Ask corporate insiders what they think about their company (and stock) and you will always get one answer: nothing but upside. Judging by their actions, however, one would get a very different picture.
According to a data compiled by Bloomberg and the Washington Service that goes back to 1988, the number of officers and directors of companies purchasing their own stock tumbled 44% from a year ago to just 316 in July, the lowest monthly total ever. With 1,399 executives unloading stock, sellers outnumbered buyers at a rate that was exceeded only two other times in the history of the series.
With equities setting records, insider purchases are dwindling, with two buying for every nine that sold. At 0.23, the buy/sell ratio is about one-third of what it was in February and last August, and compares with an average of 0.69 over almost three decades.
The insiders' reluctance to buy as they urge others to do is not surprising: Thursday’s gain pushed the S&P 500’s P/E ratio to to 18.6x, the highest since 2002. Echoing rising equity pessimism among executives, earnings sentiment is souring. After predicting profit would expand 2.3% at the end of June, analysts now see S&P 500 income contracting 0.6% . That would put U.S. companies on track for a sixth consecutive period of falling profits, the longest since the financial crisis. “It’s people who are looking at the fundamentals of their business every day and seeing a picture that’s deteriorating,” said James Abate, of Centre Funds in New York. “Combine that with the lofty stock valuations makes the market vulnerable for some degree of correction.” Abate told Bloomberg he has bought S&P 500 put options to protect against potential losses.
Luckily for the insiders, they have no problem finding willing buyers of their stock: they instruct their own companies to buyback their shares!
As Bloomberg observes even as earnings fail to rebound, companies looking to charge up their stock returns with repurchases are turning to debt markets like no time since the Internet bubble. The proportion of buybacks funded by debt rose above 30 percent in June for the first time since 2001, data compiled by JPMorgan Chase & Co. and Bloomberg show. It will only get higher as the demand for any yield reaches panic levels.
Bottom line: while companies themselves keep buying back shares, using record amounts of freshly-issued debt to fund the purchases, demand from their highest-ranking employees has dried up. Everyone's a winner, except of course for those "credit managers" who are desperate to provide funds to any company, regardless of use of proceeds, just to collect a little extra yield than "risk-free" securities.