When will IPO cool down?

Business world's hot topic of last week was Zynga's IPO, a lack luster one on Friday. Naysayers focused on Zynga's model relying too much on Facebook and ability to hike up revenue.The IPO price is $10/share, although one of the co-founders was able to unload a few hundred million shares at $14/share before the IPO. Zynga's IPO isn't the most exciting one with $1B capitalization (see the shortened list below). It can at most be seen as a rehearsal for Facebook's 2012 IPO. Facebook is estimated to have value at $100B. This number shouldn't be too far away because of the maturity of the secondary markets that allow professional investors to trade equity of private companies efficiently before their IPOs. That is also a simple way for employees and early stage investor to cash in some shares for future deals.

Company IPO price First day performance Market valuation

Zynga $10 -5% $1B

Groupon $20 31% $16B

LinkedIn $45 +171% $8.8B

Pandora $16 $3.3B

Yandex(Russia) $25 $2.4B

We want to understand economical implications from this series of IPOs. The key question, regardless of possible bubbling, would the trend be maintained? To answer this question, we will have to see what inspired the trend.

It is commonly viewed that the Internet world is being transformed by a number of powerful forces, three of which stand out. First, technological progress has made it much simpler and cheaper to try out myriad bright ideas for online businesses. This the fundamental part. As the popularity of Facebook helps significantly Zynga's business, it would not be surprised some companies relying on brand name mobile systems (iPhone, iPad, Android) follow the same suit, if timing is right.

Second, a new breed of rich investors has been keen to back those ideas. According to the Centre for Venture Research at the University of New Hampshire, angel investors in America pumped about $20 billion into young firms last year, up from $17.6 billion in 2009. That is not far off the $22 billion that America’s National Venture Capital Association says its members invested in 2010. Much of the angels’ money has gone to consumer-Internet firms and makers of software apps. In the meanwhile, easy financing may be due to low interest rate around the globe. While overall recovery is stagnant, smart money won't sit at the side line but out to pursuit returns. Funds are not scarce at all from technology to energy. It seems not in the very near future, central banks will tighten their monetary policy, given that the European debt problems. Therefore, the demand side may not subdue soon. Therefore, besides the inflating IPO bubbles, in which investors are desperate on shares, larger companies would definitely seek merger and acquisition route. We have seen a number of them in the past 2 years. For instance, Microsoft had issued debt in 2010 and acquired Skype in 2011. They also extended their interests in Yahoo.

And, third, this boom is much more global than the last one. There are a series of internet IPOs in 2011. The boom is not only in the United States but more global. China and Russia have had exciting IPOs with much higher capital. See the list below. Once the trend is established, it would take a while to break it.

Company Market cap (May 2011)

Baidu $49.7B

Tencent $49.6B

Alibaba $8.9B

Sina $7.7B

Renren $5.8B

Given these driving factors, the European crisis will take toll in global economy. When austerity plans in Europe come in place and the Fed stops pouring cheap money, the IPO may cool down. The cool down may knock down Facebook's capitalization. Smart money sense the day is not that distant so the second quarter of 2012 is the right time. Therefore, our view is that the technological boom will continue. But to be safe, be careful when going into the second half of 2012.

Firm Positive Employment View

The number of jobs added comes from a survey of establishment payrolls, or employer payroll survey. The unemployment rate comes from a separate survey of U.S. households. The household survey is much smaller than the establishment survey, and as a result it can swing around a lot — and move the unemployment rate up and down when it does. So the establishment report is more justified.

The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force.

The labor force has been in the down trend since 2008, because of retirement, reduced immigration, and early retirement after many lost their jobs. The more troublesome indicator is declining participating rate among age 25-54. The participating rate is defined as the population force share in labor force. It has dropped from 66.5% in 2007 to 64.3% in 2011. As the denominator becomes smaller, the nominator has to drop faster to have a negative trend. That means the actual unemployment may be bigger than reported. In addition, positive GDP growth in the past quarters supports employment growth.

The trend has also been confirmed another measure. The U-6 figure from the Department of Labor dropped dropped 0.6% in November, including everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

But we may have some variance down the road. If extending unemployment benefit fails in the Congress, people will be forced to go back to job markets. It is estimated 1.2 million will lose this benefit in January 2012 and total 5 million people in 2012 i
f the bill fails by year end. Another factor is that warming job market may attract more people back to look for jobs. Both these would make the denominator bigger again.

But the trend is convincing.

Optimistic and Continuous Cautious

Central banks intervention finally came on Wednesday. Coordination among the G7 group as well as lowest unemployment rate in the past two years sent last week's Dow 7% gain last week, the best in the last 2 years. Banks will provide liquidity as needed. This is the first orchestrated effort to stop Euro zone problem from spreading to other areas. Risk of European country defaults had driven Euro/USD to new lows and the U.S. Treasurys notes to lows.

Similar moves occurred after the terrorist attacks of 9/11, 2001 and Russia's default in 1998. Both of these threatened to wreak havoc on the financial system. From these experiences, we learned that capital rebalanced from disaster zone to heaven markets. Then markets responded positively after intervention, albeit in different patterns. Also, intervention won't drive up markets indefinitely. Therefore, we should still be careful and keep cash when dips come. A record-proved way is buy dividend-paying kings.

In fact, risk is still rampant especially agreements still need time to become action. European plan needs significant effort to reach common ground. The G7 agreement doesn't guarantee a quick Euro crisis resolution. Back to homeland, analysts have already questioned that newly employed don't have enough quantitative mass to support economic growth. This is reflecting the common sense that the U.S. will not be a fast track to recovery, regardless of taking advantage on Europe's problem. Hence, caution is deemed to pay off at this volatile time.