Merger Monday evokes fond memories of 2007 and 2008, of mega deals breathlessly reported on CNBC, when everything was still possible, until it all fell apart. But mega deals have been gracing the headlines again, and deal volume has soared, and Merger Monday is back. With the hoopla of IPOs and other wondrous events that are part of the daily circus on Wall Street, what could CEOs, officers, and directors possibly be fretting about?
And apparently, they are fretting. Only 7,181 insiders bought shares of their own companies so far this year through September 12, down 8% from a year ago, while 23,323 sold shares, according to Bloomberg – approaching the worst buy-sell ratio since 2000.
This insider aversion for their companies’ stock is in sharp contrast to stock buybacks that their companies have undertaken. When it comes to using their own money, insiders have become very bearish, diversifying out of their companies, selling hand over fist. When it comes to using other people’s money, they have no such compunction: corporate share buybacks reached a near record in the first half. And for the trailing 12 months, according to FactSet, buybacks jumped 29% to $539 billion.
But insiders know this pace of buybacks isn’t sustainable: free cash flow declined 0.5% while the ratio of buybacks to free cash flow rose to 82%, the highest since, well, Q3 2008. And so in Q2, buybacks actually plunged 27% from Q1, according to Capital IQ (via Zero Hedge). Alas, buybacks – that $539 billion over 12 months! – have been one of the most important pillars of the stock market rally.
Nothing good happens to stocks when such large, relentless, price-insensitive buyers walk away from the market. Corporate insiders are the first to see when that happens. They don’t have to wait till others gather up the numbers the hard way to release them months behind reality. Insiders know this in advance!
These insiders are also seeing that sales growth in the US has been averaging a mere 2.6% over the last two years, barely above the rate of inflation. GDP has been growing at a languid 2.1% since the Great Recession, never gaining the escape velocity that economists had promised five years in a row. But stocks soared! And insiders might have been scratching their heads about the valuations of their own stocks.
Frank Calderoni, CFO of buyback queen Cisco – which had announced $15 billion in share repurchases late last year – dumped 120,000 shares in September (excluding options-related and automatic sales), Bloomberg reported, the first sale since his eerily prescient sale in 2008.
The stated reason is always the same corporate speak about following “widespread financial advice to diversify their personal portfolios.” But Calderoni wasn’t the only insider who knew when to sell.
Company officials turned pessimistic on their own stock in October 2010, with about seven insiders selling for every two that bought shares. The ratio exceeded three for five straight months, the longest stretch in a decade. The S&P 500 peaked in April 2011 and slumped 19% through October, the closest the market has come to ending the bull market.
Executives became optimistic at the end of the financial crisis six years ago. The number of buyers almost tripled that of sellers in November 2008 and stayed higher in each of the following four months. The S&P 500 bottomed at a 12-year low in March 2009.
So they were early, but they were right.
And what else do Calderoni and his ilk know this time? They know first-hand that the buyback frenzy is supported by a credit bubble of historic proportions, and it includes a bond bubble that has spread across much of the world, with even the most dubious government bonds yielding below the rate of inflation, or zero, or even below zero, and even junk bonds yielding so little as to practically guarantee investors a loss over time.
“Bonds are at ridiculous levels,” explained founder of Tiger Management, Julian Robertson, at the Bloomberg Markets Most Influential Summit on Monday. It was “a worldwide phenomenon that governments are buying bonds to keep their countries moving along economically,” he said. A phenomenon that would end “in a very bad way.”
“Very overvalued” is how Omega Advisors founder Leon Cooperman called bonds at the summit. Howard Marks, chairman of Oaktree Capital Group, mused: “If you participate in that enthusiasm, then you’ll also participate in the correction.”
Even the Fed, after years of denying the existence of bubbles, or their visibility if they did indeed exist, is now trying to see bubbles as part of its job under the doctrine of maintaining “financial stability.” So they have created a “financial stability” panel, led by Vice Chair Stanley Fischer. Even super-dove and passionate bubble-blower, New York Fed President William Dudley, is on board. “I think we do need to try to identify asset bubbles in real time,” he told Bloomberg. “You can’t have an effective monetary policy if you have financial instability.”
And these folks at the Fed are seeing the ballooning credit bubble, which includes the bond bubble and the nearly free cash it produced for corporations, cash that supported the near record share buybacks and dividends, which contributed to the soaring stock market. And the Fed, nervous about that credit bubble, nervous that it might implode and cause financial instability, put its hand on the spigot and started turning.
That’s what corporate insiders are seeing. And they’re seeing what’s going on at their companies, and they’re wondering about the sky-high valuations powered by juice that is getting turned off, and so they’ve been dumping shares in their own companies. Once again, they’re early, but the last few times, they were right.
Obscured by the stock market hoopla, and under the leadership of our fearless Treasury Secretary Jack Lew, the G-20 finance honchos fretted about faltering global growth. Read…. OK, I Get It. Things Are Coming Unglued
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A direct question, Wolf: how do you think all this is going to play out eventually? Having followed your blog for quite some time now, I’m really curious about your personal take on this. Will there be a big bang somewhere down the road or wiIl the unwinding of these serial bubbles happen in a controlled, civilised way? I really would like to know, because I strongly suspect I don’t have the same financial expertise you possess (no irony intended).
Excellent questions!
Let me just say this: he (or she) who gets the answers to your questions right and bets on it accordingly is going to make a lot of money.
There are no certainties. Things that are already irrational and crazy can by definition get a lot more irrational and crazy. And the extent to which this can go on leaves some saner minds breathless.
I’m just an observer. I try to point things out, give people some information, analysis, something to consider. I don’t recommend buying or selling anything. I try not make any predictions.
To address your question about bubbles unwinding in a “civilized way”: these are financial bubbles. When they unwind, most Americans won’t even notice. Of course, if Wall Street, corporate America, Warren Buffett, etc. declare the end of the world unless they get bailed out again, things might get messier.
HD,
I would also like to know if Wolf thinks it probable that this could be different than other times of excess. I see a lot of leverage out there and not enough value added productive income and lots of risk. If the correct word for our current situation is bubbles, I see no history of bubbles being slowly deflated. They just pop.
It would be nice for the country if there could be a slow unwinding but I personally can’t see how that could possibly happen considering human nature is at play here. Those who have the most gains would also have the most to lose and I just don’t know many people who, once the money is in their pocket (bank account, property, trading account or other assets) deciding to give a portion of it back.
Seems to me all I hear is that they should have more. They want less taxes and less regulation and less interference with their luxurious life styles. There is no way to re-balance this on the backs of the poor or what’s left of the middle class. What happens to all the mortgages that are for more than the housing asset is worth compared to incomes? If interest rates are allowed to go up to reflect risk, this will exacerbate the trend towards lower asset prices.
Maybe I am missing some of the picture. It would be better for the country if I am wrong.
Central banks continue to print and more bubbles are created. The middle class doesn’t benefit whatsoever and this climate is making it harder and harder for Main St. to make it in small business thanks to stupid regulations that help corporations instead of everyone (i.e. crony capitalism).
Are these pump-and-dump moves? Pump up the price with buybacks, hit the option target, then sell?
Or is this just outright selling independent of exercising options as with Calderoni?
My own personal view is that during the Clinton years, the US economy began to shift away from production of real goods and services toward a speculative Ponzi-style economy based primarily on financial bubbles.
We’ve all seen the stock market crash in 2000, and the housing bubble and stock market crashes in 2008-2009.
We see now all-time highs in the stock market despite mediocre GDP growth. It is important to note that even this mediocre GDP growth has been achieved only by using an inflation deflator that is even lower than the seriously flawed CPI. If a more realistic inflation deflator were applied to GDP, it is entirely possible that GDP growth would have been hovering at 0% for the past 5 years.
Also, a huge part of corporate earnings growth over the past 5 years has been the result of refinancing high-rate corporate debt at lower interest rates, and not necessarily actual growth in unit sales. That ship has sailed and isn’t coming back to port.
We are also seeing an echo-bubble in housing, driven primarily banks holding onto foreclosed properties rather than selling them, and by cash investors bidding up prices. That bubble is now stalling, even in the “hot” real estate markets.
The current iteration of Federal Reserve money-printing (AKA ‘QE’) is just about over. Without all the free money printed by the Fed, it is going to be interesting to see what happens if the free money spigot is actually turned off.
My personal view is that stocks, bonds and real estate are all like balloons in search of a pinprick.
In a normalized interest rate environment, rates would be probably rising to choke off the massive malinvestment in the economy. However, the authorities are so desperate to avoid the economic cleansing that would come with massive defaults of unpayable debt at all levels – government, corporate and individual – that I think they will do everything possible to keep interest rates low. However, I don’t think low rates will keep the economy humming along forever.
Debt expansion cannot exponentially outpace real economic growth forever. Even if low rates are maintained well into the future, eventually the rising cost of debt service will put a damper on the expansion of consumption. That is when we are going to see the proverbial stinky brown stuff hitting the fan.
Insightful comments, VB. I agree that the authorities will continue to do everything they can to keep interest rates ridiculously low ( at whatever cost to the real economy), until they run out of legal / acceptable ways of doing so. That’s when TSHTF.
fantastic post!!!!
There are some real WORRY SIGNS for the russell too. Have a look at the russel chart here ==> http://bit.ly/1B4K0wk
The vix is warming up too, probably cause of the bombing over in syria / middle east. Will give us our next dip?