IPOs Aren’t Cool Anymore? – the technology community doesn’t seem to think so. Evidence exists in the sheer amount of private capital being raised as Silicon Valley CEOs shun the equity markets and the shareholder scrutiny that accompanies them.
The evidence is fairly tangible – the last year has seen massive private raisings from some of the biggest rising stars like Uber and Airbnb. Just this week, social messaging app Snapchat raised some $200 million to put its valuation at a sky-high $22.7 billion. Why IPO if getting operational cash from private investors is so easy and you can maintain more autonomy? That’s probably why in a recent survey, only 17% of Silicon Valley companies indicated that an IPO was a goal, while 42% of them said IPOs had no chance.
Economic Check-in: Europe – Europe’s economies, as a whole, continue to move in-line with our long held expectations of slow and steady growth. Investors won’t find much inspiration in the economic data, but we don’t see bears lurking either. After opening the year with three consecutive months of improvement, the May Composite PMI (indicator of manufacturing health) ticked down one basis point to 52.9, from 53.0 in April. This still marks expansion, but bucked the trend of accelerating activity. Expect fixed investment to be weak in May as well. With the “Brexit” referendum looming (June 23), we expect many businesses to delay making any big moves or investments as they await the outcome, and whatever consequence to labor and capital movement the decision may entail. Germans seem to be the most nervous, as confidence in the country slid to a low in May falling to 6.4 from 11.2 points last month – well below the long-term average of 24.4 points.
The Latest on European Banks – some hysteria broke out early this year, in the midst of the correction, when rumors circulated that some of the big European banks were not adequately capitalized. Deutsche Bank was the subject of much of the negative outlook, as you might recall. In April, it was rumored that the bank wouldn’t be able to pay interest on debt coming due, which eerily sounded like a Lehman moment. But, Deutsche Bank quelled fears by offering to buy back some of its debt which it simply could not do if it was illiquid. Also, it supported a report by Moody’s stating it would be able to make payments on its riskiest debt this year and that only a “major, unforeseen event” would cause it to miss a debt payment. False alarm. Most banks turned out to be capitalized just fine, and the group has seen a bounce off the mid-February lows. Where some concern does exist, however, is that perhaps too much bank capital is being used to pay legal fees associated with compliance and pending lawsuits. Bank lenders set aside $160B in provisions for legal costs between 2008 and 2015, with an estimated $50B for litigation fees in the last year. Big players like Deutsche Bank and UBS actually set aside more for legal considerations than they made in profit. That’s not a great business model.
Oil Story Fading – remember recently when each day brought a fresh oil headline? There was even a stretch then when many traders were convinced the stock market’s single influence was the price of oil. That can happen with “center stage stories” most of which take a few months to slip into the background. That’s what appears to be happening now that the price per barrel is hovering around $50, up some 75% or so from February lows. Demand is firming up in China and India as supply pressures are easing from companies filing for bankruptcy and recalibrated production cycles are taking hold. The unfortunate wildfires in Alberta have also given bottom support to prices.
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