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Are the insiders wrong?

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October 12, 2009 – Comments (17) | RELATED TICKERS: IN

I came across an interesting statistic while reading the always bearish Alan Abelson's column in Barron's this weekend. 

The article contains an interesting statistic on what company insiders (officers and directors) have been up to.  According to a group called InsiderScore, they bought $410 million in stock during Q3, but sold $7.4 billion.  In other words, insiders sold $18 worth of stock for every $1 that they purchased last quarter.  Now that's a dramatic difference. 

Later on in the article, Abelson mentioned another interesting statistic.  He cites a report by David Rosenberg which states that on an operating basis, the P/E ratio of the S&P 500 has expanded by 10 points since the March low to 27.6.  Rosenberg claims that historically when an economy switches from contraction to expansion the S&P's ratio is 15. 

Now one could argue that this was not a normal recession and the snap back will be much more dramatic this time because the downturn was steeper.  That's the V-people's argument.  I still see too many headwinds out there and think that it's more likely that we are headed for the "new normal" that PIMCO describes, where we experience sub-par growth for years to come instead of a roaring economic recovery, but time will tell.

I generally like Abelson's column.  Yes he's a bear, but in a cuddly koala bear sort of way, not a wacko, lying war-monger we're all doomed so load up your basement with canned goods and shotguns sort of way.  I always make sure to check it out.  Here's a link to the latest one for anybody who's interested:

Ganging Up on the Dollar

Deej

17 Comments – Post Your Own

#1) On October 12, 2009 at 7:17 AM, portefeuille (99.60) wrote:

some places have recovered quite a bit already ...

------------------------

Singapore sees recovery continue

Singapore's economy has surged for a second consecutive quarter, continuing the recovery from its worst recession.
Gross domestic product expanded at an annualised rate of 14.9% between July and September, following a revised 22% jump in the previous three months.
Singapore, which is heavily reliant on tourism, trade and finance, said a "clear recovery" was under way.
But it warned that woes in developed nations meant economic activity would remain below pre-crisis levels.
The economy also expanded from a year earlier for the first time since the third quarter of 2008, the Trade and Industry Ministry said. GDP was up 0.8% from the July to September period in 2008.
Despite the growth, Singapore still expects its economy to have shrunk during 2009 as a whole, though this contraction is expected to be between 2% and 2.5% rather than the 4%-6% range previously forecast.

...

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#2) On October 12, 2009 at 8:27 AM, alstry (35.36) wrote:

Deej....or course they are wrong!!!!

Just because revenues are evaporating, the reported PE of the S&P is over 100, our currency is collapsing, and government will be forced to tax us everything we have to maintain anything close to current spend........what Fool would not be buying stocks now????

Sheeesh.

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#3) On October 12, 2009 at 9:16 AM, TMFDeej (99.33) wrote:

Those are real numbers, Alsy.  I always provide the source where the data that use in my posts in from.  These statistics were published in a research report by a real bank and mentioned in an article in a reputable publication. 

Where does your info come from, other than your own mind?  You never cite any sources for your questionable statistics. 

Who to believe, who to believe, real people or anonymous bloggers who claim to be lawyers yet can barely write, who claim to have been in a war but probably have not, and who calim to be friends with famous athletes, famous economists, billion dollar fund managers, who make fantastic predictions about the end of the world in 9/9/09 that never come true, blah, blah, blah.

I'm not even bullish on the market, yet you're still infatuated with posting drivel in the comments section of nearly every one of my posts. 

You do realize that this is a stock-picking game, right?  You haven't picked any in several months and your score is falling fast.

Deej

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#4) On October 12, 2009 at 9:25 AM, alstry (35.36) wrote:

Drivel...You call this drivel????

Tax revenues used to pay teachers and fuel police cars continue to trail even the most pessimistic expectations, despite the cash from the economic stimulus plan pouring into state coffers.

"It's crazy. It's really just unbelievable," said Scott Pattison, executive director of the National Association of State Budget Officers, and called the states' revenue situations "close to unprecedented."

How about this....is this drivel????

Kentucky...

FRANKFORT - State tax receipts plunged in September and for the first quarter of the fiscal year, making a grim budget outlook even worse.

Georgia....

Georgia tax collections dropped by about 16 percent in September over the same month last year, continuing a trend set in the first two months of the fiscal year, Gov. Sonny Perdue announced Thursday.

Massachusetts

Despite spending reductions and massive tax increases, Massachusetts' state government continues to exceed taxpayers' price range, new revenue data shows, as September receipts crashed $333 million below a year ago, and state officials are warning of spending freezes and reductions just three months into the new fiscal year.

State tax collections fell $243 million below estimates last month, the Patrick administration conceded Friday, meaning that monthly revenues were down 15.9 percent from a year ago, and the first quarter of the fiscal year produced $477 million less than last year's.

Iowa

Six Mid-Iowa legislators were asked for their reactions after the Iowa Revenue Estimating Conference reduced projected income by $414 million Wednesday, prompting Gov. Chet Culver to order a 10-percent, $565 million, across-the-board reduction in state spending on Thursday.

WE KNOW ABOUT NEW YORK and CALIFORNIA....

Nebraska

State tax projections have fallen $93 million below forecasts since then, and state tax revenues for September - which the governor will discuss today - are expected to be $40 million less than projections.

Illinois

The State of Illinois' pile of unpaid bills has grown to a record-breaking $3 billion. Comptroller Dan Hynes said Tuesday it's never before been this bad at this point in any previous fiscal year.

IT LOOKS LIKE THERE IS DRIVEL ALL OVER THE PLACE.....

WHEN THE GOVERNMENT IS BROKE....EVERYTHING AND EVERYONE INSIDE THE NATION IS BROKE.....YOU HAVE JOINT LIABILITY WITH GOVERNMENT.....JUST WAIT TO SEE WHAT YOU HAVE TO GIVE UP IF WE GO TO WAR!!!!!

In WW2, we were no where close to being broke.

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#5) On October 12, 2009 at 9:26 AM, alstry (35.36) wrote:

Drivel...You call this drivel????

Tax revenues used to pay teachers and fuel police cars continue to trail even the most pessimistic expectations, despite the cash from the economic stimulus plan pouring into state coffers.

"It's crazy. It's really just unbelievable," said Scott Pattison, executive director of the National Association of State Budget Officers, and called the states' revenue situations "close to unprecedented."

How about this....is this drivel????

Kentucky...

FRANKFORT - State tax receipts plunged in September and for the first quarter of the fiscal year, making a grim budget outlook even worse.

Georgia....

Georgia tax collections dropped by about 16 percent in September over the same month last year, continuing a trend set in the first two months of the fiscal year, Gov. Sonny Perdue announced Thursday.

Massachusetts

Despite spending reductions and massive tax increases, Massachusetts' state government continues to exceed taxpayers' price range, new revenue data shows, as September receipts crashed $333 million below a year ago, and state officials are warning of spending freezes and reductions just three months into the new fiscal year.

State tax collections fell $243 million below estimates last month, the Patrick administration conceded Friday, meaning that monthly revenues were down 15.9 percent from a year ago, and the first quarter of the fiscal year produced $477 million less than last year's.

Iowa

Six Mid-Iowa legislators were asked for their reactions after the Iowa Revenue Estimating Conference reduced projected income by $414 million Wednesday, prompting Gov. Chet Culver to order a 10-percent, $565 million, across-the-board reduction in state spending on Thursday.

WE KNOW ABOUT NEW YORK and CALIFORNIA....

Nebraska

State tax projections have fallen $93 million below forecasts since then, and state tax revenues for September - which the governor will discuss today - are expected to be $40 million less than projections.

Illinois

The State of Illinois' pile of unpaid bills has grown to a record-breaking $3 billion. Comptroller Dan Hynes said Tuesday it's never before been this bad at this point in any previous fiscal year.

IT LOOKS LIKE THERE IS DRIVEL ALL OVER THE PLACE.....

WHEN THE GOVERNMENT IS BROKE....EVERYTHING AND EVERYONE INSIDE THE NATION IS BROKE.....YOU HAVE JOINT LIABILITY WITH GOVERNMENT.....JUST WAIT TO SEE WHAT YOU HAVE TO GIVE UP IF WE GO TO WAR!!!!!

In WW2, we were no where close to being broke.

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#6) On October 12, 2009 at 9:33 AM, leohaas (31.60) wrote:

Deej,

Insiders are always net sellers. That is because most of their compensation is in stock or option grants. They'd be fools to hang on to all of that. And so they sell.

P/E calculations today aren't useful. Let me try to explain why.

When trying to determine how much a business is worth, the most widely accepted method is to calculate how much in profits the company will generate in the future, discounted in today's dollars. That amount is a fair value of the business in today's market. Of course, this is a somewhat complicated method. Turns out there is a much simpler method if you can assume that the profits will grow at a fixed rate. That simpler method is calculating P/E: just take two numbers you can easily retrieve and divide them, and voila, you have a great substitute for doing all the work of estimating all future profits (in perpetuity), discounting them to today's dollars, and adding them all up.

However, the P/E simplification only works if you can assume that profits will grow at a fixed rate. That is the case if the economy is humming along, but not during a recession. The comparison gets more out of whack if the recession gets more severe. And since the current recession is the worst since the Great Depression, relying on P/E right now is foolish. If you do, you will conclude that stocks are way overpriced right now. Apparantly, reported P/E of the S&P500 is currently 140. That is because the recession has slashed profits tremendously, while the market is calculating in some form of recovery.

Quarter-over-quarter we will see companies doubling, trippling, or even quadruppling their profits. Many will see a reported quarterly loss change into a quarterly profit. As a result, reported P/E will return to more normal levels. It is not until we are out of this recession and in to the "new normal" that we should rely on P/E as a measurement to value companies, whatever this new normal is.

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#7) On October 12, 2009 at 9:36 AM, alstry (35.36) wrote:

Deej...sorry for double post.....computer slow this morning:(

But this is what happens to nations that go broke w/o the reserve currency.....

Latvia to make painful cuts, raise taxes

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#8) On October 12, 2009 at 9:38 AM, TMFDeej (99.33) wrote:

JUST WAIT TO SEE WHAT YOU HAVE TO GIVE UP IF WE GO TO WAR!!!!!

What a nut job. 

You do realize that WWII occurrect right after the Great Depression.  I'm sure that tax revenues were pretty bad then as well.

Deej

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#9) On October 12, 2009 at 9:41 AM, alstry (35.36) wrote:

They were...but going into WW2 we had a net surplus and our citizens had very little debt....and we morphed into the largest producer in the world against a backdrop of destroyed nations.

Now think about what happens if the opposite occurs in a currency war..........trust me, based  on you blogging, you have  no clue.

It will be big....ALSTRY BIG!!!!!  and the facts are all around you but you refuse to open your eyes.....very interesting.

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#10) On October 12, 2009 at 9:45 AM, TMFDeej (99.33) wrote:

Hey Leo.  Thanks for reading.  You're absolutely right, insiders are indeed usually net sellers.  If I had stock options, I would be diversifying as well.  No one wants to have happen to them what happened to all of those Enron employees who saw their entire net worth disappear overnight. 

I don't think the fact that they were selling during Q3 is the troubling part of the note...its the rate at which selling happened.  I wonder what the normal ratio of buying to selling is.  I suspect that it is much less than 18 to 1.  After I finish up some work this morning I'll look around and see what I can find out about that.

As far as P/E is concerned, you're right it certainly is not a perfect metric.  I actually am not all that fixated on it.  I personally am going to look at the revenue line of last quarter's earnings most closely.  There has been such dramatic cost cuts out there that any stabilization of revenue would be a huge plus.  Any revenue growth, even from this lower base, will cause earnings to improve dramatically.

Revenue is the most important thing right now.  One can't cut costs to improve earnings forever.

Deej

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#11) On October 12, 2009 at 9:47 AM, TMFDeej (99.33) wrote:

Now think about what happens if the opposite occurs in a currency war..........trust me, based  on you blogging, you have  no clue.

And you do right?  Which war were you in?  I suspect that you're in your 40s...if so you weren't in any major wars.

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#12) On October 12, 2009 at 9:52 AM, alstry (35.36) wrote:

Take a look at Iran, Argentina, Lebanon, Latvia, Iceland, Jamaica to name a few....all those nations had the world to bail them out as they were very little ships.......and their people sufferend.....there is no nation or group of nations in the world strong enough to bail us out from our bankruptcy.

It is not the end of the world....just massive change on historical preportions.

Now you will feel...11.10.9....since you knew in 9.09....but refuse to believe in 10.9.

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#13) On October 12, 2009 at 9:59 AM, TMFDeej (99.33) wrote:

I've fallen into the troll trap once again and runied what could be an interesting discussion, like what Leo and I were talking about.

Feeding trolls is extremely unproductive and I should know better. 

I'm putting on full ignore mode again and hoping that TMF installs that functionality soon.

Deej

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#14) On October 12, 2009 at 10:10 AM, catoismymotor (35.54) wrote:

Deej,

I have to take some of the blame for Alstry's behavior this morning. Before going to bed last night I signed on and saw he was blogging and commenting like a dog chasing his tail. I commented to one of his blogs that he should go to bed. Unbeknownst to me he actually took my advice and got some sleep. If I had just held back...and thought... a little more...about what my suggestion could do to TMF if a well rested Alstry were unleashed upon us...I would never have typed a word. The road to Hell is indeed paved with good intentions. I offer you and the other 68,000 CAPS players my most sincere of apologies.

Cato the Well Meaning

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#15) On October 12, 2009 at 10:43 AM, russiangambit (29.27) wrote:

> I've fallen into the troll trap once again and runied what could be an interesting discussion, like what Leo and I were talking about.

Bah! Alstry is just te most persistent one. I don't bother to post on blogs like this one anymore, there is nothing new to add. You have your optimistic view, I have my pessmistic view, neither of us is going to change it. We are at impasse. There cannot be a discussion until new information comes out to decide one way or the other.

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#16) On October 13, 2009 at 3:29 AM, memoandstitch (< 20) wrote:

Well, who would expect a MOAP in a TMFDeej blog.  I would like to point out one thing: the insiders have to do planned sales and at the time (April-May) they set up their sales they probably didn't have the up-to-date numbers.  In short, the September sales are probably based on the expectation that GDP will be significantly negative for the rest of the year.

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#17) On October 16, 2009 at 12:29 PM, CHillMgt206 (26.67) wrote:

Insider selling as compared to buying should be analyzed from a relative perspective.  Telling me the absolute quantity of insider buying as compared to selling is meaningless.  Telling me that the ratio of insider selling to buying is higher then it has been in 30 years would say something, but my guess is thats not the case.  Why are the absolute values not very meaningful?  Because executives and other insiders are compensated with stock options, warrants, ect.  Think about Bill Gates, he is going to be selling MSFT stock for the next 30 years on a predictable schedule almost regardless of market conditions because stocks make up the vast majority of his net wealth.  I would guess that insiders are selling more on a relative basis than the historical average but im not sure that it is a very significant difference.  Specifically, I would hypothesis that the ratio of insider selling/buying is extremely volatile and only predictive of future market conditions when it varies multiple deviations from the norm.  

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