Trader Talk

Soft IPOs inject caution into jumpy market

A trader works on the floor of the New York Stock Exchange on the morning of March 3, 2014 in New York City.
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The wave of initial public offerings continue to be mixed. After yesterday's disappointment with King Digital Entertainment, the IPO market is on pins and needles, watching new offerings very carefully.

With that said, three IPOs priced overnight. The early word: one priced below, one in the middle, and the other above.

At the Big Board, human resources outsourcer TriNet Group (TNET) priced 15 million shares at $16, in the middle of the $15 to $17 price talk.

At the NASDAQ, biotech firm Applied Genetics (AGTC) priced 4.2 million shares—more than the 3.6 million expected—at $12, below the $13 to $15 range.

Why? They needed to raise $50 million for funding, and in order to reach that figure, they raised the number of shares and lowered the price.

And Square 1 Financial (SQBK), a bank that lends to venture-backed companies, priced 5.7 million shares at $18, above the $15 to $17 price talk. What does this mean? With Applied Genetics, which is an early stage biotech, there are clearly signs of push back from investors.

The one to watch is TriNet, which priced in the middle of the range. It's a fairly large deal--about $240 million.

The average IPO was up 22 percent on the first day of trading this year, well above the historic average of roughly a 13 to 15 percent gain. If TriNet and Square 1 can't manage at least a 13 to 15 percent gain, something is amiss.

I noted yesterday that several recent IPOs are showing signs of weakness. A10, which optimizes data center performance, went public last week at $15 and is now trading below its IPO price, at $14.55.

Many other companies that went public last week: Paylocity, Mediwound, Amber Road and Q2 are trading below their first day pop. They're still above their price, but the IPO aftermarket premium is shrinking fast.


1) The Federal Reserve's rejection of Citigroup's plan to give investors higher dividends and stock buybacks is the talk of trading desks this morning.

What does it mean? Most seem to be viewing this as a black eye for management. New CEO Michael Corbat "was supposed to be the guy to right the ship," one bank trader said to me. "Making each biz unit responsible with his accountability matrix. It shows he doesn't have a grasp globally."

Indeed. The Fed seems to be saying your systems, procedures and controls are not up to snuff. Wasn't being denied a dividend hike by the Fed more than a year ago the final straw for Vikram Pandit?

Citi currently pays a quarterly dividend of one cent a share. Now, however, Wells Fargo pays 35 cents, JPMorgan pays 40 cents, Morgan Stanley pays 10 cents, even Bank of America's pays 5 cents, up from a penny.

Four other institutions didn't get approval: HSBC, RBS, Santander, and Zions Bancorp.

What is not being discussed is how much the value of banks has risen. The is just off its highest level since 2008. Many analysts have noted that the regional banks in particular have gotten price, with many trading at 1.5 to 2.0 times book: at the height of the financial crisis many were at 0.5 times book.

Some small regional are over 2 times book. Names like Comerica, Keycorp, Suntrust that were trading at 0.8 times book a couple of years ago, are now around 1.3 to 1.5 times book.

Does this mean they are over-priced? Not necessarily. Remember, bank stocks are the ultimate rising rate trade. Bank stock traders constantly point out that this is the natural trade for a generalist portfolio manager.

They aren't expensive if rates go higher.

--By CNBC's Bob Pisani