Money Matters - Simplified

Should You Sell Everything Now?

The market always has its share of Chicken Littles. Unfortunately, more
of today's cluckers hold positions of authority in the stocks you own.

A recent study from TrimTabs Investment Research found that insider
selling in August "surged to $6.1 billion," the highest total since May
2008 -- months before Fannie Mae and Freddie Mac failed, kicking off what would become the biggest financial story in 50 years.

Worse yet, for every insider bullishly buying, there were 30.6
sellers. "The best-informed market participants are sending a clear
signal that the party on Wall Street is going to end soon," said
Charles Biderman, CEO of TrimTabs, in a press release.

Chicken Little feed

Yikes! Yet there are two problems with using insider data as a leading indicator:

  1. Most of it is mishmash, such as options selling.
  2. What isn't mishmash can be misleading.

TrimTabs, for its part, told me that its analysts are careful to
track only what's meaningful. "When we report on form-4 data, we only
count open market transactions of common stock by officers and
directors (no option / no 10b5 – 1 sales)," a TrimTabs spokesperson
wrote to me via email. "We restrict the data to what we believe are the
'highest-signal value' transactions."

That's consistent with my own style of insider analysis. Interestingly, I'm finding more reasons to be bullish than bearish:

Company

Report Issued

Net Buying (Selling) In Year Prior to Report

Rating

Akamai

June 24

$1.63 million

Bullish

Activision Blizzard (Nasdaq: ATVI)

July 21

($162.5 million)

Modestly Bullish

Garmin (Nasdaq: GRMN)

July 23

$1.54 million

Modestly Bullish

Intuitive Surgical

July 28

($7.57 million)

Neutral

E*TRADE (Nasdaq: ETFC)

July 30

$0.198 million

Bullish

Green Mountain Coffee (Nasdaq: GMCR)

Aug. 5

($35.2 million)

Modestly Bearish

Microsoft

Aug. 18

($1.66 billion)

Modestly Bearish

ExxonMobil (NYSE: XOM)

Aug. 21

($1.18 million)

Modestly Bullish

Sunoco

Aug. 25

($3.8 million)

Very Bullish

Yahoo! (Nasdaq: YHOO)

Aug. 28

$66.9 million

Bearish

Source: Capital IQ, SEC filings, and author's estimates.

The difference? I've surveyed only a handful of stocks. TrimTabs is
studying the entire market, and not just the insider action. Once more
from the press release:

The TrimTabs Demand Index, which tracks 18 fund flow
and sentiment indicators, has turned very bearish for the first time
since March. For example, short interest on NYSE stocks plummeted by
10.3% in the second half of July and margin debt on all US listed
stocks spiked 5.9% in July, while 51.6% of advisors surveyed by
Investors Intelligence are bullish, the highest level since December
2007. "When corporate insiders are bailing, the shorts are covering and
investors are borrowing to buy, it generally pays to be a seller rather
than a buyer of stock," said Biderman.

A borrowing blunder of big proportions

Fair
point. My own research shows that insiders have been borrowing to buy
for far too long. You know their names. Green Mountain's Robert Stiller
makes the list, as does Oracle chief executive Larry Ellison.
Were either of these major shareholders to suffer a margin call, the
short-term consequences for everyday shareholders could be devastating.
TrimTabs is right to warn us.

But is the sky really falling? I'm skeptical. Not all insiders are
selling, and those who've been buyers in recent months -- such as Marvel Entertainment's (NYSE: MVL) David Maisel -- are now sitting on huge gains. There's money to be made in every market.

But that's also just my take. Now it's your turn to weigh in. Are
insiders dumping at precisely the right time, or is Chicken Little
clucking a bit too loud? Please take a moment to vote in the poll
below, and then leave a comment explaining your rationale.

 

Copyright 2009 by United Press International.