MorningWord 11/01/16: October Disguises

by Dan November 1, 2016 9:35 am • FREE ACCESS

The nearly 2% decline for the S&P 500 (SPX) in October was its first monthly decline since February (down 41 bps) and worst since January’s 5% decline. I  have no idea if the SPX is merely consolidating above the July breakout, building steam for a re-test of the prior highs, or if the series of lower lows since the August highs, below the uptrend that has been in place since the February lows, is hanging on for dear life at 2120 support:

SPX ytd from Bloomberg
SPX ytd from Bloomberg

Anyway you look at it, large cap stocks have lost a tad of upward momentum as the election season nears its close next week and as investors prepare for the second rate increase from the Federal Reserve in a year in mid December.

While public investors hit the pause button, IPOs picked up in the U.S. in October, hitting the highest monthly total of any 2016 month with 19. That’s picked up the slow pace of just 94 through yesterday, which is running well below the 2015 total of 170.

2016 is shaping up to be the worst year for IPOs since 2009, per Renisance Capital:


That said, the largest IPO of 2016, ZTO Express (ZTO), (also the largest listing of a Chinese company in the U.S. since Alibaba in 2014) might suggest that October’s uptick was merely a race for an exit by private shareholders and their investment bankers, as the stock opened below the listing price of $19.50, never trading above, and closed 13% below on last night’s close.

The lack of volatility and the modest gains in the stock market and the tepid IPO activity since Q1 have disguised what has amounted to a near mania in mergers & acquisitions in 2016. Deal-making went berserk in October, with the highest month total on record, topping $500 billion in announced deals:


What sticks out with the table above is that the two lowest totals (Oct 2016 and Nov 1999) were obviously made of mega-deals, when the c-level suite is either pretty confident or possibly desperate, per the FT:


Lastly, in October it was also rumored that Snapchat, a private company who’s last investment round valued it near $20 billion is seeking an IPO in the first half of 2016 to raise $4 billion that may value the company between $25 and $35 billion! While financial disclosures for Snapchat have been minimal, some analysts speculate that the company will be book revenues of less than $500 million in 2016 and possibly $1 billion in 2017.  This for a mobile media platform that has little appeal for anyone on the planet above the age of 27 and a hard time finding places to advertise on mostly disappearing content.

So what we have here maybe a failure to communicate between public and private investors, clearly a little angst in the c-level suite and possibly a sort of giddy feel in those places where investment bankers hang.  From where I sit there is no clear take-away from the stock markets stall, an uptick in exit activity, media reports of an eye-popping mega tech ipo and a surge in m&a, but none of it reads like the stuff you might come across at the start of a cycle.