A Liquidity Event Used to Mean Going Public
A liquidity event used to have a very different meaning. In recent history there have been long stretches of time when the stock market moved modestly up or down. To ‘go public’ and become a Listed Issuer was an event. It was referred to as a liquidity event.
When someone invested in a private company, their investment was pretty close to a permanent investment. There were limited ways to get your money out of that investment, such as selling your shares to another party (subject usually to a veto by the controlling shareholders), selling the entire company, or having the company buy back your shares. What many investors hoped for was the business would be successful and in due course would go public. When that happened, existing shareholders, subject to some considerations, would be able to sell their shares on the public listing of those shares, and this was called a Liquidity Event. But now the definition has changed. Recent volatility in the stock market has changed dramatically what is a liquidation event.
Recent Volatility in the Stock Market
In recent years, we have experienced a series of very unusual events in the stock market. The excesses of Allan Greenspan, Chairman at the Federal Reserve, and his successors have devastated the formerly commonly held truths and beliefs. In an enthusiastic and well supported effort, Mr. Greenspan and his cronies at the Federal Reserve decided that they had the answer to ever-repeating economic cycles. When a slow down seemed on the horizon, Mr. Greenspan had the government print more money. They did it in clever ways, and government bought its own debt in order to inject ‘liquidity’ into the banking system which in turn lent more money and circulated more money. Hence that cycle of growth in economic continued.
Their answer to the bursting of Tech Bubble was more liquidity. Their answer to the terrorist attacks on New York was to inject more money. Their answer to every slowdown was to inject more money. Previously accepted economic theory that was widely accepted was for government to spend more in bad times, and pay off debts in good times. Unfortunately, after Clinton finished his term as President of the USA, thanks to Mr Greenspan injecting money became the mantra of the Fed. When Mr Greenspan appeared before Congress, he received a standing ovation from the politicians that eagerly followed this new mantra of injecting ever more money into the system.
But by postponing the inevitable end of every cycle, the eventual inevitable end of the prolonged cycle was far more devastating than it would otherwise have been. Mr Greenspan unwittingly proved that the old economic theory was correct, and the average citizen is still paying heavily for Greenspan’s foolish attempt to be smarter than the market. The effects of his policy are various forms of turmoil.
The Turmoil in the Markets Since 2007
In 2007 there was the money market freeze when 100% “safe” money became frozen. In October 2008, there was the panic resulting in the stock market plunging to frightening lows. In March 2009, another plunge to similar levels. In 2010, the turmoil over Bank Stress Tests, in 2011, the Euro started to be questioned with Greece threatening to default, and now in 2012, Spain is asking for handouts. All of this has continued to raise the level of fear in the stock markets and in all other markets. This has upset the seasonality of the stock market, and the confidence of investors. In 2012, investors are fearful of a meltdown and are reluctant to invest more in the stock market. SO what we have are many people that want to sell some or all of their holdings but can’t because offering to sell too much stock will drive the price of that stock ever lower, and too few investors that are willing to invest new money in stock.
We Have a Conundrum
The sellers want ‘out’, but there are not enough buyers. So the investors that want to sell, can’t sell.
Historically companies were anxious to announce good news. A good press release meant more people wanted to buy your stock and the price went up. But now, a good press release means that some people want to buy your stock, at least enough people to create a demand for your stock. Now an interesting phenomenon occurs.
A Liquidation Event Occurs
The very fact that there are buyers, allows the sellers to sell their holdings without driving the stock down too badly. Hence a liquidation event occurs. Because there are so many sellers anxious to sell, they sell into the new demand created by the good news announcement, and because the market is lop sided because of fear, there are more sellers than buyers, and hence even though the press release was good news, the greater number of sellers drive the stock lower. The result is, that good news actually is the catalyst for the value of a stock to fall.
This is very counter-intuitive, and surprises the company that has made the good news announcement. yet it is the state of the markets.
For a more detailed description of these liquidation events, you might wish to read my recently given interview.
Better Times Ahead
Let me reiterate what I have said before. We are in an economic cycle, as there have always been cycles before. There have always been cycles. There will always be cycles. We are at the low point of the ending cycle, and the new cycle is yet to gain steam. Now is the time to choose good investments.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds. Larry Cyna and/or the CymorFund have positions in the shares of companies mentioned.