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IPO'bsession: The Lengths Investors Go to for Love

But... will it pay off? See one chart that suggests the answer is: It won't be mutual

by Nico Isaac
Updated: July 10, 2015

Just when you thought Don Draper had the visionary "soft sell" market cornered, a July 9 New York Times article proves that, in the world of Wall Street, it's the investment bankers, not the ad men, who seal the biggest deals.

The NYT piece probes the "hallowed tradition of banks going to sometimes amusing lengths to secure a prized initial offering," commonly known as an IPO, citing several examples.

The first two of which came from legendary rain-maker and former JPMorgan Chase financier James B. Lee Jr. (a.k.a. "Jimmy Lee.") --

While wooing General Motors, Lee parked a G.M. car in the lobby of JPMorgan's headquarters in plain sight of the visiting automaker's executives

While wooing Facebook's CEO Mark Zuckerberg, Lee donned a "custom-made Facebook hoodie" [the uniform of Silicon Valley], a "sharp departure from Lee's normal pinstripe suit."

And the most recent example from the NYT article: Amidst rumors of a soon-to-be $50 billion Uber IPO, JPMorgan just announced it will now "reimburse all of its employees for rides taken with" -- you guessed it -- Uber.

Like the article states, these overtures to win over a company are "amusing," and often extreme. But guess what? It pales in comparison to the lengths that investors continue to go to in supporting the U.S. IPO market.

According to our research, investors are hopelessly devoted to any and every newly listed company, even though the relationship has become dangerously one-sided.

On page 4 of our current, July Elliott Wave Financial Forecast, we show the following 25-year chart of the % of unprofitable IPO companies over the last six months and observe:

The chart below of money-losing public offerings from SentimentTrader.com shows that the willingness to bet on riskier and riskier IPOs continued through May 2015, when 78% of U.S. IPOs over the past six months had negative net incomes. The current percentage exceeds the 65% extreme in April 2007 and even the 76% extreme in July 2000.

What's so familiar about those dates, in bold -- April 2007 and July 2000?

Answer: They mark the two biggest stock market peaks since the Great Depression. The completed Financial Forecast chart (pictured below) includes the S&P 500 to emphasize this very point:

These extremes were followed by bear markets that led to NASDAQ declines of 78% and 56%, respectively. Amazingly, the bullish imaginations driving these ideas are even more inflamed than they were in 2000.

As the Financial Forecast concludes: "This topping process is more complex than an ordinary peak."
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