Market Roundup
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The easy-money gravy train is starting to run off the rails — just as I expected.

Remember what I wrote back on Sept. 4? How we’ve seen a tremendous private-equity and private-valuation bubble, particularly in technology?

Well, the public markets are now increasingly saying “no mas” to the offerings thrown at them — and not just in tech. First Data Corp. is one prime example. The bank and merchant payment-processing company tried to power through with a massive Initial Public Offering (IPO), despite worsening credit and equity market conditions.

But investors balked, forcing FDC to sell only 160 million shares at a price of $16. That missed its $18-to-$20 target range by a wide margin. Result: The company only raised $2.56 billion, rather than the $3.2 billion it had hoped to scoop up.

A profit warning by Wal-Mart shook up the retail sector.

Things were even worse for the grocery store chain Albertsons Cos. It wanted to sell 65 million shares for $23 to $26 late Wednesday. But then Wal-Mart Stores (WMT) dropped its earnings bomb on Wall Street. That provoked fears of stiff competition, deteriorating margins, and weak sales among grocery store and general merchandise firms.

So Albertsons had to yank the deal entirely. Whether it will be able to raise the $1.7 billion it was seeking at a later date … be forced to sell fewer shares or accept a lower price … or shelve the transaction entirely remains to be seen.

But clearly, this is a troubling sign for markets overall. Many of the companies that are trying to go public were previously taken over by private-equity buyers. Those deals loaded them up with debt. The plan was always to raise tons of cash from willing investors, which could then be used to reduce leverage and pay off the dealmakers.

If the IPO market shuts down, the pipeline of easy cash dries up. The PE bonds begin to sour. Corporate default rates go up, money gets even tighter, and confidence in the outlook for stock market overall sours.

“If things get even worse in the last three months of the year, look out!”

So watch the IPO market closely. Deal volume and dollars raised via IPOs already slipped to a three-year low in the third quarter. If things get even worse in the last three months of the year, look out!

What about you? Do you think this is yet another sign the gravy train is running off the rails? Does that make you even more nervous about holding shares? Would you buy shares in companies like Albertsons or First Data, or have you bought shares in other IPOs earlier this year? How did you fare if so?

Let me hear about it over at the Money and Markets website.

Our Readers Speak

The nature of deflation. The market outlook. The misery of being stuck on an airplane for long flights. You were discussing a little bit of everything at the website in the last day.

Reader Robert P. offered this take on the activity in the markets: “All this rhetoric reminds me of the referee in a professional wrestling match … while he’s distracted, one of the opponents takes something out of his trunks, cold-cocks the other one and then hides it away again … and the poor referee doesn’t have a clue!

“In wrestling, it’s all for a show and the response of the crowd. In real life, however, it’s us who just got clobbered, and it’s our money (or what used to be our money!) that’s down for the count!”

Reader Books weighed in on the pricing debate, saying: “What constitutes deflation or inflation? Groceries have never been costlier. Car repairs, cost of college, buying a used car, are all very expensive. With poor returns for years on safe investments and the cost of daily needs going higher, it seems like inflation to the average person.”

Reader Billy added his view on that topic, too, saying: “Of course everything you mention is a serious problem. It all points to one major problem that you did not mention explicitly, but only implicitly and that is deflation. I have mentioned this to you for what seems many months and, unfortunately and in a paradoxical manner, this deflation is the result of years on monetary inflation created by the central banks.

“Most sharp people understand this. What ultra-sharp and awake and aware people are wondering is: Was this by design, to bring in a crisis in order to propose some solutions? That is what the sharp folks are contemplating.”

Reader Chuck B. also answered someone’s question about credit market conditions with these comments: “Tightening credit means that interest rates for business loans are rising, and loans are harder to get, requiring more security.

“If money is harder to borrow, and often takes longer, businesses are hampered in expanding their operations or maybe even keeping the business they have. They may need to reduce their operations or hire fewer employees.”

Finally, Reader H.C.B. shared these comments about a day gone by in airline travel:

“I once flew to South Australia from Oregon, a 16-hour flight or so. It was in a jumbo jet (707) but they crammed all the passengers into the lower level so as to use a smaller stewardess staff and save costs. You could have slept just fine by sneaking up the stairs to empty seats and quiet above.

“It was permitted to tour the pilot/cockpit area during flight over the South Pacific at dawn. Awesome view! Unfortunately, now airlines are more like grossly overpriced Greyhound buses. Food about the same as a Greasy Spoon on the road at the bus stop, too.”

Thanks for mentioning the “good old days” of flying. I’ll be traveling to Europe at the end of the month to present to subscribers of our German-language version of Safe Money Report. The perks may be better on international flights versus domestic ones, but they’re nothing like in the past.

As for the stock and credit markets, all I can say is watch the latter. I have spent my entire professional career focused on bond market conditions because they drive all the other capital markets. When junky bonds lose value, and interest rates on riskier loans rise, it’s a huge headwind for stocks.

Any ground I didn’t cover yet? Any pushback or support for my comments you want to share? Here’s the link where you can do it.

Other Developments of the Day

● Netflix Inc. (NFLX) missed sales and earnings estimates, as well as domestic subscriber growth targets, putting downward pressure on the red-hot stock. Questions about rising costs and the need to raise more capital to fund its aggressive expansion plans also weighed on the share price.

● While Wal-Mart grabbed attention for driving yesterday’s market malaise, Boeing (BA) was another laggard amid worries about future sales. Delta Air Lines (DAL) said there was a “huge bubble” in the marketplace for used, wide-body airplanes coming off lease. That would allow Delta to expand its fleet on the cheap. But it would hurt sales and profit for Boeing and Airbus by driving down demand and pricing for new planes coming off the assembly line.

● If you watch NFL games — or any professional sport, really — you see advertisements for daily fantasy football websites in heavy rotation. But now the practices of sites like DraftKings and FanDuel are coming under scrutiny from the Federal Bureau of Investigation.

Employees from both companies have been playing at each other’s sites and reportedly winning hundreds of thousands of dollars. Investigators want to know if they’re doing so with the benefit of insider information or other advantages the general public lacks.

● The plan to withdraw almost all of America’s troops in Afghanistan is on ice. President Obama hoped to wind troop levels down from around 9,800 now to just 1,000 by the end of his term. But security issues and worries about Afghanistan’s ability to handle them on its own will force more troops to remain for a longer period of time.

Can the market handle even more downward pressure on earnings from the likes of Netflix or Boeing? Do you use daily fantasy sports websites, and if so, what do you think of the government’s investigation? Any other thoughts on these stories? Let me hear about them online.

Until next time,

Mike Larson