Corporate Insiders Most Bearish in 14 Years
Thursday, March 21st, 2013
By Michael Lombardi, MBA for Profit Confidential
In the third quarter of 2012, companies in the S&P 500 reported negative corporate earnings growth. In the fourth quarter, they squeaked in a small gain. But looking ahead, corporate earnings growth becomes worrisome. Remember: for the stock market to rise there must be fundamental reasons, as hopes can only run for so long.
For the first quarter of 2013, companies in the S&P 500 are expected to post negative corporate earnings growth again. The estimate: corporate earnings will decline by 0.6% in the first quarter. (Source: FactSet, March 15, 2013.) So far, of the 108 S&P 500 companies that provided guidance about their corporate earnings, 77% of them have issued negative guidance.
Some of the most renowned S&P 500 companies are worried about their corporate earnings. For its fiscal quarter ended February 28, 2013, FedEx Corporation (NYSE/FDX) reported a drop of 31% in its corporate earnings from the previous quarter.
And the company cut back on its earnings outlook. For fiscal 2013, FedEx expects corporate earnings of $6.00–$6.20 a share compared to its previous guidance of $6.20–$6.60 per share. (Source: Goldstein, S., “FedEx Posts 31% Profit Drop, Cuts Outlook,” MarketWatch, March 20, 2013.)
While explaining the reasons for its weaker corporate earnings, FedEx’s CEO, Frederick Smith, said, “The quarter was very challenging due to continued weakness in international air freight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower-transit services.” (Source: Ibid.)
Aside from the ominous decline in corporate earnings, the people who are the closest to the public companies, corporate insiders, are fleeing at a record pace.
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According to Vickers Weekly Insider Report, in the first week of February, insiders sold eight shares for every one share they purchased (a sell-to-buy ratio of 8:1). Fast-forwarding to the end of February, this ratio surged 20% to 10:1, meaning insiders sold 10 shares for every one share they purchased. According to the report, insiders were the most bearish in February than they have been since 1998. (Source: Wall Street Journal, March 15, 2013.)
To me, such heavy corporate insider selling, coupled with contracting corporate earnings growth, is more reason to be skeptical about the rise in the S&P 500 index. As the days pass, the more investors turn optimistic that the market can only go higher, the bigger the sell-off will be when it hits.
As the chart below indicates, the price of gold bullion ticked higher when news came that the Cyprus government would vote on a levy for bank deposits. Gold bullion prices moved above $1,600 an ounce on the news.
Chart courtesy of www.StockCharts.com
What this goes to show is that in times of uncertainty, investors still run to gold bullion.
I don’t believe the gold bears realize the fundamentals, which will eventually move gold bullion prices much higher. Some investors are judging the price of gold bullion simply by looking at the wave of optimism hovering in the global economy due to rising equity markets. The view I hear over and over is: “The economy is getting better every day; gold’s glory days are over.”
The reality is that the global economy is still tormented. The eurozone is in a deep recession; China is struggling with high inflation and an economic slowdown; Japan is printing too much money in its effort to stop an export slump and jump-start its economy; and the U.S. economy saw no growth in the fourth quarter of 2012.
Central banks in the global economy are printing in overdrive, and governments are spending with both hands. The U.S. government alone has incurred a national debt of more than $16.0 trillion. By the end of this year, it will be $17.0 trillion.
Add to all this the fact that the Federal Reserve is creating $85.0 billion a month in new money with no end in sight.
No doubt, the end result of all this paper money printing is going to be higher inflation. The official numbers may not show it yet, but eventually inflation is going to be a major concern.
But what still holds true is that gold bullion still has a shiny future.
Where is gold bullion headed next? From what I can see, the mainstream has become outright bearish on the yellow metal. However, many industry veterans have a different view on gold bullion prices. Here’s what the CEO of Goldcorp Inc. (NYSE/GG), Chuck Jeanne, recently said: “I am not calling for $5,000 gold. By the end of this year we will be higher than the start of the year, and we will hit $2,000 gold in the next two to three years.” (Source: Macdonald, A., “Goldcorp CEO Unfazed by Mining Rough Patch,” Wall Street Journal, March 19, 2013.)
Dear reader, the fundamentals behind gold bullion haven’t changed in 5,000 years, and I doubt they will start to change now. In fact, we have many central banks in the global economy purchasing record amounts of gold bullion. I am as bullish on gold bullion as ever and see the current depressed price of the gold producers as a real opportunity for investors.
(In our just-released research report, Lombardi’s Second Quarter 2013 Gold Forecast Report, you’ll find: our analysis of the U.S. money supply and its implications for gold; our analysis of the current gold supply and demand; analysis of central bank activity in the gold market; our specific price projections for gold bullion; our top-five senior gold stock picks; and our top-five junior gold stock picks, all compete with charts. Click here for more info.)
What He Said:
“Consumer confidence does not change overnight. In the U.S., 70% of GDP [gross domestic product] is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate at near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in Profit Confidential, February 25, 2008. By the end of 2008, the rest of the world was realizing the recession would be much longer and deeper than most had realized.
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