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Two Signs of an Overheated Market

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Tuesday, 26 Jul 2011 08:15 AM Current | Bio | Archive

Now is NOT the time to put new money to work in the markets. The debt ceiling drama aside, two lesser-known indicators are hinting that markets may soon take a tumble.

First up is the recent spate of companies going public.

This week alone, 11 companies will undergo an Initial Public Offering (IPO). By going from private to public, the original owners will be able to cash out. That’s great for owners, but usually terrible for investors.

The last time 11 companies went public in a week’s time was November 2007, right at the peak of the market. Indeed, 2007 was the last big year for IPOs. Before that, you’d have to go back to 1999, for a huge rush of new companies going public. It’s also the year tech stocks peaked.
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That’s no coincidence. Substantial IPO activity is often linked with a market that has peaked and may be about to decline. Insiders pay close attention to the best time to “cash out” of a business, so they can get the most money possible.

That was definitely the case in 2007, when private equity group Blackstone completed a $4 billion public offering. When the smart money wants to cash out, it’s not a bad idea to take a breather.

While surging IPOs are one reason why markets look overheated, there’s another issue that could send markets tumbling.

I’m talking about the downward revision of economic data.

What do I mean? Take first-quarter GDP for example. The headline number that came in and send markets soaring was a healthy 3.2 percent rate of growth. A month later, and far from any major headlines, that number was revised down to 2.8 percent, a 12.5 percent haircut.

Simply put, growth just wasn’t as big as advertised. And unfortunately, this isn’t just an isolated event. GDP has been revised downwards quietly and well after the initial announcement since 2009.

It doesn’t stop there. Unemployment numbers are also revised lower after the fact, sometimes more than once. In fact, unemployment numbers can be more easily manipulated thanks to a category labeled “birth/death adjustment” rate.

In June, for example, the US allegedly created 62,000 jobs. What this overlooks is the birth/death adjustment of 206,000 — the largest numbers in more than a year.

Without that adjustment, employment would have fallen by 150,000, marking a true bloodbath in employment markets.

If there were any honesty to the process, then there should be lower revisions about half the time, but there’d then be higher revisions the other half.

These events aren’t as extreme a market indicator as things like investor sentiment.

But combined with the general valuation of the market, uncertainty over the debt ceiling, and record prices for gold, today’s investors might want to wait for better prices and less uncertainty.

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AndrewPacker
Now is NOT the time to put new money to work in the markets. The debt ceiling drama aside, two lesser-known indicators are hinting that markets may soon take a tumble. First up is the recent spate of companies going public. This week alone, 11 companies will undergo an...
andrew,packer,Two,Signs,Overheated,Market
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2011-15-26
Tuesday, 26 Jul 2011 08:15 AM
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