Countless people try to figure out whether stocks are bargains or overpriced, but no one on Wall Street can do this better than company insiders. CEOs, CFOs, and other senior executives know everything important there is to know about their companies, and that’s why very recent statistics about their activities are so worrisome. Insiders, you see, are unloading stock at the fastest pace in two decades.
Even worse, it’s not just one company or one industry insiders are fleeing; their selling is across the board. From the beginning of the year through mid-September, insiders dumped $19 billion of stock. If their selling continues at this pace for the rest of the year, they will have dumped $26 billion by the end of 2019. This would be the highest dollar amount insiders have sold since the beginning of 2000.
And as you may remember, that was just before the Dot Com crash. It’s not for nothing that insider trading has been called the single best indicator of future market direction.
Happens Every Day
Insider activity is completely legal and it happens all the time. Company executives have as much right to buy or sell stock in their company as any other investors. However, these transactions should not be confused with illegal insider activity: trading that is based on information that only they are privy to, such as news of an imminent acquisition about to be made public.
Insiders are very savvy at gauging whether their companies’ stock is at an “irrationally exuberant” level or is trading at a fire sale price.
Exactly how good is their batting average? For sure it is not perfect. Sometimes their opinions are mistaken; on other occasions their forecasts are correct but their timing is way off. And some insiders are better at predicting their company’s stock next move than others.
But as a group they do very well indeed. Following are a few examples. Insiders increased their selling as 2018 progressed and were on target. The fourth quarter of that year saw very sharp declines for the market, and that December was the worst December since 1931. However, just as the selling on Wall Street was peaking, insider sentiment made a U-turn and they became heavy buyers – just in time to catch the market’s strong rebound and score with big profits.
According to Smart Insider, insiders are virtually standing in line to sell their stock. The selling includes shares in fairly recent IPOs including WeWork, Uber, and Lyft, but goes far beyond that. The Walton family has sold a combined $2.2 billion of shares in Walmart. Insiders at Estee Lauder, the cosmetics powerhouse, and clothing firm Lululemon have also been active sellers. And so have insiders at Beyond Meat, whose stock was a stellar performer earlier in the year. Many other companies can be added to this list.
The spike in insider selling alone should make investors cautious, but this is only part of the picture. In fact, pessimism and concern now extend far beyond the US. Bloomberg recently quoted a report from UBS Global Wealth Management that wealthy people around the world are preparing for a potentially turbulent 2020.
According to this report, “A majority of rich investors expect a significant drop in markets before the end of next year, and 25% of their average assets are currently in cash.” There were more than 3,400 respondents to this global survey.
The U.S.-China trade conflict is their top geopolitical concern, but political tensions at home and the upcoming American presidential election are adding to their worries. The high level of insider selling is further reflective of the general pessimism about the market that is so prevalent.
Big Selloff Ahead?
Another amazing finding in the UBS survey is that nearly four-fifths of respondents expect market volatility to increase, and 55% think there will be a significant market sell-off before the end of 2020.
The survey was conducted between August and October and polled individuals who have investments of at least $1 million. Also noteworthy is that 60% percent of the respondents are considering increasing their cash levels further, while 62% plan to increase diversification.
The fact that so many smart investors prefer taking the profits they have now rather than holding for potentially bigger gains speaks volumes about their outlook for the stock market.
Some well-known and highly respected market observers have expressed their concern about what Wall Street could be facing in the coming months. Joseph Zidle, a strategist with the Blackstone investment firm, has called the government debt bubble the mother of all bubbles. “When the debt bubble inevitably busts, it will cause a meltdown bigger than the 2008 crash,” he said.
Ron Paul, a former GOP congressman, presidential candidate, and critic of financial policy, has come to the same conclusion. A few weeks ago, Paul told CNBC, “The biggest bubble in the history of mankind is about to pop,” and that the economy “is barreling towards a recession of titanic proportions.”
And Warren Buffet, who heads Berkshire Hathaway, has reportedly increased his cash holdings to a record $125 billion, which is more than half the value of Berkshire’s $208 billion portfolio of public companies. There has been only one other time Berkshire’s cash holdings have exceeded this level, and that was in the years leading up to the 2008 financial crisis.
So what lies ahead for the market? Are we watching another example of insiders leading the herd, or will the market continue its “what, me worry?” MAD approach and continue making new highs nearly every week? Smart investors will pay close attention to events that could unfold soon, because there’s a lot at stake here.
Sources: bloomberg.com; cnbc.com;