Wednesday, October 25, 2006

Feed the Ducks When They’re Quacking

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“Insider Sales Rise, but Not to Worry.”

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Thus today’s Wall Street Journal blandly describes a “sharply” increased rate of stock selling by corporate insiders in the last two months.

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"What you have to remember is that all selling is not bad," a fellow who studies these things tells the Journal, which then explains as follows:

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While open-market sales compared with purchases by insiders have increased significantly in September and October, that increase is the predictable result of the rise in the stock market…

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So, if I am grasping the logic correctly, “sharply” increased sales of stock by corporate insiders are apparently bad only if they occur when the stock market is going down.

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Well, that’s a relief!

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I guess you can’t blame the Journal for downplaying an indicator that tends to have a pretty good track record for marking sentiment extremes on both the bull and bear sides of the market: after all, the Dow Jones Industrial Average, as even my dog Lucy now knows, just broke through 12,000.

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Who wants to rain on that parade?

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Besides, insider sales are not by any means a perfect leading indicator of impending trouble—CEOs and CFOs and other Corporate Bigs sell stock all the time, what with taxes to pay and G-IVs to buy and second wives to impress and options-granted-miraculously-at-the-lowest-price-of-the-year to exercise.

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And even if those sales do indicate signs of worry among the men and women who run American businesses, and are, therefore, thought to possess foresight into future economic trends, there’s no telling when the prevailing sentiment mood will shift back to “fear” from “greed.” I mean, after all—to borrow a line from “Hot Shots!”—what could go wrong?

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Still, why wouldn’t insiders sell?

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Why not take advantage of all the hoopla over that magical 12,000 figure, which anybody inside a corporation knows is entirely meaningless; yet which is terrifically meaningful for the investment professionals whose business depends on “beating the market” even if that “market” is deemed to consist of 30 random stocks whose aggregate theoretical index value just reached 12,000?

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Why, with the bond market, along with cyclical stocks and “Dr. Copper” sniffing no let-up in worldwide growth despite the U.S. homebuilding crash, wouldn’t insiders arbitrage the higher price/earnings ratio of stocks on the one hand and the higher yield on the no-risk 10-Year on the other?

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Why with companies like Whirlpool and Kimberly Clark and Caterpillar Tractor missing numbers thanks not to weak demand but to higher input costs—a 25% higher increase in the raw material bill than previously expected, in the case of Whirlpool—wouldn’t a savvy insider let some go?

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Why not, in short, feed the ducks when they’re quacking?

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As for what could possibly go wrong—what might lurk on the horizon that could trigger an end to, or at least a pause in, the euphoria sweeping the market (a euphoria almost as palpable as the gloom two months ago, before the insider selling picked up “sharply”)— I have a thought.

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How about this: how about two weeks from now when Wall Street wakes up and finds Charlie Rangel has become chairman of the House Ways and Means Committee and Barney Frank is now in charge of overseeing Wall Street for the financial illiterates—Republicans and Democrats alike—in Congress?

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Whoops, I forgot: this is the stock market! What could go wrong?

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Jeff Matthews

I Am Not Making This Up

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© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

9 comments:

fivetonsflax said...

What's your implication -- that stocks will crater if the Dems take the House? Why should that happen?

WillisnClyde said...

...and why not when you'll be getting a boatload of new options to replenish the stock you've sold.

whydibuy said...

The Toll bros. ceo has still got to take the cake. In mid '05 at the height of the housing mania, hes telling rosy predictions for homebuilding while simultaneously dumping loads of his stock. Like the saying goes " do as I do, not as I say". I'm now well underperforming the market with my money market holdings. I shouldn't even look at stocks since I'm so ignorant of them. I think the crash in the huge asset class of housing would damage the market so the opposite happens. Who can figure this sh*t out. Yeah, Whirlpool's inflation is roaring so the treasury market rallies strongly. What happened to the concept of margin of safety? Homebuyers buying at 7-8-9 times income. Lenders not verifying income and lending with no money down. No margin of safety with 20% down for the lender or requiring no more than 30% of income coverage for the mort payment, a little margin of saftey that they'll be able to meet the terms of the mortgage every month. Its time to quote W. Buffett in '68 when he said " I am out of step with present conditions. Wall street plays a game of which I am unfamiliar, do not understand and believe could lead to a large permanent loss of capital".

whydibuy said...

Oh, btw, if your looking to replace your furnace with a high efficiency one, you better move now. I had my furnace guy in for my bi yearly inspection and cleaning and he tells me that these furnaces are going up in price from the mfgrs about 10-15% in January depending on brand. No, theres no inflation anywhere, just like the bond market says. The only real decline in prices I'm seeing is with hi def t.v.'s. They're dropping alot but I think its because of mfg volumes and efficiencies.

dkman said...

Let's not forget that stock-based compensation has pretty much become the norm over the past couple of years for all sorts of companies and all sorts of employees, not just senior execs.

For example, GOOG insiders have been selling at a fairly high rate for the last 18 months at least. This has initially caused me to suspect something funny and be bearish on this stock. But, as we know, their business remains extremely strong, so my guess is their employees routinely sell stock as their options vest so they can fund their amazing lifestyles.

Bottom line: I am not particularly bullish on this market either but I also don't think insider selling is as important of a metric as it used to be.

Sam E. Antar said...

There is an old saying among fraud investigators, "if you want to know who the criminals are, follow the money."

While, am not at all suggesting that there is a criminal element involved in the substantial majority of insider sales, any smart investor must follow the same underlying logic as the investigators in that one of the steps to understanding the market (and the reality of what is happening) should be to “follow the money trails.”

They should look deeply and consider who benefits by certain transactions and the flow of money. We should not have a “follow the herd – buffalo mentality” in throwing our money into everyone else’s perceptions.

Money flows are driven by self interests and the "perception of reality" which can be a lethal combination if such perceptions are not always in line with the true facts.

stealthelephant said...

What the "expert" should have said: "all selling isn't ALL bad" and then for the follow up: "but in this case, it is!" How can a rational market observer agree or defend the expert's explanation? Rank punditry such as this doesn't belong in the Wall Street Journal. The current rally is not a normal rally. The indexes are not in sync and we don't have comprehensive participation across industries. Positive consensus on the economy doesn't exist. We paused. Doesn't anybody remember that? There are extraordinary pressures on the consumer, several growth sectors are broken ( i.e. pharma, swaths of tech, homebuilders) we have nascent inflation in most developed nations, a surfeit of liquidity everywhere, and rampant geopolitical risk on six continents. I'm not a bear but definitely cautious. A measured view of indiscriminate insider selling and other such indicators is in order here.

Kaleberg said...

Actually, I'd consider Frank and Rangel taking over to be good news for the market. Historically, the Dems have been great for business and great for the stock market. Check your ideology at the door and look at the numbers.

Jeff Matthews said...

"Kaleberg": Ideology has nothing to do with it.

You think Charlie Rangel is going to be as nice to capital gains and dividends taxes as the Republicans?

You think the PBM's are going to get away with overcharging for pills under the Dems?

You think the Dems are going to give the ex-CEO of United Healthcare a free pass for his $1 billion payday at the expense of the poor shlubs his company nickels and dimes?

In this business you have to keep an open mind for whatever comes down the road. It never pays to keep it closed and locked.