Are IPOs a leading indicator? If so the end may well be nigh

[Mercury]

It has often been observed that high levels of M&A and IPO activity occur in the run up to a major stock market reversal as buying companies is the last refuge of CEOs desperate to keep the "growth" going and devoid of any other ideas for investment.  This time around there has also been a massive share buy back endeavor.  IPOs tend to flock when valuations are high but eventually investors get wary and so do underwriters.  Recent IPOs haven't done that well, remember Poundland?  Then again the record of IPOs being profitable for all but the people who turn it over quickly is quite poor, maybe that is because they happen near the top of a market.  If all that is true then perhaps a drying up of IPOs could be a signal of a down turn?

 

Here is a quote from a recent Elliott Wave International article:

 

"...the IPO market is comatose, with just twelve U.S. offerings so far this year. The amount raised via IPOs in the first quarter of 2016 is the lowest total since the fourth quarter of 2008, during the depths of the Great Credit Crisis."

 



[MacD]

Hi  you make an interesting point about buying companies being the last refuge of CEOs, which made me recall something that happened to me a few years back.

I used to work for an American technology company in the late 90's whose executives were being handsomely rewarded by the issue of lucrative share options. As we approached the millennium, growth started to slow and the share price waned. The executives decided that the answer to this problem was to start acquiring smaller companies, giving the appearance of growth and boosting share value and, most importantly, maintaining the share option gravy train.

Cue the demise of the dotcom bubble, and in 2002 the company I worked for went downhill to the point of going bust and was acquired by a competitor. A lot of us lost our jobs. Even worse, the CEO who presided over this debacle managed to maneuver himself into the position of receiving a huge payment from the acquiring company for his services in facilitating the takeover. Needless to say, my cynicism has never fully recovered. 

Since then I have always felt that the awarding of pay/bonuses should never be based on share price - it only encourages manipulation. It would be far better to base executive's remuneration on profits. But alas, I don't run the world - and as far as I can tell, today's company bigwigs are depressingly similar to those of yesteryear

Mac.

[Mercury]

They are exactly the same  and I have had similar experience as your have in some of the FTSE 100 and Dow companies.  The other big scandal in the making this time is share buy backs and other nefarious actions that manipulate earnings at quarter and year end.  When the dust settles on the next big crash and if it is a big one, as I expect (not just in the markets but the wider global economy) then there will have to be a clear out and lasting change in the way big business is run from central banks to the commercial banking system to the listed companies themselves.

 

For trading though it is an accident waiting to happen and we can profit from it if we can spot when the worm has turned and get on board.