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Corporate Execs expect stocks to drop - Insider Stock Sales are 22x more than shares bought


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The stock market has jumped 40% off of its March 6 lows amid talk that the economy is nearing a bottom and that signs of stabilization and even increased consumer activity may be leading equities higher. Financial stocks have been particularly strong, with (XLF) Financial Sector Spiders up 100% from the lows.

If you are listening to the rhetoric you might feel that you’ve missed the big move in stocks and you need to buy here if you want to participate in future gains. But, there is a large and growing group of investors who are betting that this recent stock market rally has made stocks too expensive to hold.

According to Trimtabs Investment Research, a company which tracks inflows and outflows of money into the stock markets, Corporate executives who are in a position to know about the future prospects for their own companies, are liquidating their personal shares, selling 22x more stock than they bought in the month of June. In dollar terms, insiders in S&P 500 companies sold $2.6 Billion dollars worth of their own personal stock holdings as compared with $120 million of insider share purchases.

To be sure, corporate executives do not have a perfect record of predicting moves in the stock market, but they are in the best position to predict future order flows. As Alan Abelson wrote in Barrons, “...We’re quite aware that insiders are not infallible. But they are, after all, in the front lines of commerce and industry and so presumably have a better fix on the economy and the prospects for recovery than analysts and economists …” He went on further to say, “...they wouldn’t be laying off people in such extraordinary numbers if they thought their business was about to rebound soon.”

Even as economists, analysts and some CEOs are calling for a bottom in the economy and a continuation to the stock market rally, insiders are selling at a rate not seen in years. In April and May, as the stock market advanced, Trimtabs reported that insiders were selling far more shares than they had been buying. That trend has since continued.

Charles Biderman, CEO of Trimtabs has called for a stock market pullback citing data going back to 1987, that excepting 2003 every year that the supply of stock has risen to these levels, the market has fallen sharply. Since the start of May there have been an additional $100 Billion in secondary stock offerings, mainly by banks, which is adding to the supply overhang.

 The message he is trying to deliver is, If you want to know what next big move is going to be in the Stock Market, investors would be wise to consider what corporate executives are doing with their own money. Look at their Actions, not their words.

To be fair, there have been economic data that indicate that the pace of economic decline has been slowing. We have had increases in home purchasing, a slowing in the decline in jobs, and have had positive reports on retail sales, and durable goods.

Many market pundits have pointed to this “less bad” scenario as a sign that the economy has hit bottom or will begin a rebound soon. Of course many differ as to the strength of the expected recovery.

We have heard quoted, CEOs, economists and investors who are offering cautiously optimistic prognostications of a decline in the rate of the decline (the so-called 2nd derivative), the nearing of a bottom, or actual predictions that we are poised for growth in coming quarters.

Even our beloved Federal Reserve Chairman, Ben Bernanke can be given credit for the increasingly popular declaration that there are visible ‘green shoots’ coming out of the soil of the economic graveyard, the shoots rise and flowers will ultimately bloom.

But it seems that many economists and market analysts are not considering the magnitude of the shock experienced by financial systems Worldwide, or the depths of despair the economic decline has caused consumers during the recent recession. Naturally when extreme crises strike a financial system and it’s participants experience shock and awe in their lives and individual finances, there is a moment of exhalation when they realize that World is not coming to an end. But after they take that breath, they must consider the economic reality that conditions are not going back to normal very quickly and any bounce off the lows should be considered in relation to the level of that recent bottom.

It seems nearly every corporate spokesperson is a politician these days and certainly the Fed Chairman has to choose his words carefully, so most corporate news releases attempt to sound an optimistic tone, and are invariably couched in language which echoes the Chairman’s statement that while the economy is still declining “the rate of contraction is slowing”.

Finally this past week a more honest albeit negative tone was offered in a press release by Federal Express’ parent company Fedex Corp., which is often cited as a bellwether for the entire economy. The company stated that it is facing “the most difficult economic conditions ever.” Investors deciding to disregard those comments as the rantings of just one CEO of one company, are advised to consider the source. The fact is, if there isn’t visible growth in the boxing and shipping business, then the consumer isn’t spending money and analysts shouldn’t be expecting notable growth elsewhere.

With all of the rhetoric being passed around,What is an investor to conclude about making future investments in the Stock Market?

I’ve never heard a Corporate Executive say publicly that their stock is overvalued, but that doesn’t mean there isn’t a time when they believe they’d be better off selling stock than owning it.

In June 2009 at least, If you are going to follow the Corporate Insiders, it seems that their Walking is doing the Talking.