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The "free money" aspect of IPO's is one of the hallmarks of market frenzy.
Normally, companies going to market expect IPO pricing to closely
approximate market value with a modest discount to encourage investors to
assume the additional risk. When markets hit the frenzy level, two things
happen: 1) companies are brought to market, which under normal market
conditions would never see the light of day and 2) a general attitude of
monopoly money pervades the IPO market. The result are IPO's which double,
triple and quadruple right out of the starting block.
I saw the very same phenomenon in the mid-sixties when we were in process of
taking our computer company public just before the IPO market (and the
market in general) went into a prolonged bear market.
Earl
----- Original Message -----
From: Daniel Goncharoff <Daniel.Goncharoff@xxxxxxxxxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxx>
Sent: Monday, October 18, 1999 3:10 AM
Subject: Re: FOMC meeting?
> We also must remember that a lot of the leverage today is in the financial
> structure of many of the 'new paradigm' companies.
>
> In the old days, during an IPO, when 10 million shares were issued, with 5
> million sold to the public and the balance held by the original owners,
> the cash from the 5 million shares sold went into the company coffers, at
> a level commensurate with its market price. If the 'market price' was
> thought to be about $100, the IPO was done around $100 (that was the job
> of the underwriters, to determine where that market price would be), and
> the company would take in $500 million cash to support its value.
>
> Now, the same IPO would be priced at $20, the market price shoots to $100,
> but the company only receives $100 million.
>
> So what? This will impact the ability of these companies to survive a
> downturn. Once this is widely realised (my belief is that it is not
> understood by most investors), confidence will drop, hurting market prices
> in some sectors severely.
>
> Just my opinion.
> DanG
>
> Mike Higgs wrote:
>
> > Personal debt by itself doesn't mean much. Is 400K in debt a lot
> > compared to 190K in 1980? No, it isn't. In fact, it's exactly the
> > same after deflating it by the annual CPI numbers. What's more
> > relevant is the ratio of debt to income, i.e., the ability to service
> > and repay debt. I suspect that this ratio expands and contracts in
> > direct relation to the degree of consumer confidence. I don't have
> > any of this raw data but I wish I did so that I could see if I'm
> > talking out my elbow.
> >
> > This stock option corporate game is such bs. My sister-in-law just
> > received 1000 IBM stock options. Given IBM's price, she was ecstatic
> > until she realized that if IBM's stock price dropped below the level
> > that it was at the time she received the options, they were worthless.
> > Depending on how your AOL friends options work, they may be in for a
> > big surprise. And they're nuts to spend a promise of things to come.
> >
> > Regards,
> > Mike
> > ---
> > Aboard 35' Edel Cat "Moongate" in New Bern, NC - the hurricane capital
> > of North America
> >
> > ----- Original Message -----
> > From: Howard Hopkins <hehohop@xxxxxxxxxxx>
> > To: <bruceb@xxxxxxxxxxxxx>; <eadamy@xxxxxxxxxx>;
> > <realtraders@xxxxxxxxxxxx>
> > Sent: Sunday, October 17, 1999 3:25 PM
> > Subject: Re: FOMC meeting?
> >
> > > I've been following your discussion over the past few days.
> > >
> > > I have a question and I wonder if anyone knows the answer. Although
> > margin
> > > debt is not at the % of net worth that it was in the late 20's, how
> > is
> > > personal debt today compared to then? I live in the Wash, DC area
> > and have
> > > two friends that work for AOL. They make good money, but they
> > believe they
> > > are paper millionaires (even though they are not... yet)through
> > thier stock
> > > options. And they spend accordingly to that "inevitable" windfall
> > that they
> > > are "entitled" to.
> > >
> > > Many of my thirty-something friends have $400,000 in home, car, and
> > credit
> > > card debt. Isn't this just as important in evalutating how
> > precariously
> > > perched this game of cards really is?
> > >
> > > Thanks for any feedback,
> > > Howard
> > >
> > >
> > > >From: "BruceB" <bruceb@xxxxxxxxxxxxx>
> > > >To: "Earl Adamy" <eadamy@xxxxxxxxxx>, "RealTraders
> > Discussion Group"
> > > ><realtraders@xxxxxxxxxxxx>
> > > >Subject: Re: FOMC meeting?
> > > >Date: Fri, 15 Oct 1999 08:07:38 -0400
> > > >
> > > >Earl, the point of the info is that investors (speculators) had
> > access to
> > > >enormous amounts of leverage for the vast majority of time the
> > market went
> > > >through its meteoric rise in the 1920's, ranging from 3% to 20%
> > margin
> > > >rates. As the info points out, margin rates didn't hit 20% until
> > just a
> > > >few
> > > >months before the crash (sorry, I said "after" in my previous
> > post).
> > > >Whether you choose to accept the "conventional" figure of 10% as an
> > average
> > > >margin rate for that period is up to you.
> > > >
> > > >Once again, the important point of this whole subject for all
> > investors is
> > > >that the 1929 market was built on massive leverage. History has
> > clearly
> > > >shown that leveraged money is the fuel for market crashes (on this
> > point
> > > >Norman and I agree completely). Our current market, while reaching
> > > >valuations comparable to the 20's, doesn't have a fraction of the
> > leverage
> > > >built into it. No leverage, no crash. It's that simple.
> > > >
> > > >When the market "corrected" last fall to the tune of 20+%, who was
> > it that
> > > >sold? It was hedge funds, who were heavily leveraged and had to
> > sell to
> > > >cover margin calls. The average investor sat on his hands and was
> > well
> > > >rewarded for his resolve.
> > > >
> > > >Bruce
> > > >
> > > >----- Original Message -----
> > > >From: Earl Adamy <eadamy@xxxxxxxxxx>
> > > >To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxx>
> > > >Sent: Friday, October 15, 1999 6:06 AM
> > > >Subject: Re: FOMC meeting?
> > > >
> > > >
> > > > > The material Bruce attached was interesting and carried some
> > eerie
> > > >echoes
> > > > > including the Fed's easing of rates in 1927 to help the
> > Europeans.
> > > >However,
> > > > > I didn't find much in the way of specific info regarding call
> > rates
> > > >except
> > > > > for two passages:
> > > > >
> > > > > a) "The practice of buying a large number of shares of stock
> > with a very
> > > > > small amount of one's own money (as little as 3% during the
> > 1920's) and
> > > > > borrowing the rest from the broker."
> > > > >
> > > > > b) "On Tuesday, March 26, 1929, the trend intensified and the
> > rate on
> > > >call
> > > > > money went to 20 percent."
> > > > >
> > > > > The first is pretty generic as it applies to an entire decade
> > while the
> > > > > later is more specific as it applies to the period some months
> > before
> > > >the
> > > > > big one let loose. There is no indication regarding the length
> > of the
> > > >period
> > > > > to which the 20% applies but I see nothing which refutes
> > Norman's
> > > >statement.
> > > > > While I have extensive historical data, one item I do not have
> > is call
> > > >rates
> > > > > back to the 20's ... if anyone has monthly call rates for 1929
> > we could
> > > >put
> > > > > this part of the discussion to be and move on to new material.
> > > > >
> > > > > Earl
> > > > >
> > > > > ----- Original Message -----
> > > > > From: BruceB <bruceb@xxxxxxxxxxxxx>
> > > > > To: <ericrogers@xxxxxxxxxxxxx>; BruceB <bruceb@xxxxxxxxxxxxx>
> > > > > Cc: <droex@xxxxxxxxxxxx>; Earl Adamy <eadamy@xxxxxxxxxx>;
> > RealTraders
> > > > > Discussion Group <realtraders@xxxxxxxxxxxx>
> > > > > Sent: Thursday, October 14, 1999 10:05 PM
> > > > > Subject: Re: FOMC meeting?
> > > > >
> > > > >
> > > > > > Sorry Norman. After a grand total of 5 minutes of searching
> > on the
> > > > > > internet, I found enough info to invalidate your opinion.
> > Attached is
> > > >a
> > > > > > text file containing passages from two different sites on the
> > web
> > > > > discussing
> > > > > > the 1929 crash. The first passage makes it clear margin rates
> > for
> > > > > investors
> > > > > > in the twenties got as low as 3%. The second passage makes
> > clear that
> > > >the
> > > > > > broker call rate (referred to as the "Call Market") did not go
> > to 20%
> > > > > until
> > > > > > AFTER the crash was underway.
> > > > > >
> > > > > > Now, if margin rates got as low as 3% during the twenties, and
> > didn't
> > > > > reach
> > > > > > 20% until after the crash, is it really so hard to believe
> > that the
> > > >market
> > > > > > spiraled upwards at an average margin rate of 10% before
> > crashing?
> > > > >
> > > > >
> > > > >
> > > > >
> > > >
> > >
> > > ______________________________________________________
> > > Get Your Private, Free Email at http://www.hotmail.com
> > >
>
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