August 18, 2003

Merrill Lynch May Be Bullish on America, But...

Corporate insiders appear to be selling, not buying, their companies' stock. At the very least, this tells us that insiders do not think the stock of companies they manage is a particularly good investment.

WSJ.com - Insiders' Moves in Face Of Rally Spark Concern: The economy and the stock market may be perking up, but the nation's corporate executives aren't yet buying into the recovery. In fact, they are selling their company's stock at levels not seen in more than a year -- a potentially ominous sign for the market in the months ahead. Common Wall Street wisdom, and recent history, hold that the sentiment of company insiders when it comes to their own stock is an unusually accurate indicator of future market performance. Executives, after all, are among the best-informed investors when it comes to their companies, giving their buying and selling significant predictive value.

Their recent predictions aren't very encouraging. According to Thomson Financial, the dollar ratio of insider transactions in July was $32.21 in sales for every $1 in purchases, the highest monthly reading since May 2001. July marked the third consecutive month the ratio topped 20 to 1, a bearish level that hasn't been sustained for such a period since July through September 2000. After that streak, the Standard & Poor's 500-stock index dropped 19% in the next six months and was down 28% within a year -- its worst 12-month performance in the past decade, says Kevin Schwenger, a Thomson analyst...

Posted by DeLong at August 18, 2003 07:52 AM | TrackBack

Comments

This is the wood/trees dichotomy. Executives act on private information that drives the markets from the bottom up, whereas the markets aggregate information from ALL sources - cross-market relationships, a complex web of arbitrage condition, macro information etc. By the time it is published, insider selling reports have no predictive power over future equity returns.

Posted by: Peter vM on August 18, 2003 08:09 AM

Wouldn't you expect a fair amount of stock selling given that some people probably now have options that *aren't* underwater for the first time since 2001? In that case, wouldn't the selling be more predictive of just needing the money more than anything else? Having said that, I admit that selling in this scenario does suggest that the execs in question see at least some risk that prices won't continue to climb. But given the existence of framing effects, I'm not so sure this is as bad as it sounds.

Posted by: Jonathan King on August 18, 2003 08:41 AM

Has anyone ever been able to monitor the investment practices of people who make their living advising on investment, from high profile media guys on through the brokers, etc.? I realize that gross forms of insider trading (and journalism) are illegal and/or unethical, but I wouldn't be surprised to find that a lot of people in the biz hedge against their own advice, without telling their audience that that's what they're doing. Sort of the way that preachers whose stock in trade is a very strict morality (what's expected of them, what brings in the money) often allow themselves little indulgences. My guess that where this happens, the adviser's advice is more optimistic than his behavior, since the money is in encouraging investment.

Posted by: zizka on August 18, 2003 08:53 AM

"...whereas the markets aggregate information from ALL sources - cross-market relationships, a complex web of arbitrage condition, macro information etc."

Ah yes, the same impeccable sources that apparently predicted a never-ending boom in late 1999. And how many times is it now that the markets have signalled an imminent upturn in the last few years?

So much for the predictive power of the markets.

Posted by: Pooh on August 18, 2003 10:04 AM

Pooh, you're being a shrill, objectively pro-Saddamist
American-hating Evul PC Librul. Heh. If the markets signalled an upturn, then by George Dubya there would be one. If there wasn't, then either the market signalls were being distorted by the Evul PC Librul Meedya, or by Islamofascist Terrorists.

Posted by: Barry on August 18, 2003 10:16 AM

It's always fun to watch bullish analysts when confronted with this embarrasing issue.

Usually they say something like, well the poor cash-strapped executives just need a little money to get the car fixed and pay for the kid's braces.

Posted by: Mike Hackenkaus on August 18, 2003 10:17 AM

Not that it would explain the entire phenomenon of insider selling, but... To the extent these guys have a portfolio of financial investments broader than just their employer's stocks, but that their portfolios are badly skewed toward holding shares of their own firm, then whenever their firm's stock goes up, their porfolio gets even more badly skewed. They already have considerable exposure to their own firms performance, in the form of bonus payments (if they are lucky) and their paycheck. Selling in response to gains may not be a portfolio decision, but it is probably what they would do if they were outsiders and held an insider-like portfolio.

Posted by: K Harris on August 18, 2003 10:53 AM

That people still even try to gauge market direction on such is eveidence that things still haven't changed on Wall Street. Everybody still thinks there will be no consequnces for the previous bubbles and the Fed's rampant policy of flooding the world with US dollars in an attempt to reflate the economy.

Maybe they'll be successful, and the Dow will cruise to 25,000...and the price of a loaf of bread will be $10-15. Be careful what you wish for.

Posted by: mcp on August 18, 2003 11:27 AM

That people still even try to gauge market direction on such is eveidence that things still haven't changed on Wall Street. Everybody still thinks there will be no consequnces for the previous bubbles and the Fed's rampant policy of flooding the world with US dollars in an attempt to reflate the economy.

Maybe they'll be successful, and the Dow will cruise to 25,000...and the price of a loaf of bread will be $10-15. Be careful what you wish for.

Posted by: mcp on August 18, 2003 11:29 AM

Jonathan King is correct. If you read the full WSJ article, you'll see that some people think the insider selling is more the result of options being in the money for the first time in a while after recent market gains. That's a much more benign scenario than what Thomson wants us to believe. Maybe Thomson also has an incentive to scare people and make this seem really important in order to get more people to buy their research?

Posted by: Dimmy Karras on August 18, 2003 11:42 AM

"Maybe Thomson also has an incentive to scare people and make this seem really important in order to get more people to buy their research?"

Unlike most Wall Street cheerleaders, I suppose, who wouldn't dream of prostituting their wares at valuations which now exceed 1987 and 1929?

If people aren't scared already, they are as nuts as a guy standing half-way up Everest wearing nothing but a blindfold and a pair of underpants and wondering whether he'll be home in time for tea.

"Roll up ladies and gents, have we got some bargains for you today...EBay and Amazon going cheap..."

Cheep cheep.

Posted by: Pooh on August 18, 2003 01:52 PM

There's an old saying on Wall Street -- "there are a million reasons to sell a stock, but only one reason to buy 'em."

What concerns me is not the excess of sellers in the present market -- remember, the markets climb a wall of worry -- Rather, its the dearth of buyers.

Do any insiders see the economy getting better? Its long been my thesis that what stands between us and a full-throated economic recovery is the legions of tight fisted corporate IT managers, CFOs, and budget committees who stubbornly refuse to believe their own CEO’s happy talk. Once these Scrooges start spreading their love (i.e., $$$), I would expect consumer confidence to rise, employment to markedly improve, and tax receipts to climb.

But they have to be willing to break open the “lock box” and start hiring and spending. Instead, they remain too focused on making this quarter's numbers . . .

Posted by: Barry Ritholtz on August 18, 2003 02:27 PM

What Barry's pointing to with IT managers, means that the way to recovery is rather easy to see:

Microsoft must come out with either a new operating system or office suite that is so bloated it requires everyone to go out and double their hardware capacity. Our economy needs, nay demands, that Redmond engineers come out with another poor product to get our economy flowing again!

Posted by: Rob on August 18, 2003 03:21 PM

Damn. That means we'll have to wait until Longhorn, which will require a special CPU, comes out in 2005 to stop this economic "recovery."

Posted by: rps on August 18, 2003 09:59 PM
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