There are thousands of reasons to sell, but only one reason to buy: You think a stock is going to go higher.
The people who are thought of as having the greatest insight into that upside potential — corporate insiders — are always doing both, buying and selling. So it can be instructive to see the ratio of what their Buys/Sells are like. Oftentimes, that can provide a small measure of insight into sentiment and potentially what management thinks the next 6-12 months miught hold. They aren’t infallible, but they do have access to better info than most investors do.
"As Alan Newman notes in his always rewarding CrossCurrents commentary, in November, those worthies, as totted up by Thomson Financial, dumped an astounding $16 billion worth of their stock, or nearly 35 times as much as they bought. By comparison, in the 11 months beginning December ’05 and ending October ’06, the ratio of sellers to buyers among insiders averaged 10.7-to-1.
The early returns for December are even worse: in that month’s first two weeks insiders collectively sold 55 shares for every one they bought. As Alan comments, they were so bound and determined to take money off the table that they couldn’t even wait the few weeks until January to avoid the serious tax bite for what probably was a pretty lush year for them in ’06. "What," he asks, "does that tell you?" We’re terrific at answering rhetorical questions, and the answer to that one is "plenty."
So who’s buying those billions of dollars worth of shares the insiders are selling? Alan speculates that the latest Wall Street wonder, exchange-traded funds — or in the lexicon of the Street, ETFs (see Exchange-Traded Funds) — has been sucking up a lot of that stock gushing out of insider portfolios.
By his reckoning, through mid-December, last year’s net issuance of ETF shares weighed in at a massive $54 billion, extending a smashing seven-year growth that has averaged an awesome 41% annually and has lifted the total value of such shares to close to $400 billion. It’s critical to remember, Alan points out, that for an exchange-traded fund to issue shares it must first buy the underlying assets, primarily stocks. That demand all by itself, he reckons, was enough to keep the market rally of the past few months alive and well.
Not the least interesting thing about ETFs and their powerful impact on market prices is that they don’t trade on the basis of individual corporate prospects. Alan posits that more than half the price of many stocks is now dependent on "index or sector sponsorship, the obvious result of a market that has been increasingly sectored to death and indexed beyond any efficiency" imagined by academics. For ETFs, in other words, valuations don’t matter.
Which is the dangerous message he gets from the fact that the top 10 constituents of the most popular ETF, the Nasdaq 100 Trust (QQQQ), which trades a formidable $4.7 billion a day, sport a P/E north of 33 and are selling at over six times sales.
Unless we’re willing to say history and, for that matter, logic are bunk, it’s plain as the nose on your face that valuations do matter. That’s what investors should have learned from their sorry experience in 2000, reflects Alan, and what they very well may learn again the hard way when this market turns tail."
That’s fascinating stuff. Its hardly a precise timing mechanism, but it does point up an interesting factor: Insiders have been taking advantage of the stock run up from July to year’s end to sell into the strength.
I would be curious to see how this compares to other significant market periods. Is it determinative? Does it provide an early warning, or is it merely an interesting data point?
If any hung over revelers have an idea, please let us know . . .
UP AND DOWN WALL STREET
MONDAY, JANUARY 1, 2007
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