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Insider purchases at lowest level since 1992 / State Pension Problems

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April 27, 2009 – Comments (15)

I started to write a post on the common stock of a company that is sitting within shouting distance of its 52 week low, pays a solid 3.5% dividend that is easily covered by its cash flow, that has a great management team, actually might benefit from a slowdown in consumer spending, certainly would benefit from a fall in the U.S. dollar, and that has been a solid performer for decades before I shocked myself and actually pulled the trigger on my first purchase of common stock in months. 

I was hesitant to pull the trigger because I am about as positive as can be that we're due for a pullback in the major indices, but this stock had not participated much in the recent rally I decided to pull the trigger because it was too juicy to pass up.  TMF disclosure rules prevent me from talking any more about this company for the next ten days but I plan to do so in the future.

So for now I will tell you about two things that caught my eye this weekend.  The first is an excerpt from Alan Abelson's piece in this week's Barron's.  According to a recent study, insiders have sold $353 million in stock thus far in April.  That's 8.3 times more than insiders purchased this month.  In fact, the $42.5 million in insider purchases that have been made so far put April on track to be the weakest month for insider purchases since July 2002.  Not exactly a bullish sign.

The other piece of news that I wanted to mention is actually from an obscure newspaper, Central Pennsylvania's Centre Daily Times.  I took my family to Penn State University this weekend for its annual Blue - While Spring Football scrimmage.  We had beautiful weather, Penn St. is a beautiful college, and State College is a beautiful town.  A great time was had by all. 

On Sunday morning, I went to the door of our hotel room to grab a copy of the local newspaper to read the articles on the game and see what the sports writers thought of some of the new players.  The front page contained three articles.  One on the game and two on problems with Pennsylvania's state pension funds.  Arrgggg, I can't get away from this financial mess for even a day ;).

I found it particularly interesting how the implosion in the stock markets has such wide-spread implications that even a newspaper that would never normally lead with financial news on a day that was huge for the area still has to talk about financial problems.

For those of you who are interested in the details, here's the into to the piece.  I couldn't find it on-line.

Pennsylvania's day of reckoning over its multibillion-dollar pension promises to government employees and teachers has been pushed back for the better part of a decade.

But long-expected increases in costs are scheduled to kick in three years from now, and meeting those retirement obligations could cripple state government and school boards.

Depending on what happens in the stock market, taxpayers could soon find themselves stuck paying more than $5 billion in additional annual payments.

The figure is a moving target.  But in a March presentation to a state House panel, the state's two large public-sector pension plans estimated that the $821 million a year they currently get in "employer contributions" - the vast majority of it from taxpayers - will need to grow to $5.7 billion a year by 2012.

Even more frightening is that those numbers involve assumptions that could be overly optimistic.

For example, the state government pension system's numbers assume it will earn 8.5 percent this year, but its 2009 investments are currently about 6 percent in the red.

The Bloomsburg Area School District last week offered a sign of how bad things may get for the property owners who pay about half of the teacher's pension subsidy.

To cope with its growing pension liability, Bloomsburg officials are talking about imposing eight straight years of tax increases.

"Absent stratospheric returns that are hard to imagine and certainly can't be counted on, there's a big liability that has to be paid," said Bob Grentzel, spokesman for the state government pension system.  "Are there things that can be done to sort of ease the slope of the increase?  Probably so, but there's nothing to be done that can make the unfunded liability go away."...

You get the idea.  Underfunded pensions are going to be a serious problem going forward.  I mentioned a number of companies that have underfunded pension plans the other day, but this is a public problem as well.  This pension fund shortfall means one of two things:

1)  Retirees are going to get less money than they were counting on and they are going to have less to spend in retirement than they had hoped.

or

2)  Taxes will increase to make up for the shortfall in pension plans.  These higher taxes will take money away from working people who in turn will spend less.

Either way, underfunded pension plans are going to serve as a on a drag on economic activity in the U.S., which is heavily dependent upon consumer spending, going forward.  This is one of a number of reasons why I expect the U.S. economy to grow at a much slower rate over the next decade than it did over the past several decades.

Go Lions!

Deej

15 Comments – Post Your Own

#1) On April 27, 2009 at 2:13 PM, alstry (35.19) wrote:

Now who is lying Deej.....not many tell the truth like Alstry...and now I just don't know who to belive???  Hulbert or Deej???

The stubbornly bullish insiders

Commentary: Insiders are more bullish than they have been in years

By Mark Hulbert

Last update: 12:01 a.m. EDT April 27, 2009

http://www.marketwatch.com/news/story/insiders-upbeat-about-their-companies/story.aspx?guid=%7B7B6A6FDE%2DA1BC%2D455E%2D9203%2D0E4DA0B55C05%7D&dist=msr_2

 

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#2) On April 27, 2009 at 2:22 PM, alstry (35.19) wrote:

BAN ALL CARS AND BUSSES!!!!!!!!!!!!!!!!!!!

BOSTON (MarketWatch) -- The Centers for Disease Control said Monday afternoon that 40 cases of the swine flu strain H1N1 have now been confirmed in five states in the U.S. The agency said 20 new cases have been confirmed in New York City since Sunday, all of which were part of a group of high school students who recently traveled to Cancun, Mexico. So far, all of the U.S. cases have been relatively mild, with only one requiring hospitalization. The CDC warned, however, the it expects more severe cases to be reported in the future and for the illness to pop up in additional states. Currently cases have only been reported in California, New York, Texas, Ohio and Kansas.

OH MY GOODNESS!!!!!!!!!!!!!!!!  40 CASES!!!!!!!!!!!!!!!!!!!  AND SIMPLY DIAGNOSED....NO DEATHS?

DO YOU WANT TO KNOW HOW MANY PEOPLE HAVE BEEN REALLY KILLED OR INJURED IN MOTOR VEHICLE ACCIDENTS??

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#3) On April 27, 2009 at 2:23 PM, alstry (35.19) wrote:

Sorry Deej,

I meant to put that second one on my blog:)

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#4) On April 27, 2009 at 2:53 PM, TMFDeej (99.46) wrote:

Hmmmm I usually like Hulbert's stuff, but the article that he published today is the polar opposite of Alan Abelson's piece in Barron's. 

Shareholders Be Damned!

"SINCE WE ENDED THE LAST ITEM with a question (two, to be precise), we feel, just in the interest of interconnectivity, we should begin this one with a question: How come, if the stock market is telling us everything is coming up roses -- the Dow has shot up 23% since March 9, the S&P 500 28% and dear old Nasdaq 34% -- corporate insiders are selling like there's no tomorrow?

Much as anything, we suspect, what has given legs to this rather improbable but undeniably impressive rally is the rally itself. Let us assure you that we haven't gone mystical (we've enough sins to atone for without adding still another).

Let's put it this way: As a stimulus for equities, come rain or come shine, just about nothing beats higher prices. They entice risk-shy investors, including or especially (hard to decide) those who have been mauled by the bear market, to edge off the sidelines and get their feet wet.

Higher stock prices (as Ken Lewis might say) escalate expectations and earnings estimates of analysts, most of whom are, in any case, reflexively bullish. They give the yak-yaks on Tout TV something to crow over and excite their innocent viewers.

In other words, they serve to inject a dose of euphoria into the investment atmosphere, particularly after a long and morose stretch of gloomy markets, like last year's.

Of course, rising equity prices also inspire less chimerical reasons for the quickened interest in the stock market. They are widely taken by institutions, individuals and kibitzers as a welcome harbinger of economic recovery, and there's been a lot of that lately. Our own feeling, as you may have gleaned, is that such hopes are heavily laced with wishful thinking.

Leading us to the question with which we began these musings: If those now infamous shoots of recovery are popping up all over, why would insiders be so aggressively dumping stocks?

Yet, they indisputably are. According to a study prepared for Bloomberg by Washington Service, a research outfit, directors, officers and the like have sold $353 million worth of stock in this fading month, or 8.3 times the total bought. As a matter of fact, according to the firm, insider purchases of $42.5 million are on track to make April the skimpiest month for such buying since July 1992.

The pace of selling in the first three weeks of this month, incidentally, was the swiftest since the market peaked and the bear came out of hibernation with a vengeance in October '07.

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, whether of macro or micro persuasion.

And just as they wouldn't be laying off people in such extraordinary numbers if they thought their business was about to rebound soon, they'd be loath to liquidate their holdings in such an emphatic way if they espied a turnaround in the offing.

It all boils down to this: Nobody ever sold a stock because they thought it would go up. And as a group, corporate insiders obviously are scarcely enthusiastic about the prospects for a genuine bull market."

The Barron's numbers are a lot more specific and make a lot of sense than the Hulbert article to me, but one of the two is clearly wrong here.

Deej

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#5) On April 27, 2009 at 2:56 PM, Tastylunch (29.54) wrote:

Lions? No way! go Buckeyes! :-)

yeah if Goldman sachs is selling you have to ask yourself why you are buying.  Seems like we still have some forced liquidation to go. Every company I can think of is trying to sell down assets or cut costs(inventory, real estate, staffing etc) all at the same time. evryone is selling no one is buying

That sounds like lower stock prices to me.

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#6) On April 27, 2009 at 3:00 PM, TMFDeej (99.46) wrote:

In the interest of procrastination, I sent an e-mail to Barron's asking about the situation.  Here's what I sent:

"Question for Alan Abelson 

Hi Alan.  I am an avid reader and I love your work.  It's the first thing that I read when I get my Barron's every week...and not just because it's always published at the beginning :).  I have a question about a section of your article in this week's Barron's titled "Shareholders Be Damned!"  In it you cited statistics that indicate insiders are selling their stock at a rapid pace, yet I came across a Marketwatch article by Mark Hulbert this morning that says the exact opposite thing.  Both cannot be right.  I was hoping that you could shed some additional light on this situation for me if you have the time.  Thank you very much for your help and have a great day.Below I have included a link to the Hulbert article and the quote from your piece that I am referring to."Deej Report this comment
#7) On April 27, 2009 at 3:02 PM, alstry (35.19) wrote:

Hey,  Why didn't you give a hat tip to Alstry and Alstrynomics and suggest that Barron's pick up an Alstry column?

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#8) On April 27, 2009 at 3:02 PM, TMFDeej (99.46) wrote:

Here's what I just sent to Mark Hulbert.  I'm sure that they'll both ignore me, but if one does actually take the time to respond they are they clear winner and I will shun the others' column for eternity. 

Probably not, but at least it will be interesting to see what, if anything they say. 

"Hi Mark.  I am an avid reader and I love your work. 
 
I have a question about a section of your article in this week's Barron's titled "The stubbornly bullish insiders"  In it you cited statistics that indicate insiders are buying their companies at a rapid pace and that such activity is a bullish sign, yet I came across a Barron's piece by Alan Abelson in this week's Barron's titled "Shareholders Be Damned! " that says exaxctly the opposite thing.  Both cannot be right.  I was hoping that you could shed some additional light on this situation for me if you have the time.  Thank you very much for your help and have a great day.
 
Below I have included a link and a quote from the Abelson article that I was referring to: 

"According to a study prepared for Bloomberg by Washington Service, a research outfit, directors, officers and the like have sold $353 million worth of stock in this fading month, or 8.3 times the total bought. As a matter of fact, according to the firm, insider purchases of $42.5 million are on track to make April the skimpiest month for such buying since July 1992.

The pace of selling in the first three weeks of this month, incidentally, was the swiftest since the market peaked and the bear came out of hibernation with a vengeance in October '07."

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#9) On April 27, 2009 at 3:51 PM, kaskoosek (93.50) wrote:

http://www.bloomberg.com/apps/news?pid=20601213&sid=arl3VgxA0FAA&refer=home

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#10) On April 27, 2009 at 3:53 PM, jmt587 (99.89) wrote:

Option 3: Inflationary run up in equities in the pension funds will result in the future liabilities being manageable.

You could argue this is a subset of Option 1 though, that in real dollar terms, the retirees receiving the pensions would be able to buy less (instead of have less to spend, as you put it) than they planned on.

It's great... to be... a Michigan Wolverine!

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#11) On April 27, 2009 at 4:22 PM, TMFDeej (99.46) wrote:

And Mr. Hulbert wins the e-mail reply race.  Here's his response:

"Fair enough question...

The difference is between the absolute level of insider selling, on the one hand, and the ratio of selling to buying, on the other...

Mark"

I guess that this means that I can't read Abelson any more.  To his defense, he seems much more old-school than Hulbert so he probably doesn't check his e-mail as often.  Plus, there was no way on the Barron's site for me to e-mail him directly.

Also, while Hulbert did reply quickly, his response doesn't answer my question.  He said that he was referring to the ratio of selling to buying rather than the absolute numbers.  His article states that "the latest reading of this sell-to-buy ratio is 0.72-to-1".

Yet, when one takes the absolute numbers that were published by Bloomberg and Barron's there ratio of sales to purchases was 8.3-to-1 ($353 million in sales versus $42.5 million in purchases).

Huh?  Hulbert's explanation doesn't make any sense.  Someone is clearly wrong here.  I won't pester Mark any more, but I'm leaning towards believing that his Marketwatch article is incorrect.

Deej

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#12) On April 27, 2009 at 4:26 PM, alstry (35.19) wrote:

My instinct is with you Deej...even though I haven't done the math like I have with unemployment and its rapid approach to 30%.

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#13) On April 27, 2009 at 4:57 PM, angusthermopylae (40.00) wrote:

Just jumping in here at the end...and I have a definite skeptical attitude toward "good news"...

I agree that Hulbert's explanation isn't really a clear answer; it seems to say "Well, from a certain perspective, that would be true."

Perhaps this goes with the whole end-of-trading-day spike thing?  Instead of the market volume having unusual spikes, one CAPS player pointed out that the normal volume was way down...and the corporate players final actions were just showing up a lot more.

And yet, we still occasionally see articles saying there was a late-day jump in volume...or a lack of that jump.

"From a certain perspective" brings out the cynic in me...I'm too old to hit the "I believe" button, and too young to  squint too hard...

...just my seasonally-adjusted, prorated 2 cents....

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#14) On April 27, 2009 at 5:43 PM, portefeuille (99.43) wrote:

The average for April of the S&P index was lowest since 1997, so it is not really that surprising to see the lowest amount of insider buying since 1997 (it might spoil the headline though ...). The 1992-1997 period was part of the 1991-2000 "bull cycle", where you would not expect to find a low in insider buying either. It would be nice to have a graph of the amount of insider buying relative to the index.

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#15) On April 27, 2009 at 11:45 PM, RVAspeculator (31.42) wrote:

Option #3...

States recieve bailout funds from the federal goverment to shore up public pensions.

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