Stocks exit the best first quarter in 14 years amid a flurry of IPO activity, a trend that should continue into the second quarter.
The first quarter has seen 40 U.S. initial public offerings as of Thursday, a 29 percent increase over last year, and the highest number in a first quarter since 2007, according to Renaissance Capital data.
But the dollar value of the deals has not been huge — a total $5.5 billion versus last year’s $13 billion, according to Renaissance. Of course, that will change in the second quarter when Facebook comes along in May, with its proposed $5 billion offering. There were 29 IPOs in the fourth quarter, and just 18 in the third quarter.
“I think that there is a big back log of companies that have been waiting to go public. For that to happen, you have to have a market that’s consistently solid. What happened in the September, October time frame last year was there were a lot of deals that canceled due to market conditions,” said Art Hogan of Lazard Capital Partners.
As stock offerings picked up in the first quarter, corporations also tapped the debt market at a record pace. The first quarter has seen the largest amount of non-financial corporate bond issuance ever, totaling $255.5 billion, according to Dealogic.
“That’s obviously a good sign for the market when you are seeing capital markets activity… and debt issuance was a record. That’s been a story for a long time, but it’s been harder for capital to be raised in the equity side so I think (the pickup) is a good sign,” said J.P. Morgan chief U.S. equity strategist Thomas Lee.
David Menlow, president of IPOFinancial.com, said some of this week’s IPO activity reflected “emotional” buying, not fundamental. He pointed to organic food company Annie’s Inc , which has was up 89 percent on its first day Wednesday. Millenial Media jumped 92 percent Thursday, to close at $25 on its first day.
Not every company was a winner. Solar power company Enphase, expected to price this week, cut its offering price to $6 to $7, from an earlier $10 to $12 range, for 7 million shares.
“The IPO market is healthy. The valuation modeling is still relatively cheap,” said Menlow. “The fact that a few of these deals had upward pricings is a clear indicator that the underwriters are doing their best to put fair valuations on the companies, and they’re now becoming a little more responsive to the demand side of the situation.”
He expects the deal activity to continue, and it is in no way a ‘hot’ market. “The market is taking the ones it wants, and the other ones they take them out in the back and shoot them. It says that the investors understand what’s happening in the market and they’re not likely to be duped as they were in previous market cycles... I do believe that there’s still very tender and unhealed scars from what we went through 10 years ago,” said Menlow.
While he expects the second quarter to see a fair number of deals, when Facebook looms large with its offering, activity could slow down temporarily.
“The Facebook will suck the oxygen out of the corporate finance market. I think just before and just after there will be a diminished quantity of deals that will come to market,” Menlow said. Analysts say Facebook’s so far $5 billion offering to rise to as much as $10 billion.
Stocks Thursday recovered from steep losses as quarter end buying lifted the market in afternoon trading. The Dow was up 18 at 13,145, and is now up 7.6 percent for the first quarter, its best first quarter since 1998.
The S&P 500 , off 2 at 1,403, is now up 11.6 percent for the quarter, its biggest quarterly gain since the third quarter of 2008. The Nasdaq , down 9 at 3,095 Thursday, is up 18.8 for the quarter, its best quarter since the second quarter of 2009.
Nasdaq trading volume, however, was off 12.5 percent from a year ago, and is now the lowest first quarter average volume since 2003. NYSE first quarter trading volume of an average 3.8 billion daily shares is the lowest quarterly average volume since the fourth quarter of 2007, and it is down 14.5 percent from the first quarter last year.
As the first quarter progressed, analysts have increasingly called for a pullback, and they continue to do so.
“I hope we get a five percent or so pull back here. I’d like to see the market correct a little bit here. The internal energy needs to be rebuilt,” said Jeff Saut, chief investment strategist with Raymond James.
“If you look at the intraday peak on January 26, the Dow was at 12,841 and as of yesterday it was only about 200 points above that,” he said. The market saw four days of closing at lower lows after Jan. 26.
“By my work, the buying stampede ended on January 26,” Saut said. “I think we’re due for a pullback but I’ve felt like that for a month. I think dips are for buying.”
What to Watch
In the U.S., personal income and spending is released at 8:30 a.m. ET, while Chicago purchasing managers data is released at 9:45 a.m. Consumer sentiment is reported at 9:55 a.m.
European finance ministers are meeting Friday and Saturday to discuss boosting the size of the bailout fund, and Spain is introducing its 2012 budget Friday.
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