Today's WSJ reports that:
Investors are stampeding into initial public offerings at the fastest clip since the financial crisis, fueling a frenzy in the shares of newly listed companies that echoes the technology-stock craze of the late 1990s.
October was the busiest month for U.S.-listed IPOs since 2007, with 33 companies raising more than $12 billion. The coming week is slated to bring a dozen more initial offerings, including Thursday's expected $1.6 billion stock sale by Twitter Inc., the biggest Internet IPO since Facebook Inc.FB -2.10% 's $16 billion sale in May 2012.
As I document in my article How American Corporate and
Securities Law Drives Business Offshore, in The American Illness
During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.
Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.
In the article, I explained that how the risk of anti-fraud liability adversely affects the competitiveness of U.S. capital markets and how the federalization of key aspects of corporate governance during the last decade generated significant net regulatory costs adversely affecting those markets. None of these structural problems have been solved. Instead, the current book in IPO volume is happening despite them.
The reasons behind the IPO boom in fact make it look like an IPO bubble:
The rush to buy shares of newly public companies is the latest sign of investors' thirst for assets with potential upside, at a time when relatively safe investments are generating scant income due to tepid economic growth and Federal Reserve policies that have kept a lid on U.S. interest rates. ...
To others, however, the demand is an indication that a rally fueled primarily by abundant liquidity from the Fed, and not by earnings growth and economic expansion, is entering dangerous territory.
"When I hear intelligent investors asking me not which companies are good to invest in, but which IPOs can I get into, it scares the heck of me," said Mark Lamkin, a wealth-management adviser based in Louisville, Ky.
As well it should. Once the Fed starts to curb liquidity, the structural legal problems that beset US capital markets will quickly pop the present IPO bubble.
