The Bull 'n Bear on IPO Traps and Central Planning
May 18, 2011
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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
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