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Insiders Cashing in May Hurt Stocks
Saturday August 16, 10:17 am ET
By Elizabeth Lazarowitz

http://biz.yahoo.com/rb/030816/markets_stocks_insideselling_2.html

NEW YORK (Reuters) - Think it's time to buy stocks now the market has stabilized after its spring rally? Many corporate insiders don't.

Executives sold about $32 worth of their own companies' stock for every $1 they bought in July. That is the most bearish they have been since May 2001, and it marks the third straight month that the ratio of selling to buying has topped the $20 level, according to research firm Thomson Financial.

While Wall Street experts say there could be many reasons for employees to trade their own companies' shares, executives' recent reluctance to buy may not bode well for the stock market in the days to come.

"Any time investors stop buying, it signals that they think they will earn better returns someplace else," said Charles Elson, a professor of corporate governance at the University of Delaware. "For us investors, it's not a particularly good sign."

The last time the market experienced three straight months of such bearishness by insiders was July to September of 2000. Six months later, the Standard & Poor's 500 index (CBOE:^SPX - News) had dropped 19 percent, and a year later, the index was down 28 percent, said Lon Gerber, director of insider research at Thomson Financial.

"Is that going to happen now? We don't know for sure, but it's just not a very encouraging signal," Gerber said.

Money managers follow trading by employees since insiders often have a close-up view of their company's day-to-day progress and so are thought to have a particularly keen sense of its financial health.

SELL AT THE TOP

Executives sold $2.4 billion worth of their own companies' stock in July, a number that is right in line with the historic five-year monthly average for selling. But they bought only $73 million worth of stock last month, giving July the lowest monthly level of insiders' stock purchases in two years, according to a Thomson Financial report.

Stocks barreled higher this spring as investors bet on a rebound in the economy and corporate profits in a rally that drove the Standard & Poor's 500 index (CBOE:^SPX - News) up about 26 percent from its 2003 low on March 11 to its closing high for the year on June 17.

The S&P 500 is still up more than 23 percent from its mid-March low and up more than 12 percent so far this year.

Among the big sellers over the past six months have been executives at Dell Inc. (NasdaqNM:DELL - News), Microsoft Corp. (NasdaqNM:MSFT - News) and Mandalay Resort Group (NYSE:MBG - News).

Between May 22 and May 27, for example, Michael Dell (News), the chief executive officer and founder of Dell Inc., sold about 10 million shares worth about $279 million, according to a Securities and Exchange Commission (News - Websites) filing. The week before he sold, Dell stock surged over $32, the first time it had seen that level since November 2000. The stock now trades slightly below $32 a share.

Michael Ensign, Mandalay's chairman, CEO and chief operating officer, from mid-June to mid-July disposed of about half of his stake in the casino operator -- selling a total of about 2.9 million shares worth about $95 million, according to data collected by Thomson Financial.

Mandalay Vice Chairman William Richardson, another top shareholder in the company, also cut his stake about in half during that period to rake in about $95 million.

The sales followed a jump in the company's stock price that came after Mandalay said it would pay a dividend for the first time. The shares have climbed further since then.

In May, Steve Ballmer, Microsoft's chief executive and the long-time partner of co-founder Bill Gates (News), sold shares in the world's largest software maker for the first time in 12 years, getting rid of about $1.4 billion worth of his holdings in the company, federal securities filings showed.

RISKY BUSINESS

But counting strictly on insider trading to gauge the market's future direction can be a risky proposition, some analysts say.

Just because executives are not buying their own companies' shares does not necessarily mean they are not buying stocks at all. Plus, they are not always as prescient about their companies' futures as one might expect.

"How do we know their sense is good? Maybe they're misjudging it. I can think of examples where you had insiders buying, and the company went broke," Elson said.

In addition, employees sometimes receive stocks on a regular basis as part of their pay packages and selling is a way of cashing in.

"Clearly there are individual situations where stocks that have been bruised in the market and an insider will step up and buy stock, that I think can be relevant," said Rick Meckler, president of investment firm LibertyView Capital Management.

"But as long as stock is going to be used for compensation, you would expect people to be net sellers over time."