WASHINGTON, December 27, 2012 ― (Note: This story was originally filed on 12/18/2012 but ended up in the wrong WTC section. We are re-posting it today in the right section as a reference article.) IPO action last week was interesting. Solar City (SCTY), whose Initial Public Offering (IPO) was delayed for a day due, apparently, to lack of interest and aggressive overpricing, finally went through the following day, priced radically downward from initial expectations of $13-15 per share. Available shares were increased by a million and the price was slashed to $8 per share. The result? A massive pop from $8 on the offer right after the opening, which has now taken the stock to roughly $12 per share as of this writing. What gives?
We’d previously been interested in this offer as we indicated here last week. SCTY seemed—and seems—to be one of the more viable entries in the volatile solar arena primarily because it, unlike the late Solyndra and countless other taxpayer supported disasters, doesn’t manufacture solar panels. They only sell them or lease them. And there is a market for the end-product, however small at the moment.
Nevertheless, we became concerned about this offering when another potentially sinister issue cropped up for the Initial IPO, causing a delay in the actual offering date. It seems that besides the mis-pricing issue, SCTY was required to add to their preliminary prospectus a good deal of verbiage—conveniently left out of the original we think—pertaining to a Federal investigation as to how SCTY was using and reporting its own deployment of government provided taxpayer largess.
Hmmm. Echoes of Solyndra, anyone?
This flap may have been the reason why there weren’t many nibbles for this stock at $13-15 in the underwriters’ notebooks. Once again, potential major buyers of the issue appear to have been alerted ahead of time on the investigatory issue. Shades of the insider tipoffs preceding the Facebook (FB) face plant disaster. Small investors were screwed on that one, and Morgan Stanley, the lead underwriter, has just agreed to pay a large fine to Massachusetts for its part in this.
For us, however, the whole SCTY thing turned out to be a moot point. (Or a “mute point” as one of the Maven’s freshman English students once wrote in a term paper, one of our favorite malapropisms to date.)
As we struggled with our own Hamlet-like decision—to buy or not to buy on the offer—our brokerage firm, Charles Schwab, made the decision for us. They told investors like the Maven who’d queued up for the SCTY IPO that they were withdrawing from the deal, thereby canceling all outstanding investor requests for stock.
Sometimes when Schwab does this, we suspect that the lead underwriters* themselves have pulled back stock for their own full service clients—usually a clear sign of a good deal. Discount houses like Schwab, which cater primarily to retail clients (you and me) are generally not underwriters but are in the “selling group.” That is, they join in the offer to broaden the base of potential purchasers. Since they don’t usually have underwriting skin in the game, however, if a deal gets “hot,” the underwriters start pulling stock back in from the selling group so they can allocate more shares to their own clients. It’s irritating as heck, but there’s nothing illegal about it.
Other times, we think that discount houses like Schwab pull out of offerings when they discover something that seems fishy in the offer—something to which they’d rather not expose their largely small investor clientele. Given SCTY’s big pop on the open, it looks like the lead underwriters, having finally priced the deal low enough to heat it back up, pulled all Schwab’s share allocation back, the better to give out rich Christmas goodies to their own wealthy clients before January 1. After that date, such a nifty short term pop, if flipped and sold immediately, becomes a short term capital gain, which will likely have the bejeezus taxed out of it in 2013. So why not scoop up the goodies this year while they last?
Regarding today’s market action, nothing much to add, really, which is why we decided to give you the finale to the strange maneuverings in SCTY, a stock we’d mentioned last week. Today, as of about 12 noon EST, the market is levitating modestly once again, but it’s hard to tell why.
Perhaps it’s optimism that the heretofore immovable President has apparently moved just an itty bit toward the Republicans in fiscal cliff negotiations, generating happiness among the bulls, or, more likely, among the headline-driven HFTs. One nasty word from either side will bring the bears back with a vengeance in less than a New York minute.
Currently, however, the bulls are happy to overlook unpleasant economic stats that have come out this week without much fanfare. There are days when the Maven wonders if the HFTs are even telling financial publications in advance precisely which headlines will get top billing each morning.
Anyhow, the market is levitating and we’re missing some of it because we’re going more to cash. We think it best to have cash around rather than being all in at this point, just because we tend to be a little on the fiscally conservative side.
That said, it’s also entirely possible that hedge funds, mutual funds, corporate insiders, fat cat investors, etc., have already gotten done with their mass selling. Taking outsized gains in stocks like Apple (AAPL) in particular while dumping big dividend payers like REITs, MLPs, utilities, and telcos seemed like a good idea to such investors given the likelihood of vast changes in the tax structure in 2013 that are not likely to favor such stocks. Problem is, the outsized yields in many of these vehicles will still remain outsized when compared to treasurys, moneymarket funds, and interest bearing bank accounts even in a more burdensome tax environment.
These stocks, as a result, may be bottoming or may already have bottomed as the selling draws to a close, perhaps making them safer to get back into—if not right now, then perhaps right after the turn of the year when the artificial pressure is off.
As we’ve been threatening to do for a couple of columns, we’ll have a little more info for you on REITs and MLPs in our Prudent Man column, starting today (really). The issues are a little complex, so we took extra care in writing this info. After all, we’re trying to help the little guy here. The Feds, Wall Street, and the real fat cats have abused all of us enough.
*Note on Underwriters: Similar to the use of this term in the insurance business, an “underwriter” in the most general sense, is a firm that’s responsible for financing a given product or business.
Your insurance company, for example, “underwrites” the value of your life insurance policy. You agree to pay them X dollars for Y period of time, usually many years. In return, the insurance company agrees to pay your family the full value of the insurance contract upon your death. Using whole life as an example, you’re effectively time-paying on a much larger death benefit, ponying up for only a portion of its value while the insurance company—as underwriters—has underwritten and is responsible for the full face value of the policy at all times.
While not exact, the analogy carries over to the issuing of stock IPOs. What happens here is that one of more big Wall Street firms (usually) “underwrite” the entire IPO. In other words, they actually buy all the stock from the new company, help the company create a marketing plan (often called the “road show”), pitch the stock to corporations and investors, and then pocket a usually handsome fee for taking on the risk, which is considerable.
The underwriters are committing their own capital to purchase a huge batch of shares in a generally unknown and untried company, at which point they need to distribute that stock to investors at a stable price. Otherwise, if the offering fails, they lose a chunk of their own money. That’s why big underwriters, like Goldman Sachs, have traditionally been known as “investment banks” rather than just “banks,” although the 2008-2009 financial disaster has muddied this distinction.
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