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The Bull 'n Bear on IPO Traps and Central Planning

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May 18, 2011 – Comments (1) | RELATED TICKERS: GS , NEM , PTR

Frothy IPOs are the new contrarian indicator. Professional social network LinkedIn has raised the indicative pricing of its shares by 30% -- unheard of since the tech bubble. Commodities producer/ trader Glencore which is also preparing to list also raised its pricing range. Finally, bond/ distressed debt investment firm Oaktree is also preparing to transfer its listing from a semi-private market organized by Goldman Sachs to the NYSE. Oaktree will not be raising any money in this transaction. Nevertheless, these 3 IPOs are emblematic of the ambient enthusiasm for risk assets. Be fearful when others are greedy, as Mr. Buffett likes to say. Glencore are savvy money men -- one should be very wary of buying when they are selling. Here's a historical example that illustrates why it pays to be wary: The returns to shareholders of Goldman Sachs (NYSE: GS) since the investment bank's listing have been inadequate.

For some reason, American investors/ capitalists often appear to fall over themselves praising China's central planning model. Electricity generators are now implementing power rationing in China. One of the problems is that the industry is operating at a loss due to government's insistence on keeping end-use prices low; meanwhile input costs are increasing. This distortion could create a long-term problem, too, in that it disincentivizes producers from adding capacity.

Enjoy your day.

Alex Dumortier

1 Comments – Post Your Own

#1) On May 20, 2011 at 4:46 PM, rfaramir (29.42) wrote:

Hello, California, all over again! This time, with no Enron to blame, government central planning is the culprit (again).

With properly deregulated input prices (yay!), but still-regulated output prices (boo!), what else could you possibly predict? The deregulated input prices will on average be lower (free market effect), but not evenly so, and when the conditions are right, will remain high for periods of time. If the companies could increase output prices, they'd stay alive, and consumers would economize on power usage. But the state intervening to set the output price level dooms the companies during these times of natural (free-er market) higher input prices.

Just in case it's not clear, the answer is not to re-regulate the input prices, but to let the output prices float according to supply and demand.

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