Insider Heaven

Corporate insiders, the officers and directors that run America’s public companies, have been selling their stock holdings at an alarming rate.

In the old days, when corporate insiders were selling stock in the company they worked for, it was taken as an indication that the insiders were concerned about the company’s future. On the same vein, if corporate insiders were buying stock in the companies they worked for, the thought was that the insiders had faith in the company… and that higher stock prices may not be far behind.

There are still many market watchers who monitor corporate insider activity for “buy” and “sell” signals on stocks. But the problem today is that insiders are dumping their stock holdings at record levels, while very few insiders are buying stock in their own companies.

Vickers Weekly Insider Report has been monitoring the actions of insiders since 1971. The service recently reported that insider selling of stock over the past several months has been the highest on record.

In fact, corporate insiders sold about $14 billion in stock in the first four months of this year. There’s obviously a huge demand for stock from investors, and these insiders are providing an ample supply. Comparatively, during the same period, corporate insiders bought only $430 million of stock in their companies.

To put this in ratio form, the dollar value of corporate insider buying to selling has plummeted to 1:32.5 in first four months of 2004. I’ve never seen such an imbalance in insider buying and selling.

Are corporate insiders simply telling us their stocks are overvalued? Could be, but the situation requires further interpretation. Corporate insiders are compensated heavily these days with stock options. Exercising those options and cashing out is often the “big ticket” corporate insiders have been waiting for… their insider heaven. With the new accounting rules, whereby stock based compensation must be expensed, one would have thought generous option packages might decrease. This has not happened as of yet.

It’s not the heavy insider selling itself that has me puzzled, as I just see it as insiders exercising their options and cashing out. Yes, I’m disappointed insiders are not buying more of their companies’ stocks, but I don’t blame them either, considering general price/earnings multiples are so high.

What surprises me is the thirst of investors for stock… $14 billion in insider stock sales absorbed by investors in only four months! Add to this the amount of new stock being floated in IPOs and secondary offerings, and we have what amounts to a huge demand for stock.

It’s a funny thing the stock market… one of the rare places where supply can be created so easily. We’ll have to see what will happen to all that supply when stocks become out of favor with investors. I have a really good idea already as to what happens when demand falls and supply rises.