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 23% from Q1, according to FactSet. 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 FactSet and 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