Monday, June 22, 2009

Shocker: Insider Sales at Fastest Pace in Two Years

Bloomberg finally got to report the "news." I commented on it in early May. The article in part reads:
"Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.

Insiders of Standard & Poor’s 500 Index companies were net sellers for 14 straight weeks as the gauge rose 36 percent, data compiled by show. Amgen Inc. Chairman and Chief Executive Officer Kevin Sharer and five other officials sold $8.2 million of stock. Christopher Donahue, the CEO of Federated Investors Inc., and his brother, Chief Financial Officer Thomas Donahue, offered the most in three years.

Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.

“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock- price levels,” said Joseph Keating, the chief investment officer of Raleigh, North Carolina-based RBC Bank, the unit of Royal Bank of Canada that oversees $33 billion in client assets. “They’re taking advantage of this bounce and selling into it.”

Pardon me for posting that much, I personally dislike blog entries that do this. So what is actually happening?

Again, pay attention to the informational asymmetries in insider sales. If the stock is a good investment, why are the insiders selling? The one legit reason is estate planning. More often than not, people are greedy and if they see the prospects of a business looking up, they would likely double down, not sell. On rare occasions, there are forced sales (see CHK) due to margin calls, and those sales might be good opps to buy. But by and large, in a phony rally like the one we've had, insider sales are not a good omen.

Longer-term, the market is driven by earnings, and it does not seem like insiders think the earnings will be there in the near-term future. I personally do not think that the earnings, in real terms, will come back in a long time for a number of reasons: end of peak credit, political uncertainty in the US, grand-scale transfer of wealth from the taxpayers to the connected few, likelihood of increased taxation, the economic distortions of hyperinflation, the prospects of 20% U6 unemployment structurally(!), energy source depletion, and so on.

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