Just last week Goldman noted that February was “the busiest month in the buyback desk’s history,” so one has to wonder just what management is thinking when the Wall Street Journal reports that corporate insiders are more bearish than they have been at least since 1990. According to this adjusted measure, there have been two prior occasions when the insider ratio got almost as bearish as it is today – early 2007 and early 2011 – and the first came a half a year before the beginning of the worst bear market since the 1930s. Simply put, it seems management teams are using their company’s balance sheet as their own personal piggybank.
With stocks rising to record high after record high, and with even Goldman’s clients now asking “When does the party end?” as noted by Goldman’s David Kostin overnight, the answer is simple: nothing has changed. Specifically, between the Fed’s ongoing monetization of tens of billions monthly in bonds, the missing piece to the equation is also a known one – corporate buybacks. In fact as Goldman admits, “February was the busiest month in our buyback desk’s history.” (which surely is Chinese walled off from Goldman’s prop trading desk). Why? Because as Reuters reported previously, this was the second-busiest week ever recorded for high-grade bond issuance. And with the use of proceeds certainly not going to capex, companies continue to buyback their shares in record amounts to mask the decline in actual cash earnings by lowering the amount of shares outstanding and thus keeping EPS rising or flat.
But aren’t companies leery of buying back their shares at all time highs?
And this “adjusted” measure (discussed by the Wall Street Journal’s Mark Hulbert) supports these concerns as the traditional insider-buying/selling measure is misleading, says Nejat Seyhun, a finance professor at the University of Michigan who has extensively studied insider behavior…
Corporate insiders are more bearish than they have been at least since 1990.
That isn’t good news for the stock market, since these insiders—corporate officers and directors—know more about their companies’ prospects than the rest of us. You may want to take their pessimism as a signal to ditch some of your stocks or shift into industries in which insiders aren’t heavily selling, such as energy, financials and basic industrials.
Mr. Seyhun strips out the largest shareholders from the sell-to-buy ratio, and that adjusted figure shows the current record level of insider bearishness. According to his calculations, corporate officers and directors in recent weeks have sold an average of six shares of their company’s stock for every one that they bought. That’s more than double the average adjusted ratio since 1990, when Mr. Seyhun’s data begin.
One year ago, Mr. Seyhun’s adjusted ratio was solidly in the bullish zone, he says. And in late 2003, the ratio was more bullish still.
The current message of the insider data “is as pessimistic as I’ve ever seen over the last 25 years,” he says. What makes this development so ominous, he adds, is that, while no indicator is perfect, his research has shown that “the adjusted insider ratio does a better job predicting year-ahead returns than almost all of the better-known indicators that are popular on Wall Street.”
There have been two prior occasions when the adjusted insider ratio got almost as bearish as it is today—early 2007 and early 2011.
The first came a half a year before the beginning of the worst bear market since the 1930s.
Among the stocks you should be looking to sell are those in industries whose officers and directors are selling particularly aggressively. These sectors, according to Mr. Seyhun, include capital goods, technology, consumer durables (such as automobiles, construction and appliances) and consumer nondurables (food and beverages, clothing and tobacco).
Simply put, it seems management teams are using their company’s balance sheet as their own personal piggybank.