I am of the opinion that the recent wave of inside selling is tax related, not necessarily an indication of dire outlooks.
Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market.
Gap Inc.’s (GPS) founding family sold $45 million of shares in the largest U.S. clothing retailer this month, according to Securities and Exchange Commission filings compiled by Bloomberg. Daniel Warmenhoven, the chief executive officer at NetApp Inc., liquidated the most stock of the storage-computer maker in more than six years. Sales by the co-founders of Bed Bath & Beyond Inc. (BBY) were the highest since at least 2001.
While the Standard & Poor’s 500 Index climbed 28 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc.
“They should know more than outsiders would, so you could take it as a signal that there is something wrong if they’re selling,” said Stone, chief investment strategist at PNC’s wealth management unit, which oversees $110 billion in Philadelphia. “Whether it’s a sustainable rebound is still in question. I’d prefer they were buying.”
Now, I am not by any means saying we are due for a rebound in the economy anytime soon. I think the most likely scenario is we bottom and just drag along it for quit some time. But, the market has had an irrational rally (in my view). Execs also recognize this and further, they know the the Obama administration has plans to raise the capital gains tax next year.
If you are an owner or an executive at a public company who sees the balance of 2009 being stagnant at best for the overall economy, why wouldn’t they take advantage of a 25% market run to sell out and take advantage of capital gains taxes that are sure to be lower now than in the future.
The argument of course is “why do it now?”. “Why not wait for the year to progress and see if the market rises more”? I am assuming even they recognize the rally vs. fundamentals argument making the case for flat prices from here on out at best and most likely falling. It could also be a case of not wanting to take any chances after seeing your holdings rally this much.
The tax argument is huge. The administration has danced around the issue in terms of specifics. First saying the “Reagan Era” rate of 28% was fair then backing of that and now ignoring the subject. So, while the “how much” is not clear, the “its coming” is.
That causes tax behavior. People will sell assets now, in the anticipation of higher taxes in the future. This dynamic seems to be lost on those in power rather frequently.
Disclosure (“none” means no position):None