Insider Selling

A week ago, my friend, the Perma-Bear introduced me to a new financial term, insider selling.  Insider selling is not to be confused with insider trading, which is a crime.  You can ask Martha Stewart about that.  She might quote Nelson Mandela to you, “many, many good people have gone to prison”, like she did after she was sentenced to prison for lying about her insider trading.  No, insider selling is not a crime, but part of the cure for insider trading.

If you are a company officer, a CEO, CFO, COO, president, VP, director or whatever, you are generally privy to three things:

  • Insider information about your company
  • Company stock as part of your personal incentive compensation plan
  • Regulation on when you can buy and sell your company’s stock

Insider selling is regulated by the Securities and Exchange Commission (SEC).  Company officers are only allowed to sell or buy their company’s stock within prescribed time periods.  Plus, they must schedule their trades well in advance and finally, all such trades are eventually made public.  All of these measures were designed to limit if not actually eliminate insider trading.

The reason that the Perma-Bear introduced the term, insider selling to me was because he wanted to make another one of his bearish points.  To wit, normally the ratio of selling trades to buying trades is within a range below ten-to-one.  Company officers generally get paid in large part, in company stock, but because you can’t use stock certificates at Walmart, they need to convert them into cash.  This helps to explain the normal preponderance of selling to buying, but not near as well as greed does.

The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. – Gordon Geeko, Wall Street

But I digress; the Perma-Bear’s point was that now the insider selling ratio has ballooned to 1400 to one.  There are currently 1400 more company officer trades that are selling their company’s stocks then buying it.  He went on to explain that this was more proof that our economy was not on the mend, but probably sinking into a double dip recession or worse.  His point, if these company officers truly believed in the near term prosperity of their companies, they would be buying company stock or at least holding on to what they had.

I took in his argument without objection, but then thought about it overnight.  After a week, I am ready to respond.  The Bush tax cuts are scheduled to expire at the end of this year.  There are three possible outcomes:

  • No change, the Bush tax cuts are extended
  • Only tax payers earning less than $250K see their tax cut preserved
  • Congress cannot come to any agreement and all of the tax cuts expire

So with three possible outcomes and two of them leading to a 5% increase in personal income tax for the wealthy and possibly a 5% increase in the capital gains tax too, I find this massive sell off by our corporate elite as simply personal tax finance played out enlarge and not a predictor of future economic times.  I also find navel gazing is better suited to lotus-eaters then to investors.

This post’s picture, backlit lotus leaf, was taken on Anne’s Sunday afternoon bike ride.  She used her iPhone for the picture, arguing against my long-held assertion that the iPhone is no good as a camera.  Maybe it is the eye behind the camera that is more important than the camera in the hand.  Right Anne?

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