Stocks went nowhere to start the week. Again.
And according to David Bianco at Deutsche Bank, stocks probably aren’t going to go anywhere until after the election, give or take.
First, the scoreboard:
- Dow: 17,530, +14, (+0.1%)
- S&P 500: 2,037, +1, (+0.1%)
- Nasdaq: 4,768, -5, (-0.1%)
- WTI crude oil: $39.40, -0.2%
2016 so far has seen the fewest IPO deals since 2009, which was shrouded in post-crisis doom. According to data from Dealogic, just $1.2 billion has been raised through just nine public debuts; last year the same period saw 33 deals raising $5.5 billion come to market.
So, this is bad.
Portia Crowe asked some bankers what’s going on. Now, given that these folks are in charge of bringing companies to market the commentary wasn’t all doom and gloom. But the general idea is that, well, there will eventually be a window for initial public offerings, it’s just that someone (rather, some company) is going to have to do it first.
“While the filed backlog is fairly diverse, the most likely first few names to hit the IPO market will probably fall within the technology, media, and telecom or consumer sectors,” Peter Lyon, co-head of equity capital markets in the Americas at Goldman Sachs, said.
“Once a few transactions price and trade well, we think that will likely propel a broader group of prospective issuers to approach the market.”
But, again, who is going to go first? “I don’t actually think the water’s cold, but if you’re not highly confident of investor sentiment, do you jump in, or can you just wait it out until there are stronger signals and data points?” asks Anthony Kontoleon, global head of syndicate in equity capital markets at Credit Suisse.
If you can wait, you wait. As we all do.
Chinese insurance giant Anbang really wants to buy Starwood Hotels.
The company on Saturday offered $81 per share in cash for the hotel chain, which has currently agreed to merge with Marriott in a deal that would create the largest hotel chain in the world.
Starwood said it will do what is best for shareholders, which, you know, sounds about right.
But this deal is actually about the trend of Chinese companies coming to the US to scoop up assets. And these companies are often using cash, which is hard to challenge when a domestic-based potential acquirer like Marriott wants to offer some cash and some stock, which is more or less the traditional mix of merger financing, and a mix that in this case is slightly less attractive to existing Starwood shareholders.
Or as Portia Crowe writes (emphasis mine):
Marriott’s big disadvantage in this fight is that while Anbang’s offer is all in cash, its offer is based primarily on stock — and investors have knocked the value of that stock back.
Last week, for example, Marriott’s stock dropped after it made its higher counteroffer. By the close of business that day, its bid had dropped in value to about $78.85 a share. Early on Monday, the value of Marriott’s offer hovered close to 78 a share.
Because Marriott was counting on using shares to fund most of the deal (only about $3.6 billion of its $13.6 billion offer is in cash), the company is still not free, as Anbang is, to boost its offer without worrying about what its stock is doing.
With the backing of the Chinese government, companies like Anbang are usually able to take a longer-term view on value and are less likely to have vocal shareholders banging on their door if they overpay. Brand names and goods can be sold across a giant domestic market after an acquisition, and Chinese bidders rarely compete with one another.
So not only does Marriott not have the implicit backing of its home government (from a financing standpoint) to make an all-cash offer for Starwood, but, unlike Anbang, Marriott is also fighting off the arbitrageurs taking the other side of its offer’s success, thus keeping a lid of sort on its share price. A share price which, in this instance, is being used as currency.
A pickle, surely.
Speaking of deals, here’s early Facebook employee Chamath Palihapitiya speaking with Vanity Fair’s Maya Kosoff (emphasis mine).
VF: Funding is slowing down, both in seed rounds and mega-rounds. There have been fewer tech I.P.O.s recently, more companies are raising down rounds. Are we in a downturn?
CP: I think we’re in a phase where we’re realising that the people who have been allocating capital thus far have done a horrendous job. Most people’s inherent reaction is to make sure they never lose their job, and so they become risk-averse. I think what we’ve had is a handful of investors who have extreme vision who make great investments in things that are amazing businesses: Facebook, Google, Uber. And then everybody else reacts to that success by trying to do the thing that most approximates the thing that’s working. As a result, most of those businesses are fundamentally not good, they’re poorly run, and they never should have been invested in in the first place. But the capital came in because the person who had control of the capital was able to justify it intellectually to themselves versus something else that could have become the next Facebook or Google.
The reality is, great companies can go public in any market. When we talk about the I.P.O. slowdowns what we’re really saying is that there really just aren’t that many good companies being built. We need to divorce ourselves from venture capital as an occupation and focus on using capital as a way to take really big bets on things that just seem totally audacious. Right now we haven’t done enough of that, and the result is that most of the things we’ve funded are mostly crap and largely worthless.
Think about the bankers above: eventually there will be a window for companies to go public.
But consider, again, the sort of conundrum we laid out: someone has to go public first so that other companies will be confident a market for new issues exists. I’d guess that, at least on the tech front, Palihapitiya sees this is as kind of a lame excuse for, “Yeah, these companies are just bad.”
Of course, you can’t go talking to the press about potential clients like that if you’re a banker. But if you’re a respected Silicon Valley veteran it is almost an obligation to do as much.
Speaking of Facebook! Here’s a great Wall Street Journal story from Georgia Wells about how firefighters in Menlo Park, California — where Facebook global HQ is located — are having a hard time finding places to live anywhere near the town.
“We’re grateful for the thriving economy, but as fire chief, I’m challenged by it,” fire chief Harold Schapelhouman told the Journal. But: “I need to stop my workforce from moving further away.”
Wells notes that one the department’s former captains lived in Reno, Nevada, roughly a four-hour drive away. Now, Wells notes that the department has firefighters on shift for 48 hours straight and then they get four days off. So, the four-hour drive isn’t quite what it might seem.
But the gist of this story still works: a few amazingly successful companies create an entirely new class of money that pressures the existing services economy in ways you sort of might realise but not fully appreciate until members of your fire department drive several hours to work.
Also: literally unicorns.
Personal income and spending data out Monday morning was disappointing.
Incomes rose 0.2% in February and spending rose 0.1%. Both figures were expected to rise 0.1%.
But this report also gave us the latest reading on “core” PCE — a measure of inflation that strips out the more volatile costs of food and gas and is preferred by the Federal Reserve — which rose 1.7% against last year. This increase was the same as that seen in January, but below the 1.8% that was expected and showed that while some progress has been made on the inflation front, the Fed is still undershooting its target and the idea that we’re looking at a coming “inflation scare” this spring is getting slightly more distant.
This report also indicated that the personal savings rate remains stubbornly high, clocking in at 5.4% in February.
We’ve written about the savings rate here and here, but the broad idea is that if consumers are electing to sit on extra money earned from lower gas prices or raises received at work, the consumption-led next phase of US growth will simply not materialise.
This is slightly counterintuitive and, some might argue, advocating for irresponsible personal financial behaviour. But look: we have a credit- and consumer-based economy and if we’re not spending money on goods and services (let alone borrowing money to spend on goods and services) then we’re simply not going to see the kind of GDP growth numbers most private citizens can get excited about.
Accordingly, the Atlanta Fed’s latest forecast for first quarter GDP has fallen all the way to growth of just 0.6%, down from as high as 2.3% earlier this year.
Elsewhere in the economy, pending home sales in February rose 3.5%, more than expected, while the Dallas Fed’s latest manufacturing gauge beat expectations but still showed regional activity is on the decline.
Andrew Caspersen, formerly a managing director at PJT Partners’ Park Hill Group, was charged with securities and wire fraud on Monday.
And, uh, this was doesn’t seem to be that subtle.
The SEC alleges that Caspersen, “solicited approximately $95 million from two institutional investors by offering promissory notes issued by Irving Place III SPV LLC. The complaint alleges that Irving Place III SPV LLC is a shell entity formed and controlled by Caspersen with no legitimate business operations, unlike the similarly named Irving Place Capital Partners III SPV, a legitimate private equity fund not associated in any way with Caspersen.”
Additionally, the SEC complaint also alleges that:
- Caspersen obtained a $25 million investment in November 2015 from an institutional investor by falsely representing that the investment would be secured by approximately $900 million of assets of Irving Place Capital Partners III SPV.
- Shortly after the investor wired its $25 million investment to Irving Place III SPV LLC’s bank account, Caspersen simply took control of the funds for his personal use.
- Using similar false and misleading statements, Caspersen later solicited an additional $20 million from the first investor and $50 million from a second, in both cases unsuccessfully.
So, Caspersen allegedly used someone else’s brand name to create a similar brand name which was actually just a bank account for himself (and definitely not that other brand!). I’m not a lawyer, but this seems straightforward?
In a statement to Business Insider, PJT said:
Since the inception of our Firm, an unconditional principle of integrity has been a core value as we build a lasting franchise. Our commitment to clients begins and ends with honesty and transparency, and strict adherence to these values is the absolute cornerstone of our Firm.
We were therefore stunned and outraged to learn of the fraudulent circumvention and violation of the Firm’s compliance policies and ethical standards by Andrew Caspersen, a member of the Secondaries Group at Park Hill since January 2013. Immediately upon learning of facts that suggested improper behaviour, we commenced an internal investigation led by outside counsel, Paul, Weiss, and very quickly thereafter, brought the matter to the attention of the U.S. Attorney’s Office in Manhattan. Since that time we have cooperated fully with law enforcement, and we will continue to do so. We have terminated Andrew Caspersen for cause.