May 20, 2011 - The Glencore Effect

Featured Trades: (THE GLENCORE EFFECT), (BLK), (RENN), (LNKD)

3) The Glencore Effect. One of the greatest indicators that the music has stopped playing, the fat lady is singing, and it is time to get out of Dodge City, is the level of insider selling. Given the recent hyperactivity of the IPO calendar, it's looking like it is a great time to take off on a long summer vacation.

The commodities trading giant, Glencore, has lead the parade this year with a massive $11 billion IPO in Europe. The booty will be split up among a mere five individuals, making them all billionaires. Chinese networking giant, Ren Ren (RENN), hit the market for $743 million a month ago, and promptly tanked 30%.

Only today, Linkedin raised $352 million in an issue that doubled in 20 minutes. Institutional investors complained that allocations were made with an eyedropper. Facebook and Twitter are said to be waiting in the wings with gigantic offerings of their own.

Of course, the official explanation for the timing of these issues includes the diversification of the investor base, raising cash to broaden their business, and improving the company's public profile. Wall Street often speaks in an arcane, difficult to understand language, so let me translate this for you lay people: 'Get out at the top!'

Everyone remembers too well Larry Fink's infamous Blackrock IPO brought out at the top of the market in 2007, just before the stock market crash took 75% off its value. I was also once a beneficiary of such strategic timing. Morgan Stanley (MS) went public not long before the 1987 crash sent its share price sprawling.

One of the basic facts of life on Wall Street is that the seller of a security usually knows a lot more about it than you do. If nothing else, these sales are sucking money out of the market that would otherwise being going into equities already listed. Such is the power of the printing press. The prudent would take notice of these huge cash calls and respond by reducing the risk in their portfolios, laying on some downside protection, raising cash, and get ready for the approaching storm clouds. Lake Tahoe, the Hamptons, and Key West are beckoning.

When You See This'?

It Usually Means This

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