially much-cheaper domestic fossil fuels while favoring and massively subsidizing “alternative energy.” Since we’ll have to endure at least two more years of this kind of regime, a company like Opower will be perceived as riding the wave and will thus be favored by speculative investors.
Furthermore, its products are attractive, although there’s lots of competition. Holding a stock like this either for the pop or for potentially more profit afterwards before fiscal reality sets in is attractive. Under the oil-happy Bushies, the Maven would likely never have touched this one. Come to think of it, under the Bushies, it likely would never have gone public. Anyhow, we actually wish them luck, since they’re local boys.
Regarding IMS, this is a profitable company, albeit burdened with debt, in another current sweet spot, the medical industrial complex. Same reasoning. Why not pick up some and ride the crest at least until this fall’s elections. Because, Obamacare.
We mention these stocks not so you’ll chase them—you shouldn’t—but to show you the kind of rationale the Maven often uses to pick the occasional ride on a shiny new IPO even if he doesn’t, long term.
After all, a few years back, the Maven rode the IPO of the Obama-loving, government subsidized, and now bankrupt and nonexistent Michigan battery-maker A123, getting off darn close to the highest price it ever achieved before its descent to earth and below. Those were the times when Obama was still “The One,” and when folks were certain we’d all bask in the green, utopian times that would soon unfold under his benevolent gaze.
When investors are so stupid as to actually believe in the ridiculous, Messiah-driven premise behind obviously never-to-be-profitable IPOs like A123, that’s when professional investment cynics like the Maven want to get in. If you can actually get shares, you get in and hold them until you figure all the marks are in after you. Then you climb out, walk away, and never look back.
The pathetic rem ants of A123, BTW, were sold at a bargain basement price to the Chicoms, wouldn’t ya know. The American taxpayer, in this case, got left holding the bag. In Obamanation, it’s only your money, after all.
Immoral, you say. Perhaps it is. But if you look at what’s going on in the rest of this market, in the too-big-to-fail banks, and in the political corridors of Washington, perhaps this kind of investing, in which at least one part of your strategy is to flirt with flavor-of-the-day IPOs, is the only way to keep at least a little of your own money in your wallet before the elites figure out a way to scoop up the rest of it. Just because, fairness you know.
Have a good weekend. We will. IMS is up about 13 percent, offsetting some of our bonehead move in HVPW. If you can’t always make money, you can at least try not to lose it, even when the Gates of Hell are arrayed against you.