Eric Fry: insiders are selling at historic high levels
"Over the last eight weeks, there have been 4.2 insider sales for every insider purchase reported...This ratio is higher than it ever was in the 1990s bull market."
after cooking the books, execs are leaving the kitchen
option grants in compensation packages have motivated cooking the books
executive packages are out of proportion to anything sane
some selling might be linked with knowledge of ended accounting exaggerations to earnings
S&P now trading at 35x overstated earnings
/ jim
- To judge from the recent stock market action, many
folks have been trying to "catch the bottom," hopeful
that stocks will quickly rebound. Corporate insiders,
however, do not seem to number among the optimists.
- "There is one interesting group," notes Floyd Norris
of the New York Times, "that has turned more bearish
than at any time in years: corporate insiders...Over the
last eight weeks, there [have] been 4.2 insider sales
for every insider purchase reported...This ratio is
higher than it ever was in the 1990s bull market."
- "There has been huge, huge insider selling," says Phil
Roth, technical analyst at Miller Tabak. There are many
reasons, of course, for insider selling. A bullish
outlook is not one of them.
- Robert Barbera, the chief economist at Hoenig & Co.,
offers a cynical - though probably truthful -
interpretation of the recent surge of insider selling.
"If you believe people cooked the books, then right now
the cooks should be selling." In fact, they appear to be
fleeing the kitchen altogether.
- "Maybe," says the Times' Norris, "a lot of insiders
simply think that their stocks are expensive." Seems
like a reasonable guess. Clearly, insiders understand
the extent to which aggressive accounting practices have
artificially inflated reported earnings. Accordingly,
Norris theorizes, the insiders have a good inkling of
how severely earnings might suffer over the next couple
of years, as accounting gimmickry falls out of fashion.
- Then too, insiders might be selling simply to continue
cashing in on the lavish option grants they received
during the bubble years. Can you blame them for wanting
to convert their Monopoly money into the real thing?
- "Executive pay has been soaring for two decades,"
observes Roger Lowenstein, "but over the last couple of
years, as many big companies have seen their stocks
pummeled, the pay-for-performance rationale that was
supposedly driving these packages has been exposed as a
fraud."
- Lowenstein wrote a splendid piece in the New York
Times Magazine over the weekend entitled, "Heads I Win,
Tails I Win." The story, as some readers may have
already guessed, addresses CEO compensation. To make his
point, Lowenstein chronicles the geometric trajectory of
the take-home pay of SBC CEO, Edward E. Whitacre Jr., "a
60-year-old, 6-foot-4 lifer in the Bell system."
- "For the purpose of examining a single CEO's
compensation, I picked SBC for its unspectacular
qualities. It is profitable and professionally managed,
and its CEO is well-regarded in his industry...
"In the last three years," says Lowenstein, "his stock
has fallen 27 percent - more than either the Standard &
Poor's 500 or the stocks of his Baby Bell peers. But the
rate at which the boss was compensated kept growing...
Over his 12 years as CEO, while Whitacre reaped a
fortune, his stockholders have done precisely average.
Their return from appreciation and dividends is 11.5
percent a year - a notch below the S&P 500, at 12.8
percent, and a sliver higher than its peer companies.
"Ed Whitacre's cash take, at first, was relatively
stable," Lowenstein remarks. "In 1992, he got $3.1
million; two years later, $4.4 million." But then came
the options! In 1994 Whitacre received an initial option
grant entitling him to buy 161,739 SBC shares. The
following year, he received a fresh - and substantially
larger - batch of options.
"Now that he was getting huge ANNUAL grants, the
arithmetic subtly changed," says Lowenstein. "By turns,
a system designed to motivate became one simply to
enrich." In effect, says Lowenstein, SBC paid Whitacre
"for treading water."
- Then came the special grants! In 1997, Whitacre - who
by now should have felt like the luckiest man alive -
received $8.7 million as a "special retention grant."
"The most curious aspect of that work," says Lowenstein,
"was that in 1998 Whitacre received another retention
grant, this time of $12.5 million. He has received
comparable awards in every year since."
- An option grant here, a special retention grant there,
and pretty soon you're talking real money.
- "Last year, the third year in a row in which SBC's
share price declined," says Lowenstein, "Whitacre
received the largest pay package of his career - one
with a present value of $82 million...At such levels,
all attempts to rationalize pay become meaningless."
- Similarly, at 35 times overstated earnings, all
attempts to rationalize buying S&P 500 stocks become
meaningless.
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