The Long Crisis

The Dow is still up nearly 60% from its March low. This means it has regained more than 50% of what it lost from the all time high. What are the insiders doing in this market? Are the insiders taking advantage of dips in the market from last year to buy bigger stakes in their own companies? Well, not exactly. They’re selling 18 times as many shares as they’re buying. What do they know that speculative traders do not?

The insiders know that their businesses are not really in such great shape. That the only way they have been able to maintain profit margins is by cutting staff and expenses to the bone. At most firms sales and revenues are down. With unemployment still raising and the housing market still falling it is hard for them to see anytime soon where additional sales and additions to the bottom line will come from.

Meanwhile, investors and traders have been busy hallucinating about an ongoing recovery in the real economy. They’ve bid up the price of shares as though they expected an almost immediate stunning period of growth. In general, earnings have held steady or due to severe cost cutting not declined very much but stock prices have gone up. Up quite a lot.

This has brought a 10-point increase in the P/E ratio, to greater than 27. That makes stocks at current levels expensive. Very expensive indeed.

What would justify such a lofty P/E? The answer is simple; only bottom line revenue and earnings growth. Where might growth come from? Now that is a good question. Perhaps President Obama will make the speech of his life and all will be fine by decree.

But we really don’t know. Stocks are priced as if investors expected profits to double next year. However, that is unlikely. Even in good times it usually takes profits 5 years to double. And then, only when they have a solid reason to double – such as higher sales and lower costs in a growing economy.

The conclusion to all of this? That’s easy. Insiders usually are a lot smarter than the average investor and rah rah CNBC informed trader. Selling stocks at current levels may be a very good insider trade idea. The insiders know their own businesses better than anyone.

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