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Supply Can Kill the Bull
Posted at 3:57 p.m. EST on Sunday, March 23, 2014
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 the 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 , Zillow and 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 number 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 and SAP to Oracle and Salesforce.com . Why didn't any of them snap up these companies? Why didn't Workday or Cornerstone OnDemand buy Paylocity , the company that came public this week that does human capital management software?
Why didn't LinkedIn or Oracle buy Globoforce , 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, so why not snare Q2 Holdings , which does community bank software, sold as a service of course, and which is growing at a 47% clip?
Wouldn't IBM want Amber Road , 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 have developed 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. 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 deal awoke the fear in me. The deal filed when the stock was at $96, then it was priced $82 and then it 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.
No two ways about it. Supply can kill the bull. It certainly did back then.
The IPO Window Lets In a Chill
Posted at 11:55 a.m. EST on Wednesday, March 26, 2014
Flat one, froth nothing. That's the score right now in this endless series of games between the parts of the market that are cheap and represent value, and the hyped, the overpriced and the over-loved.
Just take a look at King Digital . Here's a profitable company that has mastered the art of mobile gaming but, arguably, is a one-hit wonder. It's a $6.2 billion company with a stock that immediately broke the print price, meaning it dove instantly below where the IPO was priced.
Now some of that is due to the bankers misjudging the market. Some of it is skepticism from the horrendous Zynga deal, the last time a big gaming play came public. But most of it is common-sense skepticism, people just being simply unwilling to speculate on just anything. That's the case even though, in an irony of ironies, this company is actually profitable, as opposed to many of the software-as-a-service cloud plays and developmental biotechs that may never have a product that passes FDA muster. So in that sense, you have to recognize that there is some sweet justice here. Zynga is still too fresh in people's minds.
[Read: Why You Should Short Hog Futures]
Too bad that the dot-coms aren't as fresh.
Now I have been adamant that there can't be two markets, a froth market and a stable, flat market. The froth market is made up of marijuana stocks, hydrogen fuel cells, software-as-a-service plays, data analytics businesses and too-young biotechs.
If you believe, as I do, that you can't have a recharging in the big growth tech and biotech names until the IPO market cools, because there's only so much money going around, you have to be heartened by the after-market performance of the cloud, big data and early-stage tech IPOs, because almost all of them are now down huge from their highs, and most are very weak today.
That's crucial to my thesis that this IPO window must close, because it is killing the established players as hedge and momentum funds pile out of those and go into these deals.
You need to have more fear in the IPOs, and that's what King has done. That's what the after-market collapse of the last deals has done. You need to have more fear of the hydrogen plays. That is why Plug Power is selling off, because of an injudicious release from the company that it may win a big order in a couple of weeks. Believe me, that's not how qualified CEOs announce news.
There are many established cloud plays that can't get their footing as sellers continue to dominate the cloud stocks. Today is Workday's day to go through the stock thresher. Concur Technologies is getting whacked again, as is Salesforce.com . There's just too much stock sloshing around from insiders everywhere to make them stabilize, plus portfolio managers are clamoring for low growth at a reasonable price, not ultra-high growth at a very high price.
The Facebook acquisition of some wacko virtual game helmet for a couple of billion is leaving a lot of people cold too, because it, like King, is a reminder of yesteryear, where anything goes. Now I happen to think that you are betting against Mark Zuckerberg when you bet against this acquisition. That has been a crummy bet since the company figured out digital handhelds when the stock was in the low $20s, but it's been a real good short bet since WhatsApp. Zuckerberg has lost the trust of some of the new shareholder base, all part of the froth-to-flatness conversion.
Meanwhile, the established biotech stocks are attempting to rally, but they are by no means out of the woods, and it looks like Gilead , Biogen Idec and Celgene are ready to resume their swoon.
This collapse is part of a necessary process that leads to the end of the rotation from growth to value. For the longest period, new supply was lacking, mostly because of big stock buybacks and conservatively priced IPOs of real businesses that were snapped up by long-termers. But now the insiders and the IPOs are tipping this market into selloff mode, because there is too much supply. If you close the IPO window, the same sellers will turn buyers.
That makes King the beginning of the end. The end will take a while. There are still red-hot deals such as GrubHub and Box to come. But as skepticism builds about new merchandise, the old growth merchandise will come back in vogue.
Not yet. Not yet.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long CELG and FB.
- what can kill a bull market, and
- how to deal with the collapse of IPO froth.