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There's a Wall Street Journal front page story about how bad the IPO market is. They're certainly right, but they may be a bit behind the curve, because the seeds of a potential recovery have already sprouted.
The IPO market is in tough shape: they note that of the 175 companies that went public last year, 70 percent are below their IPO prices.
And the year has started out terribly: only 4 IPOs, 85 percent fewer than last year, according to Renaissance Capital, which runs the Renaissance Capital ETF, a basket of roughly 60 of the most recent IPOs. That "basket" is now down 16 percent for the year, far underperforming the S&P 500's drop of 6 percent.
There are three things that have to happen for an IPO recovery to take place:
1) The market has to stop going down. Every time we have had even a two-day rally in the last two months, there has been selling into it, on heavy volume. This week is the first time that hasn't happened. That's a good start.
2) The prior crop of IPOs have to outperform the market for a period. That's happened this week: the IPO ETF is up 6.2 percent, far outperforming the 2.6 percent the S&P 500 is up. That's a start, but it's not enough. We have to see this happen for several weeks.
3) Once the IPO market does open up, the quality of the first companies floated will be critical. Investors burned by the prior cycle will be looking for relatively established companies that have real topline growth and cash flow. And they will be looking for attractive "discounting," meaning pricing below the range that had been talked about before the slowdown.
Who might those companies be? Let's look at prior history.
We have been here before. We are now in a two-month IPO drought, but it's been much worse. After the 2008-2009 financial crisis, from September 2008 and March 2009, there was a 6-month period where there were only two IPOs. One company that broke the logjam was OpenTable (now owned by Priceline) which went public in May and popped 60 percent on its first day.
Think about that. Two IPOs in six months.
In 2011, there was a three-month period from August to October during the European financial crisis when the IPO market also dried up. One of the first IPOs to come out of that drought was Workday , another company with topline growth that priced at $28 and opened on October 12, 2012 at $48.05.
So, who might fit these criteria? First, there are a lot to choose from. There's 126 companies trying to raise $28.9 billion who have already filed to go public, according to Renaissance Capital.
Others—perhaps an equal number—are percolating under the radar under "confidential" filings, meaning they have filed with the SEC but don't have to disclose that fact until a few weeks before they go public.
But coming up with names that might lead the IPO charge is a tough call. Perhaps a tech name, like security firm SecureWorks, the Dell subsidiary. No debt. Revenues growing year over year, but they still have losses, though they are declining year-over-year. But the whole tech sector has been plagued by worries about multiple contraction.
How about other tech/media darlings? Spotify? That's a possibility. Pinterest? Sure. But these stocks have again been plagued with multiple contraction concerns.
Perhaps well-known consumer companies. Albertson's, perhaps, which postponed its IPO? It's well-established, but it has a lot of debt. US Foods? Again, a lot of debt, but the food sector has been holding up. Maybe. Univision? More debt.
A better choice in the consumer space might be fitness company SoulCycle, a high-growth consumer name.
This is the bottom line: all these names could go public soon if market conditions improve. But the investing public has been so burned that they are going to demand bargain prices, especially for the first few that come out of the gate.
Recently, there have been signs of buying interest in oil stocks after it had been common wisdom that oil stocks would have a hard time accessing the capital markets in 2016.
That has been proven wrong. In the last 24 hours, two Exploration & Production (E&P) companies announced major secondaries. Not only were they able to sell them, the demand was so strong they increased the size of the offerings.
This morning, Devon Energy priced a 69 million share secondary at $18.75, well above the initial share size of 55 million, though at a discount to the prior day's price.
Yesterday, Energen announced the pricing of 15.8 million shares, a nearly 30 percent increase from the 12 million they initially announced. They will use the money to repay outstanding debt, to fund drilling and for general corporate purchases.
What's going on? Here's the good news:
1) The successful secondaries prove there is appetite there for these E&P stocks, despite the "lower for longer" scenario.
2) Investors would not being putting additional money to work to buy new shares if they didn't believe there was some plausible evidence we were somewhere near a bottom in oil in the coming months.
Now the bad news:
1) No matter how you spin it, investors are being diluted, and that is not good. In the case of Devon, the float has been increased by roughly 15 percent.
2) How much more demand is there for these exploration and production names? Many other names are likely to float stock soon, and that is likely the reason most stocks in the E&P space are down 3 percent to 6 percent today, even with oil up.
The lesson is, investors will buy, but only at bargain basement prices. "Sell the secondary" is the new trade in oil.
2) It's not clear the Street will just keep buying secondaries, even at lower prices. Devon had to price its secondary at an 8 percent discount to yesterday's close. John Kilduff at Again Capital noted to me this morning that the market may only be amenable to E&P companies "that have size, have acreage in the 'sweet spots' of the shale plays and strong balance sheets" which "gives confidence these companies will be around should crude oil prices move higher."
3) Despite the buying interest, there was a slight air of desperation about Devon's secondary. The company had already announced they were cutting capital expenditures by 75 percent, had cut its dividend by 75 percent, had cut its head count by 20 percent, was looking to sell assets, and even that wasn't enough. The secondary was announced after the earnings conference call.
So where does this leave us? It certainly goes a long way toward "solving" Devon's liquidity issues. As in all deep downturns, the ones that survive will reap huge rewards. Specifically, they will survive.
And that's what we have come down to. This is a battle for survival.
Rally time? Some think so, but be careful.
Gee, suddenly some formerly gloomy traders are talking sunshine.
But is this THE bottom for the year, or even a bottom for a few weeks? Making that kind of call seems premature. We are on the verge of our first three-day rally of the year. You'd think we could at least wait a few days before getting exuberant.
But some aren't waiting. Rich Ross, an ISI technical analyst, said Wednesday morning, "the lows for the year are not in, but they are for now. The S&P should test 1,950 at a minimum with upside to 2,000 - 2,037 from there."
The markets are putting together one of the few multi-day rallies of the year. The S&P rallied almost 70 points—about 3.8 percent—from bottom Thursday afternoon to the open today.
We are seeing the best 2-day rally for the S&P 500 since August 26 and 27 of last year.
What's changed since Thursday? First, a vague comment from the UAE oil minister that there were efforts underway on a possible production cut, and Deutsche Bank saying they would be buying back some of their debt.
Since then, everything reversed. Bond yields have gone back up. Stocks have rallied. The yen has again weakened.
So far, it's mostly a lot of talk. But it's high-level talk on three of the four issues that are worrying the markets: the oil decline, a sudden devaluation of the Chinese renimbi, and bad loans in Europe.
1.Oil: Russia-Saudi production freeze? No one believes it—and even if they did freeze, production is at historic highs and will not address the oversupply issue. But these are the two biggest producers in the world at least agreeing that something is very wrong. Sure, Iran and Iraq won't comply, but the pressure is building. And even though oil is down, more than 60 percent of the S&P energy sector is up today.
2. China: weak growth is an issue, so traders took note of the record loans the Chinese banks gave out in January. Second, PBOC governor Zhou Xiaochuan strongly defended the yuan, implying there would be no sudden devaluation.
3. ECB: Draghi said he would not hesitate to act at March policy meeting if market turmoil threatens the economic outlook. Deutsche Bank definitely ignited a rally in European banks. Italian banks rallied on vague reports that the ECB or the Italian central bank authorities may start buying bad loans.
4. The Fed: more hikes on hold? On the fourth big market worry—the Fed raising rates—there has been no jawboning in the last few days, but the Fed funds futures market indicates essentially no hikes for 2016.
The fact that the market has held up well today despite a modest drop in oil is a good sign.
But it's not good enough. So much damage has been done that no one will believe anything until we put together a string of up days.
We have not put together a three-day rally in the Dow or the S&P 500 since December 21st to 23rd of last year.
All brief rallies this year have been met with new Supply (new rounds of selling). And Demand (buyer interest) has not been high despite the lower prices.
So this is still a show-me rally. Raymond James Jeff Saut expressed the sentiment of a lot of traders this morning in his note. He wants to see convincing follow-through: "I am still waiting to see if the equity markets can string together more than three consecutive positive sessions to break the back of the current selling stampede."
--CNBC's Peter Schacknow contributed to this report.
The market cannot decide how it feels. All week we were in the quasi-panic mode that has characterized the entire year. Oil down. Bond yields down. Gold up. Yen strengthening. Global stock markets down.
Then, everything changed at 2:30 p.m., ET, on Thursday. That's when oil, which was trading at $26, a 12-year-low, turned around on remarks from the UAE oil minister that OPEC may agree on a production cut.
No one believed that, but the world changed. Everything reversed! Oil rallied! Bond yields rose! Gold went down! The yen weakened!
Stocks rallied! The Monkees announced a world tour! (OK, it wasn't yesterday but they really did).
Signs and wonders! And that trend continued into Friday. In fact, the S&P has rallied about 50 points since 2:30 p.m. Thursday.
This is all the more remarkable because we are going into a three-day weekend, and you know the drill...with all the volatility, traders are wary holding positions when China will reopen on Monday and our markets are closed.
But that wasn't a worry today.
What's it mean? If oil puts in a convincing bottom, that would be important. But nothing has happened to indicate that it has. Nothing!
Next week, we'll hear from ECB head Mario Draghi, who speaks in Brussels Monday; Japan reports fourth-quarter GDP; and we'll hear from the big retailers, including Walmart.
Jamie Dimon's announcement last night that he was purchasing 500,000 shares (roughly $25 million) of JPMorgan is another sign that some executives see their shares as undervalued, and who could blame them? JPMorgan's stock is down 20 percent for the year.
Dimon already owns 6.2 million shares, but he has not been a big purchaser of stock, buying only twice in the last 12 years, once in January 2009 when he bought 500,000 shares, and again in July 2012 when he also bought 500,000 shares.
He's not the only one. Several bank insiders have bought stock in the past couple weeks.
Banks: Recent insider buying (source: InsiderScore)
Federal Reserve Chair Janet Yellen told Congress on Thursday she wouldn't take negative rates off the table as an option here in the U.S., after several central banks around the world recently adopted the extreme measure.
So how does a negative interest rate actually work and how will it affect your money?
In a exclusive video for CNBC Pro subscribers, Bob Pisani explains:
It's fairly typical for companies to announce buyback programs this time of year. Often, existing buyback programs are ending, and the company will announce a new program.
However, given the notable decline in stock prices, market watchers are paying particular attention to whether existing programs are being expanded, or those companies who have never had buybacks will implement them in order to take advantage of lower prices.
While it's early, there are several signs we are seeing somewhat more aggressive buyback announcements than usual:
Utilities, what's wrong with this picture?
Utilities are the best performers of the year, one of only two sectors in positive territory. The Dow Utilities are up about 7 percent, while telecom is up roughly 5 percent.
The S&P 500, meanwhile is down about 9 percent.
Some electric utilities have seen double-digit gains on the year:
Chesapeake Utilities - 16 percent
Con Ed - 14 percent
Duke - 11 percent
Xcel - 10 percent
For months we have watched energy, materials, and global industrials weaken on concerns about oil oversupply and slower global growth.
The concern is that "new tech" companies may have lower growth rates than the consensus, so multiples are compressing.
But there's something else going on. We are seeing signs that the weakness is spreading out, beyond "new tech," to broader names.
What happened to our rallies? What happened to last Friday, when the Dow rallied almost 400 points?
It's gone, and that's what happens in down markets: bear-market rallies are short and sharp. There's no follow-through.
Where is the bottom? Tracy Knudsen, senior VP of market research for Lowry, visited me Thursday. Lowry is the oldest technical analysis service in the U.S., founded in the 1930s, and I have been reading their stuff for years.
Her message: we are not there yet. Here's the problem: supply (selling pressure) is showing no signs of abating, and demand (buying interest) is showing no signs of picking up.
Simply put, "buy the dip" has turned into "sell the rally," and it hasn't stopped yet.
Knudsen turned bearish in August of last year. She predicted a retest of the highs, which occurred in early September, but the rally was very selective.
By early December, she noted clear signs of increasing supply (more selling) and decreasing demand (less buying interest even though prices were lower), along with declining leadership. That trend continued through the month, and by the end of December, she was saying, "the risk associated with new equity purchases appears to heavily outweigh the potential reward."
She still feels that way.
Aside from the technical issues, the biggest issue facing the market is a lack of earnings visibility.
I'll give you an example. On Jan. 1, energy analysts were expecting the energy sector as a whole to have earnings growth of negative 12 percent for 2016.
One month later, they are expecting energy be down 60 percent for the year, according to S&P Capital IQ.
Huh? From down 12 percent to down 60 percent in one month? Yep. That's because everyone realized oil was not going to go back to $70 by the end of the year. Or even $60. Or, likely, even $50.
"Lower for longer" has won out — with everything.
This was a killer for 2016 earnings. Overall earnings were expected to be up 7.4 percent for the S&P 500 on Jan. 1, now it is up only 3.3 percent.
Back to the main issue: where is the bottom? The problem is, if we are really in a bear market, it's hard to put a time frame on this.
Technically, we are not in a bear market. The S&P is only roughly 12 percent off the May historic highs.
But let's assume we are heading for a down 20 percent market, a true bear market. Knudsen notes that the average bear market lasts 13 months. The S&P 500 peaked in May. If you count it as starting in July, then we have another six months, if we go by historical averages.
My bet is, we will see a bottom before that. Haven't you noticed that everything is speeding up?
Berenberg says Wells Fargo will report earnings next year below Wall Street expectations due to "weak demand for credit."
U.S. crude prices fell more than 1 percent Friday after a report said supply from OPEC will rise.
The agenda released by the Trump administration signaled the government has halted its work on restricting Wall Street bonuses and other pay incentives.