Could jeans destroy the stock market's uptrend? Could Levi's be the straw that breaks the bull camel's back?
When people try to fathom what can crush the animal spirits they always retreat to the same old same old -- a break-up of the trade negotiations with China, a more forceful Fed, another government shutdown. An up day like today reflects the positives that are contained in those sticking points augmented by a rally in oil, which is almost always a greenlight for the market to go higher.
Me, I like to examine other reasons why the market could take a header, reasons like these jeans.
This morning the storied Levi Strauss & Co. jeans maker filed an initial public offering to raise between $600 and $800 million. Its quite an exciting deal: Levi's reported sales of $5.58 billion and a whopping $283 million in net income. This deal could be a great one, How great? Maybe great enough that you should sell PVH Corp. (PVH) which makes Calvin and Hilfiger. Is that why its stock is down a $1.50? How about Ralph Lauren (RL) ? This terrific company saw its red-hot stock decked by $3.13. Oh and how about Kontoor, the spin-off of Lee and Wrangler jeans by VF Corp. (VFC) . What if Levi's is priced at a better, lower price than Kontoor? You know VF's spinoff is going to be the source of supply to buy Levi's.
Now you may say that I am being small minded focusing on jeans. But I would tell you that jeans are the least problematic of your problems.
We are about to get a tsunami of new merchandise that is going to flood this stock market and there simply isn't enough money coming into the market to take up the slack. Speaking of the devil, Slack just filed a deal for its instant messaging and collaboration business at the workplace. It has a $7 billion valuation. Super. But what if it is priced beneath the stock of Atlassian (TEAM) , another collaboration company. TEAM has been red hot. It's got a $25 billion market cap. Wouldn't you sell Atlassian to fund a purchase of Slack? I know I would if I were a hedge fund manager. That manager is going to be begging for Slack stock but is most likely not going to have new money coming in to buy more. Plus, you don't want two messaging companies in a portfolio. That's the antithesis of diversification which, I always say, is the only free lunch in investing.
Again, I hear you, but let's go deeper. When the government shut down that left a backlog of IPOs to be examined. But the SEC is back to work and now it is reviewing a ton of deals, some of them gigantic and managers will be clamoring for the merchandise especially if they can get in early and it's red hot and will go to an immediate premium for instant profits.
Consider this competition list for money with the most recent valuations: Uber, valued at $120 billion; cyber security company Palantir, $41 billion; Airbnb, $31 billion; Lyft $15 billion, Pinterest $12 billion; and Postmates, $2 billion. We just got filings for DoorDash and Reddit, the social media publication.
Think about these. Take Palantir. Do you think that the stocks of Cyberark (CYBR) , Palo Alto Networks (PANW) , Fortinet (FTNT) , Proofpoint (PFPT) and FireEye (FEYE) won't be pummeled when that deal gets priced? I think they will be annihilated.
How about Grubhub (GRUB) ? It's in a downturn already? DoorDash and Postmates compete directly. It is up to the bankers to price merchandise so it is successful, which usually means offering the stock below the comps, or the comparable companies in the sector.
But what may be more important than any of these comps is the problem of a stock like Uber, which everyone loves. There will be tremendous demand for this stock, you and I know that. What will happen is that funds will have to indicate that they want hundreds of millions of dollars in Uber shares. When they get their allocations they are going to have to sell stocks to execute those orders.
So what happens if on the day that Uber prices we get the usual rumor story about how there are cutbacks in orders for Apple phones. There will be some analyst who comes on and says that there will be a shortfall and he downgrades it from buy to hold on the tale.
Worse, how about if that's the day that the PRC decides to launch a subtle boycott, suggesting that Chinese consumers buy Huawei because our president says that Huawei should be boycotted worldwide. Is that preposterous? I don't think so.
I see ripples everywhere. Aren't the smoking cloud kings going to be sources of funds for Pinterest? You can see Salesforce (CRM) selling off or Adobe (ADBE) because some lucky fund managers got big allocations. You want to own any travel stock or hotel stock or leisure stock if you got a lot of Airbnb? I don't know if I would.
If you go back in time over the last few years every time there has been a burst of IPOs and, worse, secondaries, we have seen whole sectors and even the whole Nasdaq get wracked in pain by a cascade of selling.
It's the nature of the beast.
Now initially you will not see it coming. There will be some big deals priced to move, deals where they only sell about 10-15% of the companies and the stocks skyrocket. That will really get the juices going and there will be a bit of money coming in from the sidelines after they deals scream higher. But then some really big deals will price and at first there will be a lot of demand. They will all go exceedingly well. Then we will start seeing several deals a week and then several deals in a day. Each one will have lower and lower quality. But once the floodgates are open there is no shutting them. And the next thing you know the market is reeking with copycats, second-rate companies and imitators and they will each provoke more and more selling.
Now I don't think this will be like the dot-com bomb when 300 companies came public in varying degrees of quality, almost all of them bad. That red tide came simultaneously with the biggest flood of secondaries I have ever seen as the initial dot comers found themselves in a footrace with the grim reaper to sell stock and get anything they could.
But it could be like the terrible tide of deals that undid the stock of Salesforce.com back in 2014 when the company itself was doing fabulously but its stock fell from $66 to $49 as accounts sold the stock to pick up a host of other cloud companies that were in the pipeline.
David Solomon, the CEO of Goldman Sachs (GS) , actually addressed this concern today when he was speaking with Leslie Picker at a Goldman conference. Solomon noted that the companies this time around are further developed and well known and he's excited by the lineup and he predicted a very good reception for them.
I think that's certainly right. This crop is really extraordinary in terms of its seasoning. Many of these companies have been around for some time and have superb track records.
But that's not the point. My worry has to do with the lack of new money coming into the market, particularly for the active money managers who compete for these deals. Earlier this very week, Doug Peterson, the CEO of S&P Global, gave us staggering figures about how money is pouring out of active funds and into passive funds, funds that can't bid for this merchandise.
And that's the issue. It's going to be a storm of deals, and sound or not, the market will not be able to handle it without taking the whole table lower. That, not the geopolitical issues everyone frets about every day, is what's really worth worrying about because when supply overwhelms demand in any market it's bad news for prices.