Thursday 16 December 2004

Rampant Insider Selling Raises Red Flags

AP Reports Major Corporate Execs, Including Some From the Homebuilding Industry Are Dumping Stocks - Serious Predictor of a Coming Crash

Special Commentary by Michael C. Ruppert

In 2000 and 2002, as the US financial markets tanked, investors lost trillions of dollars in equity as stock prices plunged and investment portfolios - many connected to pension funds - lost trillions of dollars in value. What was documented in both cases was that senior executives at many of the twenty or more companies involved (WorldCom, Enron, Adelphia, Merck, Global Crossing, to name a few) had engaged in a tactic called "pump and dump" just before the stock prices collapsed. Stock prices are pumped up by the executives and key insiders who then sell at the peak before everyone else gets reamed.

In a pump and dump operation, those who can influence stock prices issue glowing reports which cause investors to put their hard-earned dollars into a stock right before it collapses. This is a wealth transfer from poor or middle class folks to the absurdly wealthy. Immediately prior to the stock's collapse, the guys on top cash out and then the price plummets. The bad guys have the cash and the little investors and pension funds have nearly worthless or severely devalued paper.

This AP story is especially alarming for a number of reasons.

In light of FTW's recent (third-ever) economic alert, a number of very credible warnings from financial experts and the continuing intentional devaluation of the dollar, this is especially ominous. It is made more so by the fact that one of the nation's leading homebuilders is dumping stock hand over fist. This does not bode well for the housing bubble.

A critical distinction needs to be made however. Insider trading and insider selling are two different things.

Insider trading is a criminal activity in which a person with advance knowledge, acquired through inside involvement with economic or business events, violates his or her fiduciary and/or legal obligations for the sake of personal profit. This is what happened before 9/11 on markets from Hong Kong, to Tokyo, to Chicago, to New York, London and Berlin. This is what Martha Stewart was sent to jail for. As described in Crossing The Rubicon, right after 9/11 the SEC issued (then quickly suppressed) a list of 38 companies where it suspected that persons with inside knowledge of the attacks knew that the stock of these companies would be adversely affected by the attacks. They thereby made undisclosed billions in profit after betting that the share prices would fall.

Insider selling is a relatively tightly-policed area of stock trading where those employed at senior levels of publicly traded companies start divesting themselves of stock they own in their own companies. Insider trading is always a criminal activity. Insider selling may or may not be, which is why the SEC watches and reports on it fairly closely. Disclosure of insider selling is required by law and executives who sell stock in their own companies are required to report it for the benefit of shareholders and other investors. It is these required reports which prompted this AP wire story.

Given the fact that this pattern was evident just before each of the last two major financial slumps, this is a very ominous warning indeed. The Wall Street executives dumping their stocks are still trying to get small investors and pension funds to buy in when they know that a crash is coming. FTW strongly recommends to its subscribers that they take a look at any 401(k) plans or pension funds to which they belong and consider making immediate shifts out of stocks and into precious metals. For those lucky enough to have such assets, a consensus is emerging that now is a good time to have at least half of one's portfolio in precious metals.

We cannot make these warnings any clearer. - MCR

Talk about a double standard. While corporate leaders tout the benefits of investors owning their stocks, many executives seem to be running for the doors themselves.

Selling of shares by insiders - which includes executives and other top officers and directors at a company - has been rampant in recent months, with sales rising to their highest level in more than four years in November.

While no one can pinpoint an exact reason for that run-up, the implication is troubling since big insider selling is often considered bearish for the overall market as well as for individual stocks.

Of course, not all insider selling should be construed as a bad sign. Some stock sales may just be routine or may be executives wanting to free up money to cover personal expenses or to help pay the taxes on shares they buy after exercising options. And in some sectors, namely technology, stock compensation is often the bulk of executive pay, so they sell their stock for income.

In addition, November has historically been a busy time for insider selling. That's because it comes after most companies have reported their third-quarter earnings and restrictions for selling have been lifted. In addition, some executives sell in November for tax purposes.

Still, insider-trading trackers at Thomson Financial say the recent selling bonanza is "particularly noteworthy."

Some $6.6 billion in insider stock sales took place last month, the highest level since the $7.7 billion in sales tallied in August 2000, according to Thomson. Contrast that with the $144 million worth of stock that was bought by insiders last month.

The most selling came from in the financial sector, where executives sold $882 million of their own stock in November, and health care companies, whose insiders sold $734 million worth of shares. Selling in both sectors was double the five-year monthly average, according to Thomson.

On a company-specific basis, consider what has gone on at networking company Avocent Corp., where company statements seem to contradict insiders' actions. On Nov. 1, the company announced a buyback plan for up to two million shares and said in a news released that the purchase of the stock "represents a solid investment for our shareholders."

Apparently, the company's insiders seemed to have ignored that memo. In the month following the announcement, they sold 578,565 shares out of an aggregate of 645,756 insider shares sold during the last 12 months, according to Vickers Weekly Insider, a newsletter that tracks trading by company executives.

There was no buying during that time period.

Full story...