Insiders Cashing in May Hurt Stocks

Reuters ^ | August 16, 2003

[moneyrunner]

I would not expect to see, nor have I ever seen, presidents or business leaders predicting the end of the financial world. It is their role to try to support the economy and the markets, not drive them down by forecasting gloom and doom. That is also the role of the Federal Reserve.

For that reason, I'm not surprised at these quotations.

What I try to work with is logic. So, if you were a corporate exec and part of your compensation package is in the form of stock options, and your company’s stock has just appreciated by anywhere for 50% to 500% (lots of tech stocks have done just that) from the trough of the collapse, what would you do?

Well, I don’t know about you, but my reaction would be to sell some of that stock and created a diversified portfolio so that if the worst happens, I would not be caught in the same situation I was in when my entire net worth was tied up in my company stock and it cratered.

One more thing, the 144 reports that show insider selling only show selling. There is no rule requiring the purchase of substitute securities (unless you are buying your own company’s stock). What would be interesting to me is to see what is being done with the money. My educated guess is that it’s going into managed equity portfolios, hedge funds, and bond portfolios. Diversification, it’s a beautiful thing.

[moneyrunner]

Sorry to disagree, but I must. The rationale for diversification is that different asset classes act in different ways. The technical term for it is correlation factor. For example, large cap value stocks and small cap growth stocks are not perfectly correlated and will perform differently. That is why a well-diversified portfolio will hold as many as 10 different asset classes.

Since it is not possible to consistently predict which asset class will outperform in the next year, portfolios are diversified so as to own some of each. This will absolutely guarantee that the portfolio will not outperform any individual asset class during any one period, but it will guarantee that the owner of that portfolio will not get caught in the same situation that Enron or Worldcom employees were.

We can always tell each other where we should have been to make a fortune if we could go back in time. Unfortunately, my “wayback machine” is acting up.

[arete]

That does not strike me as a rush to get out of the market.

You are right. The rush is starting to look more like a panic to get out.

Richard W.

[moneyrunner]

It is important to note one thing: the only 144 reporting that is required is INSIDER buying and selling. It is not reported if the president of Exxon Mobil buys shares in IBM.

When an insider buys, he is probably adding to an already large position of his company’s stock., creating a situation where a dangerous part of his net worth is tied up in one stock.

In the lifetime of the modern executive we have never had a market melt-down like the one of 2000-2002. Many tech executives went from multimillionaires to poverty (some owing more in taxes than their stock positions were worth).

THAT is a lesson that they will never forget.

I would be surprised if anyone with half a brain would expect people who are already over-concentrated in a single stock to repeat the mistakes that got them - and their neighbors - into trouble just a few years ago.

I confidently predict that we will see much more 144 selling than buying for years to come. Their wives, friends, neighbors and financial advisors will all tell them to diversify.

[arete]

TrimTabs is also reporting more selling than buying and concludes the market will decline or remain weak until companies stop expanding supply and begin buying back their own stock. You can listen to last weeks Jim Puplava's interview with Charles Biderman here:

Charles Biderman Interview

Biderman says the trend is flashing a warning signal. Good interview.

Richard W.

[moneyrunner]

”TrimTabs is also reporting more selling than buying and concludes the market will decline or remain weak until companies stop expanding supply and begin buying back their own stock.”

I don’t wish to be disagreeable, but do wish to disagree. I contend that insider selling is natural in view of two facts: first, the run-up in the stock market – in some stocks hundreds of percent since the bottom of the market in 2002. Second, as I noted in my posts 21 and 24, corporate executives will not soon forget the lessons of the crash of 2000-2002. They are diversifying, and doing it at a time when the market has paused and the run up has stalled. That makes a lot of sense.

I would be surprised to see net insider buying for years.

In my own case, while not an insider and not subject to Rule 144, I own a lot of my company’s stock as the result of the award of stock options. My company’s stock recently hit an all-time-in-the-history-of-the-universe high. I have been selling the stock and will continue to do so until I reach a level where it does not represent more than 10% of my net worth. Under Rule 144 you would have concluded from my selling that I believed that my stock was going to decline. I believe no such thing, but I have also absorbed the lessons of 2000-2002, seeing the value of high quality companies like GE and Microsoft decline by over 50%. I will not allow my own family’s finances be exposed to a singe stock, a few stocks or even a single asset class.

[Stallone]

WARNING - This is certainly for advanced investors only.

I too was raised on the sacred doctrine of diversification.

And yes, there is always something good happening in one of a diverse group of real estate, resources like metals and energy, technology, health-care, interest bearing securities and businesses, etc.

From what I have read and experienced, the most successful do not 'cut the flowers and water the weeds'. They ride a winner for as long as possible, and the more leverage they carry on the winner, the better.

Now, if we are wanting to retire in 40 years on a modest but stable base, we should highlight safety, keep working at a steady job, invest $100 per week in a solid mutual fund, etc.

Or, if not, open your eyes wide, spot the fundamentally-sound trend in vogue, for example, investment real estate, and just go for it with both barrels.

What you will do in a single year will humble your entire past efforts, including your job income however honorably earned.

When the fundamentally-sound trend becomes momentum only, get ready to bail.

Then, shop wisely, and invest in the next fundamentally-sound trend.

I have leap-frogged entire generations of wealth because of this amazingly-safe philosophy.

The key is finding fundamental value (i.e. backed by defineable earnings and income), and having your entire focus on making it work.

Repeat - never let your eye off the ball.

[arete]

They are diversifying, and doing it at a time when the market has paused and the run up has stalled. That makes a lot of sense.

So you are saying that the insiders are trying to reduce risk by buying shares of other companies -- one's that have already risen to nose bleed areas of valuation. If it makes sense to you, then maybe there is something I'm missing.

Richard W.