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Companies Are Buying Shares — But Insiders Aren’t

by John Rubino on July 1, 2011 · 12 comments

The past year’s stock rally is a classic case of newly-created money bidding up asset prices. Now, thanks to the researchers at Trim Tabs, we know more about one of the ways this has been accomplished — and about why it might end.

As Corporations Boost Share Buybacks, Insiders Stand Back

U.S. companies are buying back stock at a blistering pace this year, but the executives who run the companies aren’t increasing their own personal stakes.

There has been $264 billion of disclosed buyback plans so far this year, compared to only $3.3 billion in insider purchases within those companies, according to data released this week by TrimTabs Investment Research. The disparity between both indicators is the lowest since 2004, and highlights some concerns on Wall Street that stock prices are still too lofty.

Analysts say the lack of any insider stock buying at companies like Wal-Mart Stores Inc. (WMT), Intel Corp. (INTC) and Walt Disney Co. (DIS) shows top executives don’t appear to be confident about their stock’s fortunes so far this year. Yet, these companies are all among the top 30 biggest stock-buyback programs in the country.

“This is a warning,” said Charles Biderman, chief executive of TrimTabs. “If you were to compare the stock market to a casino, the house is the people who run public companies. Historically, they have been more accurate than anyone else.”

Biderman has developed a ratio to determine market confidence by comparing insider activity and announced buybacks. The ratio, which divides the total amount of announced buybacks with insider purchases, currently stands at 80. Higher levels mean insiders aren’t investing at the same pace as their companies initiate buyback plans.

The latest number is the highest since TrimTabs began tracking the data seven years ago. By comparison, the ratio between announced buybacks and insider buying was only 15 in the first quarter of 2009, when the stock market bottomed following the financial crisis. The ratio hit 46 in 2010 and now has widened to what Biderman considers is an extreme level.

The data are worrisome as Wall Street wrestles with a slowing economy, with analysts and economists debating whether the recovery has either hit a temporary slow patch or faces a more prolonged slowdown.

The Dow Jones Industrial Average has wobbled in recent weeks after hitting a three-year high in late April. A series of weak economic readings have prompted concerns about how upcoming earnings reports will play out. Some fear slowing manufacturing, stubbornly high unemployment and low consumer sentiment will weigh on corporate profits as the earnings season approaches.

At the 30 U.S. companies with the biggest buyback programs, insider buying occurred at only six of them, according to TrimTabs. The top executives at these companies snapped up about $10 million, a tiny amount compared to the billions of dollars in overall insider buying so far this year.

“Any time you see on a company level that kind of conflict, it should raise some eyebrows,” said Ben Silverman, director of research at InsiderScore.com. “It’s a concern because you want that alignment between what management is doing and what the company’s doing.”

To be sure, some analysts said this particular ratio isn’t the best representation for insider buying trends. Jonathan Moreland, director of research at InsiderInsights.com, said there’s typically more open market purchasing activity among corporate insiders at small- and mid-sized companies as opposed to larger firms.

Those executives are more likely to bet personal stakes on their companies’ success in an effort to publicly display confidence in their stocks, whereas insiders at larger companies already reap the benefits from equity-based compensation, Moreland said. The companies who have instituted the biggest buyback plans this year have generally been large-capitalization companies.

“These large companies are where I least expect to see insider buying,” Moreland said.

Disney, Wal-Mart, and Intel were the top three companies on TrimTabs’ list that had huge buyback programs, yet no top executives purchased stock during the year.

A Disney spokesman pointed out the company said on its previous earnings call that it has repurchased 52 million shares for approximately $2 billion during its fiscal year, but declined further comment. Wal-Mart and Intel weren’t immediately available for comment.

Buybacks typically reduce the number of shares outstanding for a company, which can help boost earnings per share and ultimately propel share prices higher. Actual stock buybacks among companies in the Standard & Poor’s 500 index totaled nearly $90 billion in the first quarter, up 63% from a year ago.

“Insiders are willing to use the huge amount of cash on their balance sheets to prop up their stock prices, but they’re not personally interested in buying their stock,” Biderman said. “This shows stock prices are too high relative to what insiders think they’re really worth.”

 

Some thoughts:

Clearly, one reason for the recent corporate borrowing binge is that low rates might not last and companies are anxious to lock in some cheap money. They’re then using some of it to buy back stock. Not surprising as far as it goes. But the divergence between companies which are buying and insiders who are not is interesting. You’d think that executives who are optimistic about their companies would be front-running their corporate buybacks by loading up on the shares themselves. That they’re not implies that they’re either unimpressed with business conditions or they’re worried about the impact of all this new debt. Instead, as Trim Tabs notes, insiders don’t seem to think shares are a buy at current levels.

It’s also interesting that just two years after a debt-driven market collapse, companies would go right back to borrowing — would, in fact, take on more debt than they carried in 2007. This completes a dangerous trifecta: government, household and corporate debts are all at (or near in the case of households) record levels. Historically, record debts lead to recessions, not vigorous expansions. And recessions produce bear markets.

As always, the devil is in the timing. In a “normal” world this kind of debt would signal the monetary authorities to step on the brakes — or cause borrowers to stop borrowing. But today it seems to be having the opposite effect. To counter the threat of another debt implosion, central banks are creating more credit, while borrowers are addressing an uncertain future (due mostly to excessive debt) by borrowing as much as possible. This is what happens when central banks try to bend the laws of economics.

  • http://BrophyWorld.com BrophyWorld

    Any company that has cash trapped abroad by the confiscatory United States tax system ought to be borrowing to exploit low interest rates. Furthermore, it is irresponsible not to issue debt when the dollar is set to sharply devalue. Is there an easier way to earn money than repaying debt with cheap dollars?

    Technology stocks are enjoying a bubble that won’t last. Zynga, Pandora, and Groupon are bleeding money like swimmer being eaten by a shark, yet the market treats them as if they are as profitable as Apple, Microsoft, and Google.

    Vivek Wadhwa tweets, “Silicon Valley loves failure so much they came up with a fancy name for it: pivoting.” Similarly, Ben Casnocha tweets, “Seeing companies promote their Facebook fan page in advertisements reminds me of when companies promoted their AOL keyword.” The irrational exuberance today reminds me of 1998:
    http://brophyworld.com/irrational-exuberance-2011/

  • Jiggerjuice

    It is just gaming the system. The system has a set of rules, and when you figure out what the rules are, you game them to your advantage. It really isn’t rocket science. In the case of Congress, they either let lobbyists pay them to write their own little bills, or they actively write laws for companies favoring personal investments they have made. Why are we shocked? So a CEO uses every tool he “legally” can to get paid… Including using his company’s money to buy back stock so his own shares are more valuable, while not committing anything additional in the process because he knows the overall system is bound to fail. Isn’t that called… personal financial risk management? On a middle class level, access to power and money are limited to the point where the only thing we can game is our income tax return. Or perhaps not paying the mortgage.

    The rules need to be rewritten. The system needs to be replaced. Snoring until then.

  • SloandEZ

    Could it be that the execs have loaded up on money cheaply borrowed which will be held until the market crashes this year. Then these gobs of cash will buy in ultra cheap shares of their companies? This seems too depressing on my part and too prescient on theirs, but much has been borrowed without any clearly defined purpose.

  • http://www.JoinAmericaAgain.com DM Zuniga

    Jiggerjuice,

    While I agree with your premise (in this case, the fiscal mechanics of what insiders are doing…or rather, refraining from doing) but I disagree with your unfounded conclusion about America’s ‘middle class’ and our options.

    In terms of constitutional prerogatives (retained powers, to use the language of the Tenth Amendment), the citizen in America is the apex sovereign over every form of subterfuge or perfidy found in his government. We The People have a *great* deal more power than most people realise.

    We do not know civics or history because the government schools long ago jettisoned those studies. But those who still read, still do quite well.

    For instance, about 12 years ago my family ‘seceded’ from Congress’ al Qaeda arrangement with IRS. Why ‘game’ an income tax return? On a website called “A Tax Honesty Primer”, I explain why an estimated 67 million Americans are now non-filers, many of them law-abiding Nontaxpayers. No need to ‘game’ anything; just obey the law and make your public servants at the IRS obey the law as well. Then you can watch all this government turpitude as a fiscally independent spectator, at least of *that* aspect of our present debacle. Read the Constitution; if things are ‘wrong in government’, WE are to blame.

    So. Now to particulars.

    About four years ago, I began writing a book called ‘This Bloodless Liberty’, now available at Amazon, and soon available in a second edition updated for fast-moving world affairs. In it, I explain a new mechanism called the AmericaAgain! Indictment Engine(tm), designed to turn Washington D.C. from our master back into our servant as intended by the Founding Fathers. A simple tactical force-massing mechanism using the power fo the Internet and social networking in the first lawful, constitutional exercise of powerful popular sovereignty, in history.

    I know this is a financial site, and financial folk are often oblivious to, or ever averse to, discussion of what they consider ‘politics’. But history proves that politics is always about money and power; and our form of government *demands* popular sovereignty, as well as instituting it.

    Thus, a critical issue in my book is that We The People must arrest the century-long counterfeiting concession granted to a cartel of crime families operating under the fraudulently euphemistic brand, ‘Federal Reserve’. All his life, Murray Rothbard preached to deaf ears about this heinous crime; Prof. Jesus Huerta de Soto is doing the same thing, to deaf European ears. The theory is crystal-clear; it is the practice that is intractable (so far).

    (Enter the Tea Party gaggle, seeking things to do.)

    Gold is not only the undisputed champion of currencies in history; gold and silver coin are the ONLY lawful forms of money in all 50 American States. That is the law. We’ve just lacked a law enforcement mechanism, until now.

    I disagree, ‘Jiggerjuice’, that we are reduced to outdoing our bent politicians and bureaucrats in moral turpitude; reduced to ‘gaming’ anything. We need to restore rule of law, and in this Internet Age, only the American ‘middle class’ is constitutionally (in both senses of that word) able to show the world how this is done.

    My book tells how this new mechanism of constitutional enforcement can reach critical mass. Time, money, and confluence of events are required for things to fall into place; for instance, we hope to work with the ‘Constitutional Tender Act’ forces to produce a legislative workbook, a fiscal analysis and detailed description of steps in the transition to 100% gold-and-silver transactions in a given state’s operations; a sorely-needed weapon for that group in its attempts at having the States cease violating the Supreme Law at Article I, Section 10.

    For instance, a President Rick Perry (if you read his book ‘Fed Up!’) could play Andrew Jackson’s part at this point, against the Fed and its credit industry minions. The Tea Party and millions of other fed-up Americans could turn the tide as no Arab Spring ever could.

    “The rules need to be rewritten; the system needs to be replaced”. Indeed, if you mean cutting the puppet strings to Congress, and putting them back under the thumb of their constituents and State legislatures (in the case of senators, before the disastrous 17th Amendment). The States are still the creators, the federal government still the creature, and We The People still the apex sovereigns.

    As long as the U.S. Constitution stands, America will always be the world’s best long-term investment. We The People (the ‘middle class’, if you will) must only fulfill the duties and wield the retained powers suggested by our Constitution.

    Hopefully, we soon will.

    http://www.TeethForTheTeaParty.com
    http://www.TaxHonestyPrimer.blogspot.com

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  • Bruce C.

    This subject reminds me off what I heard from an interviewee on a radio show about trading in the stock market. I don’t remember who it was (nor even the name of the show for that matter) but he had all the usual credentials of Wall Street experience and track record, etc. He was of the opinion that this stock bull market was going to end soon because the process of “rotation” by the corporate insiders was nearly complete. (Some of you may recall that up until recently insiders were actually selling their shares.) He said that corporate earnings are going to soon be surprisingly lower than people have come to expect, and implied that they never were as good as advertised but manipulated or presented in ways that inspired buying and thus allowed insider shares to be unloaded at high prices.

    I have no idea if any of it is true. I guess I’ll accept Trim Tabs numbers but the reasons for them may be far different than presented here. It’s interesting that the Trim Tabs report says nothing about consistent insider selling over the past year and that the radio guest said nothing about company buybacks.

    There is so much anecdotal data like this out there and I’d be very reluctant to trade/invest accordingly. I have heard or read just about every prediction possible concerning stock market predictions and the only one who has been consistently right so far has been Nadeem Walayat who called for a bear-killing stealth bull market since the spring of ’09 based upon a brewing worldwide inflationary mega-trend. So far that has been exactly what’s happened. Stocks may be at lofty levels in real terms but their nominal values are simply reflecting weakening currencies. Nothing else seems to matter.

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  • Brad Thrasher

    While, not disagreeing with my net-friend Bruce C., let me offer a trader’s as opposed to his well reasoned investor’s view above. I love macro trend analysis such as offered by Trim Tabs. I even filled out the request for sample reports but got a notice that said they are whale hunters and don’t care for little guys.

    Which is all well and good but Trim Tabs could at least state that upfront before I took the time to fill out their form and give Trim Tabs my info. Wanna bet the low rent ho’s sell my email address lol?

    • Brad Thrasher

      My bad. I received an email from Trim Tabs and they have started my free subscription. Obviously the notice is incorrect. Trim Tabs will work with little guys.

      • Bruce C.

        Hi Thrash,

        Glad that Trim Tabs came through for you.

        Frankly, I hope they’re right about their analysis. I really expected the market to “correct” more than 7%, for many reasons, so the moon shot last week was a surprise to me. Of course, that may have been just a last hoorah and will take out the 200 DMA next week. We shall see.

        Evidently I’m not the only one who is confused. The “godfather” of newsletter writers, Richard Russell, has finally capitulated in an almost disturbing way.

        (http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/7/4_Richard_Russell_-_60_Years_Later_And_Still_Running_Strong.html).

        “Could Bennie Bernanke have it right?” is disconcerting coming from him. He’s obviously on the ropes emotionally and that should mean something given his experience.

        “The Russell reaction” probably is too pat and probably won’t happen that way since everyone is expecting it, but I suspect something equally significant will, and probably soon.

        • Brad Thrasher

          Hey Bruce,

          Russell is an interesting read. He points to part of our, what is it now, almost a 2 year long conversation? You’ve discussed it as timing the collapse and I’ve often suggested it’s amazing Bernanke has kept it going this long.

          The world’s faith in the US remains strong. Each time the world seems on the brink, whether one of the PIIGS and the EU, natural disaster hitting Japan or the ME, both gold and USD’s seem to benefit.

          while I don’t believe “Bernanke is right” that he’s been able to sell it is impressive.

          Geithner musing about leaving shouldn’t faze anyone. The word inside the administration is that if you didn’t get out in 2010 that you were staying through 2012. Even if Geithner leaves early, policy isn’t about to change.

          Austen Goolsbe is leaving outside the window but that is to maintain tenure at the University of Chicago.

          As for the markets, I’m watching T-bonds for clues. With Japan and our own Fed on the sidelines, where is the next customer for our debt? Is lack of an obvious buyer why Geithner is looking to bail? We’ll get a clue Tuesday when the 28 day bills go to market. Thursday the Treasury auctions 90 & 180 day T-bills, 10 year notes and 30 year bonds.

          All the best @U

  • c seger

    Zuniga, I just read your primer. Very interesting. I’d like to know more. I am skeptical however, after looking into Phil Hart I found this on his blog:

    “After fighting what I believed was an unconstitutional federal income tax, six years ago I capitulated, filed returns, and have since then, paid $120,054 in combined state and federal income taxes (including the interest and penalties).”

    It doesn’t give me a really secure feeling about following your advice.


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