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Friday, November 17, 2006

Anatomy of a Mispriced IPO: NYMEX (NMX)

Stock Tickers: NMX

$120.00 was the opening print for NYMEX (NMX). While there may be cheers here from the floor, this is ludicrous and obscene as far as a mispricing. I am not referring to the valuation or the stock price in and of itself, because the market is the mechanism that initially determines a fair and current price. But what is ludicrous is that the lead underwriters in charge of pricing are relied upon by a company coming public to determine a fair and equal pre-set pricing. NYMEX was told that the fair price on that was $59.00, above the raised ranges. For the first print out of the chute to be $120.00 you can rest assured that NYMEX was just boinked and a lot of IPO cash just got left on the table.

Investors that take the risk in getting IPO allocations do not deserve a 100% return instantly out of the chute for the first print after an IPO pricing. There was no history there, and there is very little risk. If you were allocated IPO shares at $59.00 on NYMEX, then you are allocated IPO shares to enough IPO's that even when you factor in pigs thatfall 20% in a day you make out like a bandit.

I am not a socialist and don't even call out for more and more never-ending market reform to protect Grandma Jones, but when you see this it is obscene. No doubt about it. If you were James Newsome, the CEO of NYMEX, you have to act happy on the floor like he just did on a quick CNBC interview, but you know he is going to go back to his office and call those investment bankers more four letter words than can be thought of. If not, then it is because of shell shock.

There have been lawsuits over this practice in the past where on IPO's in 1998 to 2000 where shares priced at $28.00 as "the max the market can bare" and then the first print is $100.00 or more. Imagine how much the bubble may have been better contained if the street actually priced deals at a fair market price. Milton Friedman is the man I recall saying the equivalent of "money is worth whatever people think it is worth," but I bet right now he would be asking the underwriters how $59.00 on a well known commodity is instantly worth $120.00 or more.

I won't even go into how this also destabilizes a market on a stock and the related companies. You never know where this IPO will close today. It could close at $175.00 or it could close at $90.00, although these are just theoretical numbers at this point. Since the open, there was even a $152.00 print, although it is back at $135.00 as I load the story and prints have been all over the place.

The Dutch Auction route for IPO's has been slammed in the past, but this makes a better and better case for it if you are an established name brand coming public. W.R.Hambrecht and its OpenIPO mechanism have often not been well received by the public and the deals are snubbed by the bulge bracket firms because it denounces how they operate, but it is probably assumed that the Hambrecht investment bankers are calling any large company out there on the IPO docket right now pointing out how much money was just left on the table by sticking with the "Good Ol' Boys."

Shares of InterContinental Exchange (ICE) have traded in a $93.90 to $98.45 range today and shares of Chicago Mercantile Exchange (CME) have traded in a $533.50 to $546.98 range today. If you wonder why researchers sometimes point out that a monkey throwing darts at a board or randomly picking names can outperform actual stock pickers sometimes, this may demonstrate part of the theory.

There is no reason to beat a dead horse (or a dead money) over and over here, but I think the point has been made.

Jon C. Ogg
November 17, 2006

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