Data Brief - IPO Appetite Has Dwindled To Nothing

IPO Appetite Has Dwindled To Nothing

Monday, April 14, 2008

There is perhaps no market phenomenon more tied to the idea of striking it rich than an initial public offering (IPO).

During bull markets, we see every Tom, Dick and Harry rushing to get their company listed so they can cash out and sail the high seas into retirement. During bear markets, owners - and more importantly, bankers - aren't quite so enthusiastic, and we tend to see IPO offerings fall dramatically.

That's certainly the case now.

Since the beginning of the year, only 28 companies have filed to go public. Granted, April isn't over yet but as of now that's one of the lowest four-month totals since 1994. The only other periods with as low or lower offerings were in the spring and fall of 2001, and again in the spring of 2003.

Not only are companies holding off listing their shares for the first time, established firms have almost stopped offering new shares in "additional" filings. The chart below shows a four-week average of combined IPO and Additionals offerings since 1994:

It's hard to make out on the chart, but the current four-week total of 100 offerings is the second-lowest since 1991. The only other period was November 1998, after the last financial-led crisis. The next lowest was in April 2003, the end of the last bear market.

It's obvious from the chart that companies aren't interested in listing new shares, and we're also seeing a spike in withdrawals of previously announced IPOs. During the first three months of this year, 34 firms pulled their IPO papers, which is eclipsed only by the spring of 2001 and immediately after the 9/11 tragedy as periods of extreme "new issue" avoidance.

The spring of 2001 obviously wasn't the end of the bear market - in fact, it was only the beginning. We had a wicked rally in the spring of that year off of an intermediate-term oversold condition, but stocks still rolled over to lower lows.

Still, when we combine the number of withdrawals with the almost complete lack of firms offering new and additional shares to the public, it's likely that we're in a period of share reduction - where the number of shares publicly traded is more likely to be reduced than expanded. That's a relatively rare phenomenon, and combined with record cash balances on company and individual balance sheets, could be a very conspicuous feather in the bulls' caps.

Less supply + rising demand + massive available cash = rising prices. The only missing ingredient there is rising demand - we need to see folks continue to become more bullish and willing to commit that cash to the market in order for this formula to have an observable effect.