Why are top execs dumping stocks?
By Al Lewis, Denver Post Business Columnist
Corporate earnings are strong, the economy is growing at a 4 to 7 percent clip depending on which economist you believe, and the Dow Jones industrial average hovers near a healthy 9,800. Even the pace of layoffs seems to be leveling off. So why are corporate executives dumping their stocks?
Corporate executives sold $8.7 billion worth of stock in the third quarter, according to data from Thomson Financial Services. By contrast, they bought only $239 million, meaning they dumped $36 in stock for every dollar bought.
This is the most bearish reading on insider sentiment that Thomson has taken in more than a decade, said analyst Kevin Schwenger. And the trend may be accelerating. Another group, Trim Tabs Financial Services, estimates that insiders sold more than $4 billion in the first two weeks of October.
Insiders may be selling because the recent rally represents the first time in years when they could harvest profits. But the fact that there are so few executives buying their own stock is worrisome.
"Executives just aren't putting any money on the table," Schwenger said. "Maybe they really don't know what's going to happen. But there's certainly a hesitancy to commit."
Many market mavens consider insider transactions a telling indicator on the assumption that executives know more about the value of their companies and the opportunities ahead than anybody else. If investors had followed the lead of insiders in 2000, for example, they would have dodged the horrifying melee that followed.
Myriad other signs, however, show the economy is improving.
Last week, economists at Lehman Brothers Inc., Merrill Lynch & Co. and Wells Fargo & Co. raised their forecasts for growth during the July-September quarter. Wells Fargo's Sung Won Sohn is at the high end of the range, saying growth may have hit 7 percent in the third quarter, although he expects that superheated rate will cool in this quarter because it is unsustainable.
A slight dip in the index of leading U.S. economic indicators reported Monday supports the claim that the fourth quarter will be slower. But other recent reports show we're still slapping together houses at a healthy pace, unemployment claims are tapering off and even the long-battered manufacturing sector is clanking back to life.
"The news has been good, but the public is not viewing it that way," said Louis Llanes of Blythe Lane Investment Management Corp. in Greenwood Village. "They read stories about job cuts and don't notice the news about earnings."
The market, however, is at 16-month highs on the news, and Llanes believes it could go higher as tax cuts and low interest rates continue to work their magic.
America's largest companies will continue reporting earnings this week, and most are likely to meet or beat earnings forecasts. What analysts are looking for, though, is revenue growth.
It's easy to improve profitability by laying off workers, refinancing debts and riding a wave of improved productivity. What's not so easy is landing new business.
IBM, for example, sent mixed signals to the market last week by meeting earnings expectations but missing revenue forecasts.
The game that Corporate America is playing is to cut and polish until the economy picks up. If companies find themselves perfectly lean as demand picks up, they will prosper.
But what if this recent surge was created artificially with borrowed money? What if companies have to keep cutting to meet forecasts because demand just isn't hot? What happens then?
Only corporate insiders know, and right now they are selling. CEOs may have bought their own blabber a few years ago, but they aren't buying it now.
Al Lewis' column appears Sundays, Tuesdays and Fridays.
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