Thursday, October 28, 2010

Insider Sales to Buys in Top 10 Holdings of QQQQ, SMH, and RTH at 3177:1

I saw a story on this subject a day or two ago but did not have time to write a piece.  I could not track the news story down today via the Google but instead found a writer on Minyanville who wrote it much better than I could have anyway.
  •  The corporate insiders running our country’s publicly traded companies have been heavily selling their stock, which some market pros say speaks volumes about the veracity of the current rally.
  • ... even as hedge funds and prop traders at the big commercial banks might be buying, one group of investors has carefully side-stepped this rally: corporate insiders.  Alan Newman, editor of the Crosscurrents newsletter, recently surveyed insider activity in three sectors. Newman says the selling he’s seeing among the C-suite crowd right now is some of the most dramatic in years.

Now let me preface this by saying that corporate selling of stock is a path to riches and does not usually indicate much.  U.S. public corporations are feeding troughs for insiders and in the wink wink financial arena we don't even consider option expensing to be a real expense.   Meaning if a company has $18million in income (say 23 cents of EPS) and we hand the corporate insider 14 million of that (say 18 cents of EPS), leaving the shareholder with $4M (say 5 cents of EPS) - well that is called 'reality'.  But in the Wall Street world we ignore the 18 cents we handed to corporate insiders, call it a "1 time expense" (even though it happens EVER QUARTER), wink at each other and cluck about non GAAP EPS and cheer about how much money our corporations are making.  (Don't hate the playa, hate the game)

Whatever the case, this has been happening for years - especially as options have become the primary way to reward the upper hierarchy - and is not changing anytime soon.  It's essentially a massive transfer of wealth from shareholder (thanks for your 401k contribution!) to corporate insider, but since we value stocks as if it is not happening I guess we all win here (as long as we close our eyes).  The "cheap" stock market would look far less so if we dealt in reality.  I referenced a piece on this early last year (another pet peeve of mine of life within the Matrix) [Apr 24, 2009: Operational Earnings v Reported Earnings]  At the time, the valuation difference was 14x (our make believe world where handing profits to the corporate chiefs doesn't matter) v 30x (the real world, when the corporate coffers are emptied into the pockets of the 'chosen ones').... and that 30x was within a month of a decade low market bottom!!  You can only imagine how "cheap" the market is today if we lived in reality based accounting. 


Anyhow, within 3 major ETFs - QQQQ (NASDAQ), SMH (semis), and RTH (retail) the top 10 holdings consist of 30* stocks that make up a good cross section of companies.  Within those 30* companies insiders (who supposedly know best about prospects of a company) are selling at a ratio of 3177 to 1.  (over the past 6 months)

Now I won't give you the normal clucking about how this represents a lack of confidence... in my eyes it is part of the game.  The best way to get true wealth in this country is to reach that top end level in our corporate feeding troughs and stick your lips to the teat.  From there - suck.   Quarter after quarter... don't worry, per non GAAP accounting it doesn't even happen.

Please note - unlike insider selling, insider buying I actually care about.  It is so rare for someone to fork over their own money to buy corporate stock it actually means something.  (That said, many of these CEOs get low or no interest loans from their own corporations to fund the purchases, but that's another story altogether).  For example:
  • That lone buy in the 10 semi companies in SMH was for just 1,000 shares while insiders sold 5.7 million shares. 
  • In the retailer top 10 companies (RTH) close to 23 million shares were dumped versus 27 thousand bought
  • As for those top 9 NASDAQ companies - many of which are market darlings?   Share purchases totaled 9,500 against a total sold of 88.9 million 
Summary: in 29 of the top stocks in America insiders have bought just over 37,000 shares of stock.  And sold close to 120 million shares.  Keep in mind we are not talking Joe6packs here, but some of the most highly compensated folk in America... so buying a few thousand shares in their own company would be a few weeks work :P   (I know I know, they have college tuition bills to pay - wink wink)

To put this in numbers... in just 29 companies, if the average stock price is $30 (maybe its higher) that is $3.6 Billion transferred to corporate insiders from company coffers.   Not bad for 6 months 'work'. We can see Bernanke is succeeding in the wealth effect..... for these folks at least.

    The lack of corporate insider buying probably would say something in a normally functioning economy and stock market.   But thankfully we exist in a Ponzi where these factoids mean little.  Just buy stock (hand over fist, with eyes closed)... there will be a new buyer at a higher level, per Fed printing press.

    Anyhow here is how it looks in graphics...

    (only 9 companies in QQQQ because #10 is TEVA, not U.S. based)

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