Supply Can Kill the Bull

 | Mar 23, 2014 | 3:57 PM EDT  | Comments
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Stock quotes in this article:

sap

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ibm

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orcl

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crm

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lnkd

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z

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yelp

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wday

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csod

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feye

It's funny how uninformed so many commentators are when they opine on what kills the bull.

They talk about higher rates as a bull killer, and that's certainly a possibility, but only when rates get so high that we laugh again at paltry dividends. We are nowhere near that. The Fed should have no desire right now to take rates to destructive levels because, as much as the more-negatively-oriented people whine about it, there is no real inflation in system, save beef and guacamole, something you can take as gospel from this Mexican restaurant owner.

Inflation is truly pernicious and has slain some bulls as the Fed crushes it with high rates.

A sudden and nasty decline in economic activity and employment can crush the profits of companies and that's always going to wreck the bull. But if you look at the 2000 dot-com crash, one of the seminal crashes of all time, that was crushed not by hard economic times -- in fact, the S&P 500 did relatively well during that selloff -- but by insider selling. That's the same kind of insider selling that we will most likely get months from now when all of these newly-minted IPOs open the gates for insiders.

Now it might not necessarily end badly. We know that there were a flood of secondaries in many of the successful 2.0 Web companies like LinkedIn (LNKD), Zillow (Z) and Yelp (YELP) and that didn't kill the technology bull.

Plus, there are enough big-capitalization stocks that have been buying stock, not selling it.

Nevertheless, the sheer numbers of cloud and biotech IPOs makes me uncomfortable and worried. For one, there are many aggressive acquirers out there in the cloud space, from IBM (IBM) and SAP (SAP) to Oracle (ORCL) and Salesforce.com (CRM). Why didn't any of them snap up these companies? Why didn't Workday (WDAY) or Cornerstone OnDemany (CSOD) buy Paylocity (PCTY), the company that came public this week that does human capital management software?

Why didn't LinkedIn or Oracle buy Globoforce (THNX), an employee-to-employee social recognition software platform for large enterprises? If it is as good as it says, why wouldn't Salesforce.com want it to complement some of its businesses? Salesforce.com has a robust platform for banking software, why not snare Q2 Holdings (QTWO) that does community bank software, sold as a service of course, which is growing at a 47% clip?

Wouldn't IBM want Amber Road (AMBR), a cloud-based software company that automates importing and exporting? That would seem to be a terrific gateway addition.

I think the answer is that the public markets had develop such an appetite for these kinds of stocks, stocks with revenue growth and no earnings, that the owners of the companies recognized a good thing when they got one. While they didn't do outrageous slivers on the IPOs -- nothing below 10% -- they did nothing to tamp the frenzy that's been going on and it is the frenzy that makes me dislike large parts of this market.

Now, I have to figure that these deals will simply be accidents waiting to happen when the follow-on offerings occur.

I think the FireEye (FEYE) deal awoke the fear in me, a deal filed when the stock was at $96, was priced $82 and then broke down to the $60s and it was like nothing bad happened. That's just the way it was in 2000. We saw secondary after secondary in rapid fashion, all of which were like FireEye: priced high, sold low and then total breakdown with the insiders glad to get something out of their endeavors.

Keep track of this. It won't happen overnight, as there are many months to go and many lock-ups to expire. But this much supply can hurt the established players -- notice how Salesforce.com has been trading? -- as well as the newbies.

I don't like it.

It's negative.

No two ways about it. Supply can kill the bull and certainly did back then.

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