Tuesday, February 17, 2009

USA Today: CEO's Not Buying Stock in Their Own Companies

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You'd think with all the bargains galore CEOs would be snapping up stock left and right since the valuations are so "cheap". Instead we get (cue crickets chirping) Even now at these "bargain" levels the insiders are unloading at a rate of 4:1 (selling:buying). Once more it really makes you wonder what this stock market is all about sometimes - outside of a great transfer of wealth from the many to the few. [Feb 11: Sirius Heading for Bankruptcy; Don't Cry for Howard Stean - Just More Transfers of Wealth] The same insiders who use "company" stock offerings to unload their shares onto the people (rather than raise money for the company) but cannot find a few bucks under their Louis Vuitton couches to make a show of faith with purchases even at these levels? Instead most are still selling... nice.
  • It's not just regular investors who lack the guts to step up and buy stocks. Companies' CEOs do, too. Other than a few high-profile exceptions, including the heads of JPMorgan Chase and Bank of America, officers of U.S. companies aren't exactly lining up to buy their companies' shares. The dearth of so-called insider buying, despite a nearly 40% fall in stock values in the past year, is a potentially troubling development. CEOs arguably know more about their companies' future than anyone. (nah, stock market pundits know best... just ask them)
  • Because CEOs typically buy when their stock has fallen and is about to recover, the fact they're not heavily buying now is "a little disturbing," says Darren Roulstone, a professor of accounting at Ohio State University.
  • The buying of stock by company officers and directors remains modest relative to selling, according to Thomson Reuters. Over the past 90 days, insiders at U.S. companies have bought just $670.2 million in stock, while they sold $2.8 billion.
A few of the reasons CEOs and other officers may not be stepping up and buying include:
  1. Personal cash crunches. Some executives may not have the cash available to plow into company shares, says Leland Bettis at market research firm Gradient Analytics. (darn, better give them even higher salaries then - obviously they are under compensated if they cannot find it in them to buy some shares)
  2. Greater uncertainty about the economy.
  3. Fear the downturn could be prolonged. During past market downturns, such as the 1987 crash, executives were comfortable buying amid what they thought was a short-term correction. But the fear this downturn could drag on for years reduces the incentive for CEOs to buy, Roulstone says. (did the CEOs not get the memo that the 2nd half recovery of 2008...err, make it 2009 was just around the corner?)
"Clearly, it would be a favorable sign if insiders were actively buying their companies' stocks right now," Odean says. "The lack thereof is not good news."

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This is one of the reasons I was shaking my head in the logic of late 2007 - hey the Middle Eastern guys whose financial expertise is .... well, sitting on large loads of oil are buying financials - so should you! [Sep 9, 2008: "Smart Money" is Buying - So Should You! (Revisited)] But how come the bank CEO's weren't?

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