IP OH!

The much anticipated Lyft IPO failed to.... lift that is.

The IPO (Intial Public Offering) market is often a litmus test for the health of the stock market. This week's news is not good.

With exciting new disruptors aplenty coming to market this year, stock investing has become topical for the tech-savvy millennial crowd. Newfound engagement by the next generation of investors is rising, now that the baby boomers are net sellers. The recent IPO of the popular ride hailing firm, Lyft, has just given our newbie investors a lesson on how Wall Street works. The lesson is - it doesn't work, at least not for you.

Allocations of hot IPOs have always been a sore point with many buy-siders. The 'game' of currying favour with the book-runners is one of the dirty little secrets on the Street. In exchange for a "good" allocation, the investment manager is expected to shower commissions on the trading desk of the broker to ensure a good fill on future deals. This concession by the PMs is borderline unethical, as a fiduciary, but is widely practiced.

The newest twist on the scheme is for managers to put in buy orders (usually 'market not held') with the broker in charge of the IPO in order to 'prove' they are worthy of future allocations. The result is usually a 'pop' for the stock on the first day of trading. The broker will be rewarded with future IPO business and the investment managers will have happy clients.

One of the blowhards on CNBC literally said that's what he did on Friday, bragging that he paid $87 for Lyft, a stock that was priced at $72 and closed at $69. Hardly the efficient allocation of capital we all learned about in CFA 1.

Closing below issue price is a disaster for all involved. Although it may work out well in the long term (it did for Facebook) but this isn't how it is supposed to go.

Welcome to the stock market millennials, you are now woke. The JP Morgan brokers were probably at the bar last night saying sorry not sorry.

"I love Wall Street" said no one ever.

So as the next generation of investors gingerly traverses the learning curve of the stock market, they will have to get used to the fact that the game can still be rigged. Not what you want to hear if you have the high ethical standards of this new generation. Cue the Elizabeth Warren investigation.

But his is just a speed bump in the juggernaut that is the FOMO market of today. Some commentators have disparaged the rally, claiming that economic deterioration is being ignored by ever-rising stock prices. That worry would hold water if the economically sensitive sectors were leading the charge, but sadly, they didn't.

Disaggregating the performance of stocks in Q1 shows a bias towards bond-like equities. Since the FED 'patience pivot', bonds have been on a tear, taking groups like Utilities, REITS and Technology with them. This has been a Powell-led, multiple expansion rally. Period.

A sustained bull market is only possible when driven by earnings, not multiple expansion.

Yesterday saw a glimmer of hope on that front. Chinese data surprised positively and U.S. data followed suit. Copper is leading Gold. Semis are challenging new highs. Even financials are catching a new bid.

All encouraging in the short-term. Brexit and trade related worries are subsiding as the market is responding to the positive second derivative data unfolding. Breadth has been spectacular in the market. Everything is up except the VIX. Even left-for-dead Bitcoin has pulse!

So, hopefully, the next set of IPOs go better than Lyft. I think they will, given the incentive for brokers to create a 'success'. They IP-owe us that.

Risk Model: 4/5 - Risk On

Only a slightly overbought RSI indicator is raining on the party. The recent pull-back in Gold and coincident Copper rally is a huge positive indicator that the economic pessimism lows have been seen.

The quarter-end window dressing needs to wash out of the system here so I'm staying patient with my blue tickets.

But only if the market recovers to new highs without including cyclical stocks will I be outright bearish.

Remember: Every bull market has a copper top!

Sell bonds here, they have negative seasonality in Q2.