Insiders Confirm: Rally Is Fake, Economy Is 'Getting Worse'

We're slowly beginning to piece together the puzzle of insider selling that has been so pronounced throughout the rally. By now we all know that the uptick in the economy has been mostly stimulus based. We also know that businesses are still seeing deteriorating top line growth and unsustainable growth via cost cuts. These have been the primary reasons for our skepticism regarding the sustainability of the rally and the economic upturn.

As the market soars higher, insider selling has been confounding to say the least, but the recent comments from Ken Langone and the Business Roundtable Survey essentially confirm what we have long thought: the rally is built on quicksand. Of course, we're not the only ones who think the rally is built on quicksand (see here and here for more from Peter Thiel and David Rosenberg).

For the latest week, ending October 1, 2009, insider selling to buying soared 44:1. Total insider buying was just $11.9MM for the week while insiders continued selling en masse - a staggering total of $532MM in selling. Perhaps most alarming is recent evidence from insiders themselves that confirm why they have been selling.

The recent Business Roundtable Survey results showed that 49% of all CEOs expect their sales to be flat or down in the coming 6 months. 51% expect an increase. 79% of all CEOs surveyed expect their capital spending to be flat or down in the coming 6 months. 87% of all CEOs expect to do no hiring in the coming 6 months:

If you missed the recent interview with Ken Langone I highly recommend you take a few minutes and watch it in its entirety. Langone is an insider amongst insiders. Not only is he one of the co-founders of Home Depot (HD) (one of the companies at the heart of this economic downturn), but he is a board member at Yum! Brands, ChoicePoint, and former board member of the NYSE (NYX) and GE. In the interview Langone was brutally honest about the state of the recovery. Not only does he believe that the government is lying about the recovery, but he says the economy is actually getting worse:

I'm confused. All of the people that I respect as investors and as people are all scratching their heads saying "we don't get it". All the businesses that I talk to - I spend a lot of my time now reaching out to people that are running companies, running businesses - I'm getting it back from everybody: it's terrible, it's getting worse, September was worse than August...I think this (rally) is a reflection of the fact that you get nothing in the way of rate of return in the bond market....

The weekly rail data, weak retail sales, lack of revenue growth, extraordinary job losses and recent downturn in housing data all validate the actions taken by corporate insiders - the rally is not sustainable because the economy is not actually recovering.....

Disclosure: No positions.

Comments

[nobby73:]

There is more to it than this. In my experience there are two types of insiders; the "sell 'em when you get 'em" group and "the hold until retirement" type. During the crash, the first lot went around crowing about how smart they were, that their policy meant that they were more risk aware and the second lot were nervous, worried about the loss of their job and savings. Their partners also probably were worried and angry that they had not sold earlier.

Now things have rallied, people realize that holding too much stock in your employer is actually more risk that you should take and therefore are actively selling. Also, for those lucky enough to get some sort of discretionary bonus, there was a much higher equity component, which (if the timing was good) will have appreciated nicely, therefore increasing the percentage exposure to the company's stock.

Does this mean the economy is not actually recovering? It is not a slam dunk case, as the insiders may be using the sale proceeds to diversify their holdings, which would be bullish and sensible.

Oct 05 06:01 AM

[perceptions...:]

It has been said, "logic does not always apply to financial markets".

In fact, in reality and on most ocassions, markets are logical, if you have access to enough inputs that go into what happens.

Of course, very few do have access, even to most of the information and markets do also inevitably overshoot, both ways, due to greed & fear, before finally arriving at an approximate balance, often as an after thought, instead of a leading indicator.

However, most people base their logic on the history of what has happened before, will continue and they do not look for changes to inputs, which may alter the risks and change the outcomes!

And, over time, particularly modern times, the changes have usually been within "normal parameters", as have been the final outcomes.

That said, lurking in the background has always been the old saying, "but this time is different"!

And, you know what, that time IS NOW!

We are now living thru events that will see the death of the "Exponential Growth Fairy" and possibly Capitalism itself?

We will soon see how the "current systems" go in survival mode, as the Boomer Bust & Peak Oil undermine their very basis.

By the way, the final death of the "Exponential Growth Fairy" will not have Stalin or Mao to thank, that honour will go to the bastions of our system -
1) Capitalism itself.
2) The laws of Supply & Demand.
3) The so-called Democratic Political system.
4) The Fractional Banking system.
5) Debt - in levels incurred, to save (?) the system

Oct 05 08:13 AM

[David Van K...:]

It's interesting to note that the chart of insider buying basically has been hugging the bottom of the graph (with an occasional short spurt upwards) for the entire length of the current rally, from March until now. So if it is presented here as evidence that the rally has no legs, it does not seem to have much value on that issue.

News flash: The rally wan't "fake." It happened, it's in the books. Sorry if you missed it.

Excellent observations by nobby73 above about how different people react to the receipt of share options. I was in the "sell 'em when I get 'em" camp myself. My selling meant nothing as an indicator of where I thought the shares or the market were going. It meant everything about getting my compensation in a timely fashion, and about prudently diversifying so that not too much of my financial well-being was tied up in the company I was working for.

Oct 05 09:21 AM

[predictorma...:]

The question for me will be how does earnings play out? Do the CEO's say on the CC that "we're no longer going down, and we think they are straight up from here" or they more modest in their forecasts?

I also wonder if the market mood hasn't changed, and unlike three months ago, every "beats a low expectation" or "didn't suck as much as we though it would" rates a significant uptick in the stock.

Maybe this time earnings will produce the correction most thinking people believe is necessary.

Oct 05 09:25 AM

[Old Trader:]

I was fortunate enough to catch the bulk of Lagone's interview. It definitely was time well spent.

Oct 05 09:25 AM

[The Geoffster:]

"By now we all know that the uptick in the economy has been mostly stimulus based."
And the uptick in the markets has been mostly FED based. The stimulus hasn't kicked started the economy and the markets can't seriously be predicting a V.

Oct 05 09:28 AM

[enigmaman:]

Good argument that should be investigated in more detail but that doesn't explain why such a disproportionate amount of insiders are selling compared to insider/corp buying. You say and I could agree that insider selling could be due to their being more cognizant of the benefits of diversification as well as others but what of the other side, where insiders vote for the company by buying shares, why isn't there any substantial buying at these levels, or even corp buying back of shares as these so called cheap levels. Since we dont see this insider buying to any great degree it leaves one to believe insiders are selling for reasons other then diversification or cash needs, this could explain the lack of insider / corp buying as well, insiders are voting with their pocket books and right now, they are saying better to be out then in.


On Oct 05 06:01 AM nobby73 wrote:

> There is more to it than this. In my experience there are two types
> of insiders; the "sell 'em when you get 'em" group and "the hold
> until retirement" type. During the crash, the first lot went around
> crowing about how smart they were, that their policy meant that they
> were more risk aware and the second lot were nervous, worried about
> the loss of their job and savings. Their partners also probably
> were worried and angry that they had not sold earlier.
>
> Now things have rallied, people realize that holding too much stock
> in your employer is actually more risk that you should take and therefore
> are actively selling. Also, for those lucky enough to get some sort
> of discretionary bonus, there was a much higher equity component,
> which (if the timing was good) will have appreciated nicely, therefore
> increasing the percentage exposure to the company's stock.
>
> Does this mean the economy is not actually recovering? It is not
> a slam dunk case, as the insiders may be using the sale proceeds
> to diversify their holdings, which would be bullish and sensible.

Oct 05 09:30 AM

[Jan Paul:]

About 76% of the S&P companies have foreign earnings and as I recall from the article I read on this, about 36% of total earnings are from overseas.

For all 3 months of the last quarter, the dollar was falling and thus, those earnings will be converted into devalued dollars. Even flat or slightly down earnings from overseas will look higher and could be "better than expected."

We won't know until the reports come out but, there is a chance this correction will end and the markets head higher but, that doesn't mean we are in a recovery.

To have a real recovery that can last years, we have to have the private sector growing, not government spending, to give us a positive GDP and that is not possible as we are using the same decades old policies that got into this debt expansion mess. With government spending 61% of national income, we can't grow out of this or tax out of it. The government has to cut spending but, if it does, that too, will cause a depression as 1 in 4 jobs are either directly or indirectly tied to government spending.

Think of the millions of jobs in private companies tied to supplying city, state and federal governments with paper, office equipment, maintenance supplies, power, cars, military equipment, etc. When the government cuts spending, the private sector has to start laying people off. But, if we don't cut it, we implode eventually, anyway. That may be in months or a couple years but, we are getting very close to that point.

Oct 05 10:16 AM

[TonyCinTX:]

I have received stock options in three companies that I worked for. Seriously, folks, sell 'em when you get 'em, I did not in the first and that was a mistake, I did in the 2nd and 3rd and although I could have made about 50% more by holding a year or so, I made twice as much as the people that held two years or more. Trying to guess the peak is a loser's game, my recommendation (which I followed myself) was to get OUT of the company I was working for and buy dividend producing companies that are already about as big as they can get.

Yes it is wonderful if you can ride a rocket to the top, but the sad fact is that most companies are too greedy and try to grow too fast and are managed incompetently; and that means the odds are very good they will falter and fall long before they dominate a market. As DVK says before me; finalize your compensation and diversify. If your company really does grow, your options that mature next quarter or whatever will be worth more. Why bet everything on one unproven long shot that is likely to fail?

Oct 05 10:21 AM

[thesenator:]

NO one here sees it, though these comments were intelligent. There IS a long-wave cycle, precisely 40 years, of Crash and Depression, based on basic human nature, and is one of macro-economic expansion & contraction, based on basic human nature and the size, et al., of each economy. Politics has NOTHING to do with it its OCCURANCE---only whether its effects are exacerbated, like by FDR in the 1930s and by that crook Nixon [of that "We are ALL Keynsians now" infamy] who "out-Roosevelted Roosevelt" with his inflation and artificial stimulation, and that incompetent, pathological liar Carter in the depression of the 1970s, or ameliorated. The last one began in 1969, the previous one in 1929, and then 1889, 1849, 1809, 1769, 1729, 1689---it is precise and INEVITABLE. It is ALWAYS followed by a major WAR, even ours in 1776. "Fore-warned is fore-armed". As we say in the US Navy, "Stand by for a ram." John Stafford, J.D.

Oct 05 11:05 AM

[thesenator:]

Shuman and Rosenau got the PERIODICITY crucially wrong in their 1979 book on the long wave, or the "Kondratieff Wave". They and many others, including my good friend, Bobby Prechter, were always talking about its being 48 or 52 or 54 or 55 or 60 years---EXTENDING the time period again and again, and further and further into the future when it KEPT NOT HAPPENING as they had said it WOULD---BECAUSE the very event that they were FORE-casting for the FUTURE had ALREADY occurred, in the Crash of 1969 and the following ["stagflationary"/IN-f... Depression [which actually describes depressed business conditions and high unemployment, NOT necessarily "Helicopter Ben" Bernanke's "deflation"---especially when we are OFF the gold standard, and we see hyper-inflating by the Fed with computer-"creation" of bank credit], or "modern day alchemy"---or "official counterfeiting", corruptly enabled by the inherently inflationary provisions of the Monetary Control Act of 1980, which allow the Fed to go to zero reserve requirements for the big banks! Mis-forecasting like that is a typical fault of those who cannot recognize reality and the major trend changes, a la Greenspan! In any event they were---wrong! It is precisely 40 years, as in a generation of 20 years plus 20 years.


On Oct 05 11:05 AM thesenator wrote:

> NO one here sees it, though these comments were intelligent. There
> IS a long-wave cycle, precisely 40 years, of Crash and Depression,
> based on basic human nature, and is one of macro-economic expansion
> &; contraction, based on basic human nature and the size,
> et al., of each economy. Politics has NOTHING to do with it its OCCURENCE---only
> whether its effects are exacerbated, like by FDR in the 1930s and
> by that crook Nixon [of that "We are ALL Keynsians now" infamy] who
> "out-Roosevelted Roosevelt" with his inflation and artificial stimulation,
> and that incompetent, pathological liar Carter in the depression
> of the 1970s, or ameliorated. The last one began in 1969, the previous
> one in 1929, and then 1889, 1849, 1809, 1769, 1729, 1689---it is
> precise and INEVITABLE. It is ALWAYS followed by a major WAR, even
> ours in 1776. "Fore-warned is fore-armed". As we say in the US Navy,
> "Stand by for a ram." John Stafford, J.D.

Oct 05 11:46 AM

[thesenator:]

Pelosi and Greenspan are either blind or lying when they claim that the current financial so-called "crisis" (primarily, in 2008-9 for their big banker pal thieves) is an UNFORSEEN, UNFORESEEABLE, 100-year, UNEXPECTED "event". ALL of that is totally false. John Stafford


On Oct 05 11:05 AM thesenator wrote:

> NO one here sees it, though these comments were intelligent. There
> IS a long-wave cycle, precisely 40 years, of Crash and Depression,
> based on basic human nature, and is one of macro-economic expansion
> & contraction, based on basic human nature and the size,
> et al., of each economy. Politics has NOTHING to do with it its OCCURENCE---only
> whether its effects are exacerbated, like by FDR in the 1930s and
> by that crook Nixon [of that "We are ALL Keynsians now" infamy] who
> "out-Roosevelted Roosevelt" with his inflation and artificial stimulation,
> and that incompetent, pathological liar Carter in the depression
> of the 1970s, or ameliorated. The last one began in 1969, the previous
> one in 1929, and then 1889, 1849, 1809, 1769, 1729, 1689---it is
> precise and INEVITABLE. It is ALWAYS followed by a major WAR, even
> ours in 1776. "Fore-warned is fore-armed". As we say in the US Navy,
> "Stand by for a ram." John Stafford, J.D.

Oct 05 01:08 PM

[mkttrdr:]

As a business owner, I must agree that business is still falling. Credit is still tight and banks refuse to lend to the worthy; yet they lend to 1st time home buyers that put down less than 10%. Geezz!

Hello-next wave of no equity homeowners are just a year away from foreclosure.

Legone's right too. Retail is dying.
Govt is lying and economy is not creating jobs!

I Spent the weekend golfing w/ a hedge fund manager of $4B. and he said they are slowly selling out of their positions for capital preservation purposes. It tells me to conserve and preserve for now; and that most of the mkts appreciation is baked in. S&P1100 and 10500 Dow is tops for me! Will it make it there?

Oct 05 01:08 PM