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‘Inside’ Information Makes a ‘World’ of Difference

Posted by Larry Doyle on June 22, 2009 7:24 AM |

Can an individual investor get a fair shake on Wall Street?

Many smaller investors believe Wall Street is biased against them. Why? Information is hoarded by major institutions who act upon it prior to it disseminating to individuals. With the development of the internet, information is processed and distributed much more quickly. How do institutional investors stay ahead of individual investors? Utilizing ETFs and financial futures.

How can individual investors try to keep pace with institutions? Track the activity of institutional insiders, that is, the senior executives within publicly traded corporations. An insider may have reason to buy or sell the company stock that goes well beyond company prospects. Often an insider will sell company stock strictly for tax purposes. However, when insider activity, either buying or selling, moves dramatically in one direction or another, every investor should pay attention. On that note, please pull in your chairs and pay particular note, as Bloomberg highlights Insiders Exit Shares at Fastest Pace in Two Years:

Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.

Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.

In typical fashion, analysts assess this insider activity as nothing more than an attempt to lock in the returns of the recent equity rally. I seriously discount that. I view major moves in insider activity as a signal of strong, macroeconomic outlook. If the insider activity was more trading related, then the insiders would not actually sell the company stock but would more likely hedge it via purchasing put options.

What do all these insiders see on our economic horizon which is leading them to sell on such a massive scale? Well, the World Bank sees dark clouds out there. Bloomberg reports,  World Bank Cuts Forecast for Global Growth to 2.9%:

The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.

The world economy will contract 2.9 percent, compared with a previous forecast of a 1.7 percent decline, the Washington- based lender said in a report today. Growth will be 2 percent next year, down from a 2.3 percent prediction, the bank said.

This outlook on the global economy does contrast with a more sanguine view provided by the IMF.  While economic forecasts from different organizations and analysts will often vary, there is nothing vague about massive insider activity, and right now they are headed for the exits.


  • beach

    Larry, it is very helpful that you highlight words like “put” for readers like me that are not up on all the “lingo” of the market! Thank you!!

  • fiscalliberal

    Larry – a bit off topic, but with the shadow banking system, would it be correct to say this is pretty much a former Investment Bank phenomona?

    Also – did Bear Stearns and Lehman engage in Credit Defaut Swaps and highly leveraged off book banking entities which relied on short term financing (SPV’s).

    So – when they couldn’t pay off the credit default swaps and the off book stuff went sour, the rest of the banking system said hosta livista to the short term borrowning.

    That started the run with no deposit insurance back up – 1930’s all over again.

  • The shadow banking system very much developed within the investment banking franchises starting back in the mid-1980s. Salomon Bros and First Boston led the development of CMOs (collateralized mortgage obligations) which was the grandfather to all other collateralized bond obligations (ABS, asset-backed securities, CMBS, commercial mortgage-backed securities, CBO, collateralized bond obligation, CLO, colateralized loan obligation).

    The investment banks were able to leverage themselves upwards of 30-1 so they did not need to utilize off-balance sheet vehicles. The large commercial banks could not leverage themselves that much with on-balance sheet assets so they achieved increased leverage via off-balance sheet structured investment vehicles (SIVs).

    The rest of Wall Street pulled the plug on Bear and then Lehman because they felt that the Bear and Lehman collateral (MBS, ABS, CMBS, CBO, CLO) had declined so much in value that it was not sufficient to support their borrowings. It was not CDS that Bear and Lehman could not pay. Technically they could not roll their repo (repurchase agreements) which were their financing lines.

    As a result, in very short order,….Game Over!!

    Actually, it is a very simple process and not dissimilar to business that occurs on the real streets all the time.

  • fiscalliberal

    Thank you – I did not appreciate that the the commercial banks were using SIV’s because of leverage limitations

    Tonight I am going to a forum put on by FINRA and Congressman Gary Peters titled “What Every Investor Should Know”

    I really appreciate having the information provided by your blog and it should be fun

  • Wow. I would love to be there.

    Please let me know what topics get addressed.

    I would love to hear Congressman Peters or a Finra rep respond to Finra’s dumping ARS and why Finra has not posted their 2008 Annual Report.

    Have fun!!!

  • TeakWoodKite

    Thanks for the insights in your articles.

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