Alibaba Group Holding Ltd (BABA)

[TRUISM]

'Baba' effect: Supply of stock set to swell as Alibaba IPO nears
By: Adam Shell September 16, 2014 12:16 pm

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Alibaba Group Chairman Jack Ma has whipped up demand for shares of its coming IPO. (AFP/Getty Images)


Supply and demand, the famous macro-economic concept, is playing out in the stock market. With 310 million shares of Alibaba set to flood the market, some investors are selling shares of other stocks to raise cash to buy Alibaba.

The trend of selling other holdings to help fund big helpings of Alibaba shares on Friday, when the Chinese Internet giant is expected to sell shares to the public for the first time, was evident in trading Monday and last Friday. The Nasdaq composite, for example, which is full of tech names and social media stocks and Internet shares, fell 1.1% Monday and 0.5% Friday, for a two-day loss of 1.6%.

Individual stocks that got hurt in the two-day sell-off include momentum names such as social-media darling Facebook, which fell 4.3%, Internet search giant Google down 1.4%, online retailer Amazon.com down 2% and name-your-own price Internet retailer Priceline.com down 2%.

(Tuesday, that selling seems to have let up, with the S&P 500 up more than 16 points or 0.8% in late afternoon trading and the Nasdaq up 0.8%; the stocks listed above are also up from 1.4% to 2%, perhaps suggesting that investors have raised the cash necessary for their Alibaba purchases. Another theory widely circulating on Wall Street is that investors are now betting that the Federal Reserve won’t change any of its language related to the timing of the first interest rate hike after all. If the Fed stands pat, it means the timetable for the first rate hike will likely not have to be pushed forward to earlier next year as feared, from the mid-year projections now priced in.)

Bespoke Investment Group has dubbed this trading phenomenon: “The Baba Effect.” Bespoke blames the sell-off in the so-called “momentum” stocks listed above on investors positioning themselves for the Alibaba share onslaught. “With over $20 billion in (fresh) stock supply hitting the street, marginal buyers were much harder to find,” the firm said.

The two-day sell-off coincided with rumors that, due to strong demand for its initial public offering, Alibaba would increase its offering price range from $66 to $68 from the initial range of $60 to $66. Alibaba confirmed the higher range in a regulatory filing after the market closed Monday. Alibaba is selling 310.1 million shares, which means it could raise as much as $21.1 billion, which would top Visa’s record-breaking IPO of $17.9 billion in March 2008.

The Alibaba IPO is expected to be the biggest the world has ever seen.

Ample liquidity has been a big driver of this bull market, but with a lot of cash now chasing Alibaba shares, the impact of fewer dollars chasing other stocks on Wall Street can act as a short-term drag on the broader market, says Robert Maltbie, president of Singular Research. His liquidity readings, which were positive at the end of August, are moving toward neutral, he says, which is a potential negative for stocks.

“This flood of new stock issuance looks like it will impact an otherwise bullish outlook on the market,” Maltbie told USA TODAY, adding that more Alibaba shares will hit the open market over the next year as so-called share lock-up agreements end and insiders and other early investors are able to sell their shares on the open market. Maltbie estimates that an additional $160 billion in Alibaba shares will have to be absorbed due to lock-ups expiring.

Maltbie uses the analogy of a homeowner wanting to get top dollar for his house, only to learn that three other homeowners on the same block also decide to put their homes up for sale, resulting in lower prices as the supply-demand dynamic gets out of whack amid a set number of dollars chasing multiple investments.

“It has a dampening effect,” says Maltbie. “It creates a competition for dollars. Investors have to sell something to buy it (Alibaba).”

Alibaba, which is a Chinese company domiciled outside the U.S., won’t be eligible for inclusion in the benchmark Standard & Poor’s 500-stock index, either. That means the more than $21 billion spent to buy Alibaba shares Friday won’t benefit the broader U.S. stock market. “It can’t be a positive impact for the S&P 500 because the money is going elsewhere,” says Maltbie.

The past few years, the average cash inflows into the market have averaged $20 billion to $30 billion per month, which means Alibaba’s first-day trade could equal almost a full month of inflows, according to Maltbie.

The Alibaba IPO, coupled with the Federal Reserve’s ongoing shift to less market stimulus, can be summed up simply: “The common theme for these two events is less liquidity in the markets,” says Pat Adams, a money manager at Choice Investment Management.




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