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Sunday, March 10th, 2013
the momentum business

13 0310 zAAPL zCFC zETYS

Joe Nocera has an article in today’s New York Times (on the front page of the opinion section) called “Rigging the I.P.O. Game.”  It deals with one of those dot-com busts, eToys, examining not the bust but the offering itself.

Specifically, it concerns the ongoing litigation between eToys and the lead manager on the deal, Goldman Sachs, regarding the first-day pop of the shares.  I’ll let others weigh in on the legalities.  (Hopefully The Epicurean Dealmaker will write about it.  An earlier posting of his gives some background on the offering process and an underwriter’s obligations, but the facts in the Goldman/eToys case appear to show that something other than a typical going-public discount was at work.)

The brief public life of eToys (ETYS was the symbol) is shown in the top panel.  Below it is Countrywide Financial (traded as CFC before its acquisition by Bank of America).  The downward arrow is a reminder that it shortly thereafter had a very large negative value for B of A.

At bottom is Apple (AAPL).  When ETYS came public, AAPL had a smaller market cap than it did and very low expectations.  More recently we have seen hundreds of billions of value tacked on to it (presenting issues for investment managers, as I indicated in April) and some subsequently taken away.

Don’t get me wrong.  AAPL is the real deal, whereas ETYS obviously wasn’t and CFC turned out to be as baked as Mozillo’s face.  But it was the hottest thing around, which meant that the Street would find a way to play it via price target leapfrogging and structured products.

The Street is in the momentum business.  Whether it’s dot-com stocks, mortgage derivatives, or anything else, playing follow the money is what they do and they’ll take as big of a cut as they can along the way.  You should not be surprised by any of it.  Take it to the limit, then retrench when it quits working.  That’s the model.  Act accordingly.  (Chart:  Bloomberg terminal.)