Sell Signals

15/04/2011 at 3:19 pm

One of this week’s biggest stories was the announcement of the Glencore IPO.

The company is hardly a household name, but has been a giant in the commodities world for years. Its business model is unusual – it is involved in extraction, distribution and trading, both directly and indirectly through financial investments and supply contracts. It has also proved highly lucrative, generating turnover / net profit of US$145bn / $3.8bn in 2010 from US$80bn of assets (company fact sheet).

One obvious question to ask is: does the sale of this company to the public mean the experts who work for it think the commodity market is about to peak?

Recent history offers some interesting precedents.

In March 2007, news broke of the sale of Blackstone, a private equity giant and major beneficiary of the cheap debt financing available in previous years. The IPO was completed in June that year – six days after the first rating agency subprime downgrades that kicked off the world financial crisis.

As debt markets began to seize up, Blackstone shares fell sharply from their offer price of $31, closing the year at $22.13. They are trading at around $18.50 this afternoon.

A similar signal on a smaller scale came from the sale of Foxtons, the UK estate agent, the same year. Founder Jon Hunt offloaded the company (to private equity, funnily enough) in May, netting £390m. Property prices peaked less than 9 months later.

So, by these yardsticks, commodities have another 3-9 months before imploding.

But there is, perhaps, a more pertinent parallel from a decade earlier.

In June 1998, Goldman Sachs announced its intention to go public in a limited IPO (of 10-15% of the company – similar to Glencore’s planned 15-20%). Plans were delayed, however, as stock markets corrected in the face of the Russian default. It wasn’t until 3 May 1999 that the sale went ahead. The S&P 500 peaked just over 11 months later – almost two years since plans were made.

We ought not to read too much into these parallels, or into Glencore’s decision. But it’s not likely they’d be selling if they thought their market was absurdly undervalued.


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