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 & here for more from Peter Thiel and David Rosenberg).
For the latest week ending 10/01/09 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. (Full data can be found below).
The recent Business Roundtable Survey results showed that 49% of all CEO’s expect their sales to be flat or down in the coming 6 months. 51% expect an increase. 79% of all CEO’s surveyed expect their capital spending to be flat or down in the coming 6 months. 87% of all CEO’s 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 (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 & 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…..
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Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.