“Nobody ever sold a stock because they thought it would go up. And as a group, corporate insiders obviously are scarcely enthusiastic about the prospects for a genuine bull market.”

>

Or so said Alan Abelson in this week’s Barron’s.

Is he right? How fallible are the CEOs, CFOs, and other execs regarding their own firm’s prospects? Consider:

“If those now infamous shoots of recovery are popping up all over, why would insiders be so aggressively dumping stocks?

Yet, they indisputably are. According to a study prepared for Bloomberg by Washington Service, a research outfit, directors, officers and the like have sold $353 million worth of stock in this fading month, or 8.3 times the total bought. As a matter of fact, according to the firm, insider purchases of $42.5 million are on track to make April the skimpiest month for such buying since July 1992. (emphasis added)

The pace of selling in the first three weeks of this month, incidentally, was the swiftest since the market peaked and the bear came out of hibernation with a vengeance in October ’07.”

There’s more than anecdotal information in insider sales. Bob Bronson, who tracks insider buys and sales, notes “We’ve found insider activity to be a very useful market timing indicator – when used in combination with others — over the short term (weeks) to intermediate term (months).”

Bronson shows that Energy, Consumer Durables and Transports look particularly bearish now:

2-insider-sales_image001

>

Back to Abelson — he concludes:

“We’re quite aware that insiders are not infallible. But they are, after all, in the front lines of commerce and industry and so presumably have a better fix on the economy and the prospects for recovery than analysts and economists, whether of macro or micro persuasion.

And just as they wouldn’t be laying off people in such extraordinary numbers if they thought their business was about to rebound soon, they’d be loath to liquidate their holdings in such an emphatic way if they espied a turnaround in the offing.”

One could argue that sellers are merely taking advantage of the big rally in the markets — the S&P 500 has jumped 28% in 33 trading days, the sharpest rally since the 1930s. But what does that say regarding the bull-tards cry that the longest recession since World War II will soon end?

This may be a classic case of “watch what they do, not what they say . . . ”

>

Sources:
Shareholders Be Damned!
ALAN ABELSON
Barron’s APRIL 25, 2009

http://online.barrons.com/article/SB124061355986854673.html

Insider Selling Jumps to Highest Level Since 2007
Michael Tsang and Eric Martin
Bloomberg, April 24 2009

http://www.bloomberg.com/apps/news?pid=email_en&sid=au8cyqeJFifg

Note: For those of you who wish to track this on your own, here are a few resources:

INSIDER SPOTLIGHT
WSJ Sales Tracker

http://online.wsj.com/mdc/public/page/2_3024-insider1.html?mod=mdc_h_usshl

Insider Monitor

http://www.insider-monitor.com/sellday.html

Category: Corporate Management, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

42 Responses to “Beware Insider Selling”

  1. Dennis says:

    Why does massive insider selling not surprise me?

    The amount of bottom calling and the dominance of greed over fear makes me wonder if the worst is really behind us.

  2. WaveCatcher says:

    The “fundamentals” underpinning this bear rally are a sham. Demand for nearly everything is weak, housing is still a mess, and the credit D-Cycle has a LONG way to run before we see a real bottom.

    As Abelson points out, it appears that that CEOs know this and are dumping their stock on the unsuspecting retail investors that have bought into the hype.

    When will the public realize this, who knows? Overbought markets often become even more overbought. For now the trend is UP. But I won’t be surprised if these last couple of weeks mark the top of a bear rally. The Market is now entering the seasonally weakest period of the annual cycle.

    The hype surrounding the GS offering set off my alarm bells. Also, Geithner’s “all clear” memo last week.

  3. dead hobo says:

    Just as many of those who are currently buyers in the stock market confuse a flower in a giant field of steaming turds to be proof of spontaneous transformation into something beautiful, this will also be seen as a positive and encourage more to buy at higher prices.

    Only those in weaker companies are selling, I would suspect. The stronger competitors in a given field are holding pat and watching their nest egg grow mightily. Plus, the fact some insiders are selling and making money is proof of a rising market. Therefore, the weak companies aren’t really very weak. After all, we’re talking about the stock market, not the economy.

    The economy is filled with dour and miserable people who rate 110% on the buzzkill meter. The stock market is filled with happy people who are making lots of money and lots of professionals who want to be my friend (except for short sellers, who just hate everybody). The stock market has happy news business reporters who tell me it’s OK to make money with stocks. The economy looks depressed enough to hang itself, but not until it talks you into going first.

    Therefore, all you need to do to profit beyond avarice is to buy companies where a) insiders aren’t selling and b) companeis where insiders are selling. You can’t lose. The stock market will protect you from the economy.

  4. franklin411 says:

    So wait…I’m to believe that the economy is crashing because corporate managers were too stupid to see the dangerous bubble they had created, and I’m also to believe that corporate managers are so brilliant that they’re anticipating problems ahead and dumping stock like crazy?

    I love it…everyone who agrees with me right now is a genius. The same guy, if he disagrees with me tomorrow, is a moron.

  5. larster says:

    Using Ford as an example, losing one billion is not a good thing. The bulls spin is that they were expected to lose two billion, so buy the stock. Either way, you go out of business. The only question is timing. Hardly a bull case and the insiders know this.

  6. dead hobo says:

    franklin411 Says:
    April 26th, 2009 at 9:52 am

    So wait…I’m to believe that the economy is crashing because corporate managers were too stupid to see the dangerous bubble they had created, and I’m also to believe that corporate managers are so brilliant that they’re anticipating problems ahead and dumping stock like crazy

    reply:
    —————
    Point taken. Since these people are confirmed stupid, this is absolute proof of a market that has nowhere to go but up. The economy may be noxious, but the stock market is soaring. It’s become the official Happy People Club. Happy people attract happy people. This is the real secret to success.

  7. sunny45 says:

    This is a Fed induced Rally!

    We are now in Financial equivalent of Alice’s Wonderland. Up is down and down is up! If you are rational question this, you will be declared unpatriotic.

    Insanity reigns! Bear and grin!!

  8. Winston Munn says:

    This should have a name: one vote here for naming it The Mozila Factor

  9. franklin411 says:

    @Hobo:
    I don’t think this data proves anything, frankly. It’s just noise. ;-)

  10. KC says:

    “skimpiest buying since 1992.” Since 1992 was in fact a good time to buy, that shows you insiders are no more knowledgeable than the average investor. Therefore, this article shouldn’t influence our market outlook whatsoever.

  11. jpm says:

    So, I love data like this.

    But if I were king, I would enact a law that requires publishing a correlation coefficient when reporting a stat purporting to be a predictor of the market.

  12. KC says:

    Barry,

    Your ‘Older Entries’, ‘Newer Entries’ links are linked to the home page, so I can’t see the older posts :(

  13. Mike in Nola says:

    I agree that it doesn’t really say a lot. It may be that they are just pressed for cash like a lot of the other people who didn’t see the crash coming and were overleveraged. OTOH, it could be proof that they don’t believe a recovery is coming soon.

    In either case, many of these same people’s companies were buying back stock at the top.

  14. dead hobo says:

    How’s Your Bank

    http://banktracker.investigativereportingworkshop.org/banks/

    I don’t know where this link came from. I found it in my bookmarks. I think someone emailed it to me. If it originally came from here, sorry for the duplication.

    Find your bank. Is it a TARP recipient? What about it’s troubled loans? More fun than a barrel of monkeys.

  15. KJ Foehr says:

    OT

    How much could the swine flu pandemic impact our economy / stock market should it spread here from Mexico?

  16. danm says:

    A huge percentage of employees cash in their 401K when they change or lose their jobs.

    In the next few months, millions of employees’ unemplyment benefits will be coming to an end, forcing them to sell their investments to make ends meet.

    In Canada most RRSPs are all spent withing the first 9 years of retirement. I imagine it’s the same in the US.

    Something tells me the savings won’t be going into the market, it will be going into paying down debt.

    IMO, the only reason the market stays up is if our leaders are printing money and using it to prop it up.

  17. Chief Tomahawk says:

    KJ, I was thinking the same thing.

    Dr. Housing Bubble has a very interesting post as well about Notice of Defaults (I forgot the terminology) surging in CA. He said with the sub-prime crisis, a similar event occurred 6 months before foreclosures boomed. If the same pattern holds, foreclosures will spike aggressively in the fall.

  18. Onlooker from Troy says:

    Mike in Nola Says:
    April 26th, 2009 at 10:26 am

    In either case, many of these same people’s companies were buying back stock at the top. <<<<<

    Don’t confuse the actions of individuals with the actions of the companies. The individuals act in their own self interest. The fact that they had their companies buy back stock at market highs is only more evidence of them acting in their own self interest. They use that excess company cash to buy back stock to keep it propped up at the highs so that they can reap bonuses based on that stock’s performance.

    They act much differently with their own cash than they do with the companies cash, unfortunately.

    So to reiterate, individuals at the top of companies sell more at the highs and buy more at the lows, and their companies do more of the opposite.

  19. Onlooker from Troy says:

    Chief Tomahawk Says:
    April 26th, 2009 at 11:37 am

    KJ, I was thinking the same thing.

    Dr. Housing Bubble has a very interesting post as well about Notice of Defaults (I forgot the terminology) surging in CA. He said with the sub-prime crisis, a similar event occurred 6 months before foreclosures boomed. If the same pattern holds, foreclosures will spike aggressively in the fall.<<<<<<<<<

    Yep, that’s the big elephant in the room. A very inconvenient fact that people don’t want to acknowledge, fooling themselves that it will somehow cure itself as the “economy picks up”, or other such nonsense. Right now they’re just trying to skim what they can off before the next shoe drops.

  20. call me ahab says:

    it’s straight up from here- put all our money in long- on Monday or as soon as possible- so what if the CEO’s are getting out of their own stock- what do they know

  21. In trying to give insiders the absolute benefit of the doubt I wonder if they’re selling is connected to the fervor over the elimination of bonuses? Otherwise, I can’t think of any other reasons why they would be selling at a bottom except that they are telegraphing even more troubled waters to come

  22. Wait, here is another one. That the stock is already down and they are trying to cash out vested options before they become worthless. I wonder what the strike prices of those stocks are?

  23. abaumga says:

    “This is a Fed induced Rally!

    We are now in Financial equivalent of Alice’s Wonderland. Up is down and down is up! If you are rational question this, you will be declared unpatriotic.

    Insanity reigns! Bear and grin!!”

    A more apt description would be biblical:

    Woe to those who call evil good
    and good evil,
    who put darkness for light
    and light for darkness,
    who put bitter for sweet
    and sweet for bitter.
    Isaiah 5:20

    Underneath it all this financial crisis has a collapse of morals underneath it. The moral crisis is the real problem. The financial crisis is merely a symptom of the unwillingness of so many Americans to deal witht the harsh reality that there are absolute truths and absolute right and wrongs. Choosing wrong and calling it right because the ends justifies the means will never lead to a good solution

  24. EAR says:

    “Bronson shows that Energy, Consumer Durables and Transports look particularly bearish now”

    And they should be. These sectors have issues that are obvious.

    You can chalk this up to opportunism and fear.

    Overall, after historic wealth destruction there are scores of people wondering how they’ll ever make it back. Some just got the opportunity.

    The insiders know that this is probably the last rally of this kind for some time. I don’t think this is necessarily a sign that the insiders know something we don’t about impending doom, but that they’re afraid of it. Our real problem is that the fear is warranted.

  25. Transor Z says:

    @KJ: It’s already here. Eight confirmed cases at St Francis Prep in NYC. 200 more reported ill. No US fatalities, however.

  26. sfharris81 says:

    I was under the impression that the general rule of thumb was to ignore the actions of insiders when as it pertains to the purchase and sales of securities in their own firms. Insiders sell stock for a number of reasons other than the viability of their firms. Likewise they purchase shares for numerous reasons just the same. An insider may purchase shares not because he thinks they will go up, but because he knows there is an audience. Also insiders may sell stock to meet their mortgage payments, after all stock options are a significant salary component of many top ranking corporate bosses.

  27. moneyneversleepsblog says:

    Throughout 2008 you had lots of people step up and buy their stock, their timing could not have been worse so now that they are selling, how much does that tell you? I agree that the buying is far more important than the selling. At the end of the day, sure the CEO’s have a better feel for their own company but they are still human just like everyone else. They get scared, they make mistakes, etc. Could be some selling related to the fact that executive comp has come down but the lifestyle has not.

    It seems pretty clear that during the past year or so we have learned that the CEO’s weren’t as smart as we thought and many had no idea what was coming… perhaps it is the ultimate sign of capitulation! You have individual investors afraid to buy.. or without any money left to do so.. senior execs selling… no stock buybacks… that’s not a horrible backdrop for the bulls out there… not that there are too many bulls hanging around here today most likely..

    http://moneyneversleepsblog.blogspot.com/

  28. Avl Dao says:

    Nomenclature Debate: ‘L’-shaped Recovery OR ‘L’-shaped Descent ?
    Is the phrase, ” ‘L’-shaped Recovery” an easily-addicted-to misnomer?
    Folks, it does not represent or signal any “Recovery”…the ‘L’ signals and represents a long traversing of the bumpy floor of a crater of unknown diameter.
    I’d suggest we say ‘L’-Shaped Descent for now.

    How apropos the uncertainty of the ‘L’.
    This debt-fueled economic re-structuring we’ve entered, kicking & screaming, has yet to signal what could replace the expired 25-yr experiment of a 300+ million-person nation attempting to operate on a GDP that is 70% driven by debt-enabled consumer spending. Therefore, the uncertainty signaled by the ‘L’-shaped Descent is perfect!

    Good stuff, Barry, on the delta-volume of Insider Sales/Buys. It is a good indicator in certain business climates, like todays, where multiple sectors are heading in the same direction per delta-earnings/sales as well as per the underlying fundamentals.

  29. Transor Z says:

    There may also be tax considerations . It seems likely that there will be zero capital gains tax in many or most cases because executive stock options are probably being sold at a loss vis a vis the time of exercise. So if they already paid taxes in 2008 for exercising they can at least cash out, get the loss, and possibly no additional tax liability for 2009.

    Also, what they are doing with the cash is purely speculative. For all we know, many may think there’s a buying opportunity in other equities.

  30. Onlooker from Troy says:

    To reiterate from my earlier comment, I think that we should distinguish between these top level insiders’ actions in their own interests and their actions with regard to their companies. All too often in our publicly owned/traded company world lately,they tend to be very much better at looking out for their own self interests than for the companies’ and shareholders’ interests.

    The fact is that many made terrible decisions for the long term health of their companies (and our economy) while reaping great personal wealth. Because of the nature of compensation plans they didn’t have to worry. They’d be getting theirs.

    I do believe there is an established contrarian relationship here that’s been used for long time. There was a graph in Barron’s not long ago that I can’t find now that showed it. It’s not perfect and can’t be used in isolation, but in the context of all that’s going on now it’s telling. They wouldn’t be selling their shares at such a pace if they thought this was some intermediate high in the new bull.

  31. dawase says:

    I’m surprised no one has clued into this – Anticipation of higher cap gains taxes and taxes generally. Usually tends to accelerate selling.

  32. danm says:

    THEY’RE selling THEIR stocks over THERE.

    With many more millions THAN you can ever hope to make, they can THEN move to an island of their choice.

    Sorry for the English lesson. Just couldn’t take it anymore.

  33. jc says:

    Not even the most optimistic claim that the bottom has been reached. No recovery is imaginable while we lose jobs at this rate. Increased foreclosure sales and super size losses for the banks will be a another body slam for the economy in the next few months

  34. kukiniloa says:

    Headlines belie this fact. Take marketwatch.com for instance. Today we have the headlines:
    “Stocks Ride Earnings Wave of Mostly Upbeat Results” ;
    “How a 5% Drop in GDP Can Look Good”; and
    “With Bar Set Low, Corporate America Exceeds Expectations.”

    Obviously these headlines are examples of “polishing the turd.”

    But really, if the bar has been set low and assuming that shares have been properly discounted, how can we argue that there will be a sell-off.

  35. Moss says:

    I suspect that some of the levered insiders had additional margin calls with the March lows.
    As far as prospects for the consumer sensitive areas go one only needs to look at UPS.

  36. Onlooker from Troy says:

    kukiniloa Says:
    April 26th, 2009 at 6:05 pm

    Headlines belie this fact. Take marketwatch.com for instance. Today we have the headlines:
    “Stocks Ride Earnings Wave of Mostly Upbeat Results” ;
    “How a 5% Drop in GDP Can Look Good”; and
    “With Bar Set Low, Corporate America Exceeds Expectations.”

    Obviously these headlines are examples of “polishing the turd.”

    But really, if the bar has been set low and assuming that shares have been properly discounted, how can we argue that there will be a sell-off.<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<

    Indeed, hard to believe isn’t it? Could be the good old contrary indicator of the MSM headline. Eventually reality will set in though and the market will no longer be able to ignore it. That’s a recurring theme in bear markets. The psychology cycles back and forth, and by the time it’s truly over they won’t believe it.

    The swine flu scare could be just the kind of trigger to snap back to reality. Who knows. Time will tell.

  37. zot23 says:

    The bottom is in? What, before the civil war? Aw man, I always miss the best parts. Who won this time?

  38. MatB says:

    They also might be selling into an upturn because their personal income has been impacted by the economic doldrums.

  39. [...] The Big Picture notes that director buys and sells are useful market timing indicators according to Bob Bronson, an analyst, and now they’re selling in droves. [...]

  40. [...] activity (the buying & selling of shares by corporate executives).  So when I ran across this post today, I felt the need to clarify my personal stance on this [...]

  41. [...] Beware Insider Selling By Barry Ritholtz – April 26th, 2009, 8:15AM “Nobody ever sold a stock because they thought it would go up. And as a group, corporate insiders obviously are scarcely enthusiastic about the prospects for a genuine bull market.” [...]