CNBC’s Jim Cramer issued a new warning this week, one that’ll likely come as a surprise.
Right now, the market is worried about the trade war with China, the Fed raising interest rates and unwinding its balance sheet, the signs of a global economic slowdown. But Cramer says investors are ignoring the threat coming from the flood of IPOs that’s about to hit the market.
“I think the biggest threat to this bull market is denim,” Cramer said somewhat jokingly on Wednesday on CNBC’s “Mad Money” referring to the news that Levi Strauss had filed the paperwork to go public. “I, right now, at this very moment, am more worried about jeans than I am about China.”
While Cramer did say that the denim maker’s initial public offering looks like “an exciting deal,” he also noted that the IPO will likely cause investors to dump shares of stocks like Phillips-Van Heusen (NYSE: PVH) and Ralph Lauren (NYSE: RL) to get in on the IPO. And therein lies the danger.
“Now, maybe you think I’m being small-minded here – it’s just jeans, right? Wrong. See, it’s not just jeans,” he said. “We’re about to get a tsunami of new initial public offerings that will flood this stock market with new supply, and there simply isn’t enough money coming into the stock market to be able to handle all of this merchandise.”
That tsunami of new IPOs includes such big names as Uber, Lyft, Airbnb, Slack, Palantir, Pinterest, Postmates, and Reddit.
And these aren’t small deals. Uber has a possible valuation of $120 billion, Palantir was recently valued at $41 billion, Airbnb at $31 billion, Lyft at $15 billion, and social media company Pinterest at $12 billion. And with each of these, Cramer foresees a situation where investors sell other names in order to take advantage of these big newcomers to the market.
For example, when Slack goes public, money managers will likely sell shares of Atlassian (NASDAQ: TEAM)—a competing work collaboration platform—in order to buy shares of the new kid on the block as “they most likely won’t have much new money coming in to fund those purchases, so they need to sell something if they want to do any buying,” Cramer said.
And with each big IPO, the same scenario will play out. When Postmates goes public, investors will ditch their shares of GrubHub (NYSE: GRUB). When cybersecurity company Palantir hits the market, investors will sell names like Palo Alto Networks (NYSE: PANW) or CyberArk (NASDAQ: CYBR).
Cramer said that in order to buy Uber, big tech stocks including Facebook (NASDAQ: FB), Google parent Alphabet (NASDAQ: GOOGL, GOOG), and Apple (NASDAQ: AAPL) may act as a “source of funds” for money managers to raise capital for the ride-sharing giant.
“These will be natural sources of funds,” Cramer said. “Historically speaking, nothing slaughters a bull market as effectively as a burst of new IPOs and secondary offerings. Whenever this has happened in recent years, we’ve seen whole sectors crushed by a cascade of selling. It’s just the nature of the beast.”
And while these companies are of relatively high quality, Cramer’s worry is that the market won’t be able to sustain the coming IPO wave.
“My worry has to do with supply and demand,” he said. “When you get a surge of new supply without any increase in demand—meaning without much new money coming into the market—that’s going to be bad for prices of all stocks.”
“The bottom line? We are about to get hit with a perfect storm of IPOs, and regardless of how good this new merchandise might be, I’m concerned that the market won’t be able to handle it all without taking, maybe, all stocks lower,” Cramer warned.
“More than anything else—China, the Fed, the possibility of another government shutdown—it’s this deluge of deals you should be worrying about because nobody else is.”