Market Bottom; Insider Buying Exceeds Insider Selling, Signaling Market Bottom
By Daniel at 4 February, 2008, 6:36 am
By Michael Tsang and Alexis Xydias
Feb. 4 (Bloomberg) — August Busch III, an AT&T Inc. board member since 1980, bought $2.27 million of shares in the biggest U.S. phone company last month, his largest purchase on record. Monsanto Co. director William Parfet added to his holdings in the world’s No. 1 seed producer for the first time in eight years.
Chief executive officers, directors and other senior officials in corporate America are buying more of their companies’ shares than they’re selling for the first time since 1995, prompting growing confidence the stock market is poised to rally for the rest of the year.
The last seven times insiders bought more than they sold, between 1988 and 1995, the Standard & Poor’s 500 Index rallied an average 21 percent in the following 12 months, according to data compiled by the Washington Service. The purchases show executives believe the worst may be over after stocks suffered the biggest January drop in 18 years on signs the economy is in a recession.
“If it’s so bad, how come these guys are gobbling up their own companies’ stock? That’s the telltale indicator,” said Fritz Meyer, 57, the Denver-based senior market strategist at AIM Advisors Inc., which manages about $166 billion. “Companies are in the best possible position to assess the economic outlook.”
Purchases by officers, directors and other senior managers of the 1,911 companies on the New York Stock Exchange reached $683 million in January, Securities and Exchange Commission filings compiled by the Washington Service, a Bethesda, Maryland-based research firm that tracks insider data for more than 500 mostly institutional clients, showed.
Perfect Record
Total purchases were 1.44 times more than sales, the first time in 13 years that insiders became net buyers, the data show. The S&P 500, the benchmark for American equities, hasn’t fallen in the 12 months after insiders bought more than they sold, according to Washington Service data that go back 20 years.
Executives and directors may be underestimating the effect of the U.S. economic slowdown on earnings, said Robin Hepworth, 44, at Allchurches Investment Management Services.
Fourth-quarter profits dropped an average 25 percent for the 289 members of the S&P 500 that have reported so far, data compiled by Bloomberg show. The economy expanded at a 0.6 percent annual rate in the quarter, half the pace of economists’ forecasts, as home construction plunged the most in 26 years and banks including Citigroup Inc. and Merrill Lynch & Co. wrote off mortgage-related losses.
Bearish Bets
While executives step up buying, short sellers are betting against U.S. companies like never before. The amount of short selling — when traders sell borrowed shares expecting to buy them back after prices fall — grew to 3.7 percent of the total shares on the NYSE last month, the highest since at least 1931.
Insiders “are being very brave,” said Hepworth, a London- based manager at Allchurches, which oversees $2.6 billion. “Against the backdrop of everything going on, this is one positive.”
Insiders have been buying stock in five of the 10 industries tracked by Washington Service: telecommunications, industrials, consumer discretionary, energy and materials.
Busch, 70, a former chairman and CEO of Anheuser-Busch Cos., the St. Louis-based maker of Budweiser, bought 63,000 shares of San Antonio-based AT&T at $36.10 a share on Jan. 25, the largest amount since at least 2002, according to SEC filings. Busch last bought AT&T stock in March 2006, the filings show. The stock has risen 6 percent since the purchase, after plummeting 13 percent from the start of the year.
Buying Monsanto
At Monsanto, Parfet bought 10,000 shares for almost $1 million on Jan. 17, after the stock plunged 22 percent in three days. The purchase was Parfet’s first since he bought stock in the St. Louis-based company’s initial public offering on October 2000 and was the largest by any Monsanto insider in five years, according to data compiled by InsiderScore.com, the Princeton, New Jersey-based firm tracking insider transactions for more than 400 institutions. Monsanto has jumped 15 percent since then. Parfet and Busch didn’t respond to phone messages seeking comment.
Executives outside the U.S. are also taking advantage of the global sell-off to buy more of their shares.
Insiders at 522 European companies were net buyers in the 50-day period that ended on Jan. 24, spending a combined 153,000 euros ($227,000) on each company, Deutsche Bank AG said in a Jan. 24 study. That compares with an average 13,600 euros sold in each period since the data began in July 2004.
Siemens AG, Europe’s largest engineering company, said Jan. 29 all executive board members bought shares after CEO Peter Loescher purchased stock for 4 million euros a day earlier. Loescher made his first open-market purchase since becoming chief executive in July, Bloomberg data show.
“That all members of the managing board have invested privately in our company, I see as a sign of strong proof of decisiveness and confidence,” Loescher said in a Jan. 29 press release. Shares of Munich-based Siemens shares have fallen 18 percent this year and touched an almost 10-month low on Jan. 23.
“Insider buying does tend to send a positive message,” said Frances Hudson, a strategist at Edinburgh-based Standard Life Investments, which oversees about $281 billion. “These are the people who should know how well the businesses are doing.”
http://www.bloomberg.com/apps/news?pid=20601213&sid=aj7iYiQKz5UU&refer=home
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