Just as financial markets were recovering from the Washington turmoil, a new danger signal has started blinking, in the form of a flood of stock and bond issues.
Many people see no problem. They find the new-issue action exciting, as the hoopla over last week's $2.1 billion offering by Twitter Inc.(TWTR) showed. The process fuels entrepreneurship and securities issues are mother's milk for brokerage firms, generating enormous profits.
But when new issues become as massive as they are today, it can mean markets are overheating and getting ready to give back some gains. That is why some experienced investors weren't wearing party hats at the Twitter celebration.
Companies are racing to issue stock and bonds because markets are high, offering great prices for sellers, said Michael Farr, president of Farr, Miller & Washington, which oversees more than $950 million in Washington, D.C.. Issuers are grabbing current terms before markets fade. That makes experienced investors ask themselves a classic question: If the smart money is selling, should we be buying?
"I wouldn't be surprised by a market correction here. I don't think anyone would," said Mr. Farr. A correction means a drop of 5% to 15%, less severe than the 20% decline that would signal a bear market.
So far this year, U.S. companies have put out $51 billion in first-time stock issues, known as initial public offerings or IPOs, based on data from Dealogic. That is the most since $63 billion in the same period of 2000, the year bubbles in tech stocks and IPOs both popped.
Follow-on offerings by already public companies have been even larger, surpassing $155 billion this year. That is the most for the first 10-plus months of any year in Dealogic's records, which start in 1995.
It isn't just stock. U.S. corporate-bond issues have exceeded $911 billion, also the most in Dealogic's database. Developing-country corporate-bond issues have surpassed $802 billion, just shy of the $819 billion in the same period last year, the highest ever.
All of this reflects the heights of the markets in question.
The broad S&P 500 stock index is up 28% in just 52 weeks. It closed Friday at 1770.61, an eyelash short of its record, 1771.95, hit in October.
The bond situation is somewhat different. Bond issuers have been rushing to market because of fears the Federal Reserve would soon push longer-term interest rates higher. When the Fed put off any reduction in its economic and financial stimulus during the recent Washington crisis, market rates fell and bond prices surged. Companies seized the chance to issue bonds at reduced interest rates.
But on Friday, a stronger-than-expected October job-creation report rekindled expectations that the Fed will reduce stimulus before long. That pushed longer-term interest rates higher, making some conclude that exceptionally low rates and high bond prices indeed are ending.
The boom in stock and bond issues doesn't necessarily mean markets are about to crater. Investors have demonstrated in the past that they can push markets to extremes.
"Before we hit a real stock-market top we see an excess of excess. We see a real divorce between supporting fundamentals and share prices," said Mr. Farr in Washington. Things aren't that bad yet, he added.
The S&P 500, for example, is trading at about 19 times its companies' earnings for the past 12 months. That is above the historical average of 16 but still short of the 20-to-30 range hit before recent bear markets.
That doesn't reassure James Barksdale, president of Equity Investment Corp., which manages $4.1 billion in Atlanta.
"People are becoming complacent about risk," he said.
He considers the flood of IPOs and bond issues just one of the warning signs.
Among others: Small stocks with weak finances are outperforming bigger, safer stocks. And the risky payment-in-kind bond, which can pay interest in new bonds rather than money, is popular again.
Mr. Barksdale doesn't try to predict markets' direction, but he is having trouble finding cheap stocks to buy. Many of his old accounts have 11% cash, he said, and new accounts may have more than 20%, simply because he can't find cheap investments. The last time his cash was so high was 2007, the year stocks hit a top. "The rational buyer is getting squeezed out," he said.
University of Florida finance professor Jay Ritter, an IPO expert, says stock-issuance data do show markets heating up, but he isn't worried.
He calculates that 62% of IPOs this year have been for money-losing companies. That is the highest of any year since his data began in 1975, aside from 1999 and 2000, the height of the tech-stock bubble. The average for the past decade is 47%.
But the increase is all due to a surge in biotech IPOs, he said. Unlike the Internet-bubble era, he said, "We aren't seeing a lot of marginal companies going public."
Outside biotech, few companies are going public with less than $50 million in sales. The median IPO this year is for a 12-year-old company, well above the historical average of eight. Many, like Twitter, are biding their time and becoming established before issuing stock. Prof. Ritter thinks it is too soon to worry.
"In 1998 I thought equity prices were getting a little too high and I exited the equity market too early," he recalled.
Mr. Farr agrees. Like Mr. Barksdale's, his cash levels are creeping up because he can't find cheap stocks. Market gains may come harder now, he said, but he doesn't see disaster looming.
"My guess is that we have an expensive market and it is probably going to get more expensive," he said.
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