Edge and Odds

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Edge and Odds

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insiders

THE DAILY EDGE (2 March 2017): Insiders Selling

Stocks Surge as Global Outlook Brightens The Dow industrials surged more than 300 points to their first-ever close above 21000, underpinned by the Federal Reserve’s growing confidence in the U.S. economic outlook and by investor hopes that President Donald Trump will deliver policies that boost growth.

(…) Stocks were powered in part by new signals from the Federal Reserve that officials are growing confident enough in the economic outlook to raise short-term interest rates as early as a meeting later this month, traders said, as well as by solid data and the generally positive reaction to President Donald Trump’s speech to Congress on Tuesday evening. (…)

“We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing and risks to the outlook are as close to balanced as they have been in some time,” Fed governor Lael Brainard said Wednesday in a speech at Harvard University. “Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.”

Ms. Brainard’s comments were striking because she has been among the Fed governors most resistant to raising rates in recent years. That she now appears on board with another move suggests Fed Chairwoman Janet Yellen has a growing consensus behind her. (…)

signs are building that the global economy is emerging from a long period of deflationary pressure marked by excess capacity in factories and labor markets. On Wednesday, German annual inflation was reported at 2.2% in February, its highest level in 4½ years. Annual inflation across the 19-nation eurozone is expected to rise above 2% when February data are reported Thursday. In Japan, data due Friday are expected to show the primary inflation gauge—consumer prices except fresh food—rose in January from a year ago, turning positive for the first time in 13 months.

In the U.K., inflation is at a two-year high of 1.8%, and the Bank of England expects it to rise toward 3% this year. That is partly the result of a sharp drop in the sterling’s value following the nation’s vote to leave the European Union. Food chain Greggs warned on Tuesday it is facing increased inflationary pressures, as a weaker currency makes imported food more expensive.

Inflation isn’t a good thing in itself; it eats away at the purchasing power of take-home pay and savings. But for years, central bankers have fretted that low inflation was a sign of weak global demand and underused resources, and an indication of their own failure to use low interest-rate policies to reach inflation targets. (…)

Some companies are scrambling to adjust. (…) “With components getting so expensive, we’ve had to increase our prices. That’s really squeezed our profits.” (…)

Underlying momentum in the economy remains modest. Forecasters this week marked down their expectations for U.S. growth in early 2017 after weak readings on consumer spending, international trade and construction outlays. Macroeconomic Advisers on Wednesday projected gross domestic product would expand at a 1.6% annual rate in the first quarter, compared with a 1.9% growth rate in the final three months of 2016. (…)

High five The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 1.8 percent on March 1, down from 2.5 percent on February 27.

Evolution of Atlanta Fed GDPNow real GDP forecast

  
Global Manufacturing PMI at 69-month high in February

The rate of expansion in global manufacturing production accelerated to a three-year high in February, underpinned by stronger growth of total new orders and rising levels of
international trade. Business confidence also improved, encouraging faster job creation.

The headline J.P.Morgan Global Manufacturing PMI™ rose to a 69-month record of 52.9 in February, up from 52.7 in January. PMI indices tracking trends at consumer, intermediate and investment goods producers pointed to a broad-based improvement in operating conditions. Rates of expansion were broadly similar across all three sectors. Growth was led slightly by the consumer goods industry, whereas intermediate goods was the only category to register a faster rate of expansion than in January.

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National data suggested that developed nations tended to fare better than emerging markets during February. PMI levels edged higher in the euro area (70-month high) and Japan (35-month high) to offset mild decelerations in the rates of expansion in the US and the UK.

Although the rate of improvement across emerging markets remained weaker than that for developed nations, it was nonetheless slightly faster than in January. This stronger upturn mainly reflected growth accelerations in China, India, Vietnam and the Czech Republic. (…)

February saw international trade flows strengthen, as highlighted by new export orders rising to the greatest extent in almost six years. Improved rates of growth were signalled by both developed and emerging nations.

Average input prices continued to rise at a marked pace in February, with the rate of inflation remaining close to January’s 68-month record. Companies passed on part of the increase in costs to clients, leading to higher selling prices. Moreover, rates of increase in output charges during the past four months have been the fastest registered by the survey since mid-2011.

Auto U.S. Light Vehicle Sales at 17.5 million annual rate in February

Based on a preliminary estimate from WardsAuto, light vehicle sales were at a 17.47 million SAAR in February. That is down about 1% from February 2016, and unchanged from last month. This was below the consensus forecast of 17.7 million for February.

  

U.S. Construction Spending Falls in January

The value of construction put-in-place fell 1.0% in January (+3.1% y/y). This decline did follow upward revisions to December and November, with December now up 0.1% versus -0.2% reported initially, and November up 1.5%, revised from 0.9%. The latest decline compares to expectations in the Action Economics Forecast Survey for a 0.5% increase.

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From the Fed’s latest Beige Book:

  • Labor markets remained tight in early 2017, with some Districts noting widening labor shortages.
  • In general, wages in most Districts rose modestly or moderately, with a few reporting some pickup in the pace of wage growth. A number of Districts noted that shortages of skilled workers–particularly engineers and IT workers–were driving up their wages, and there were also some reports of labor shortages in the leisure and hospitality, construction and manufacturing industries.

One of today’s Bloomberg feature articles:

Stocks Aren’t Overvalued

(…) Rather, they seem reasonably close to fair value. As for the future, many factors may emerge that can increase or decrease the attractiveness of stocks, albeit with more potential positives than negatives. So on balance, there’s reason to be cautiously positive on the equity-market outlook.

(…) So although stock indexes are at record levels, valuations are not. And that’s the only sensible criteria by which to judge whether the stock market is expensive.

The price-earnings multiple is one key metric to judge valuations, though it suffers from some weaknesses. Since 1954, the S&P 500 P/E trailing multiple has averaged about 16.6. But this encompasses very high P/E periods, such as the 1950s and the 1990s and exceptionally low P/E periods, such as the 1970s. Using a simple average treats radically different periods equally, which is simplistic, naïve and wrong.

While the current market P/E is somewhat above average, that average is a meaningless mix of high and low interest rates and P/E multiples over very different economic environments. As anyone who has ever worked with a dividend discount model understands, high interest rates imply low P/E multiples and low interest rates imply high equilibrium P/Es. If we focus on those periods when inflation and interest rates were low, as they are today, the implied equilibrium P/E multiple is well above the historical average, but also above the prevailing multiple in today’s market. Indeed, with interest rates still close to record lows, the appropriate equilibrium for the market’s P/E multiple should be high. (…)

Decide by yourself whether stocks are fairly or overvalued:

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It is true that “using a simple average treats radically different periods equally, which is simplistic, naïve and wrong.” Hence the Rule of 20 which says fair P/E is 20 minus inflation. By this time-tested rule, the S&P 500 Index is currently 12.5% overvalued.

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Some people have already made up their mind, voting with their feet…and wallet:

Company insiders are dumping stock at levels ‘rarely seen,’ report indicates

In the last week, insiders’ sale transactions on the NYSE outnumbered their purchase transactions by more than 11 to 1, according to Vickers, a publication of Argus Research. The 11.47 reading is 3.5 standard deviations above the mean, according to Coleman.

The report gives context on the historical relationship between the market and its insider readings:

“The last time we saw both reading at such elevated levels was in early 2014, when the total reading hit 8.3 and the NYSE/ASE reading was 6.16. In response, the S&P 500 fell from 1844 to 1741 between 1/22/14 and 02/03/14. On February 14, 2007, the NYSE/ASE reading was 11.77 and the Total reading was 7.99 Again, the S&P 500 fell — this time from 1455 to 1387 within a matter of days.”

Vickers tracks its sell/buy ratio over a period of varying time lengths in order to get a better idea of whether one week is part of a bigger trend. Its longer-term eight-week ratio for all U.S. stocks shows this is not just a short-term trend, with 5.98 buy transactions for every sale over the last two months. On the chart below, the eight-week sell/buy ratio is tracked inversely on the right scale, with the stock market on the left scale. The research shop does it this way to illustrate the divergence between insiders and the market: The Dow Jones industrial average keeps going higher, yet insiders keep dumping stock.

Writes Coleman: “The number of insiders participating in the selling is significant. That would seem to imply that equities might be ripe for some level of correction.”

Here’s another measure:

THE DAILY EDGE (9 December 2016)

Economists See Fed Moving Faster on Rate Increases

(…) Some expect inflation to pick up on its own. Some say President-elect Donald Trump’s tax and spending plans could boost price pressures. Others see Mr. Trump’s Fed nominees advocating a more hawkish path for interest rates.

The economists’ predictions for the benchmark federal-funds rate averaged 1.26% by December 2017, which implies four rate increases of 0.25 percentage point each between now and the end of next year. The economists overwhelmingly said the Fed will raise rates at its Dec. 13-14 meeting, which suggests they expect three moves in 2017.

In the November survey, the economists’ estimates averaged 1.17%.

Fed officials, in their September economic projections, penciled in one quarter-percentage-point rate increase this year and two in 2017. (…)

Other economists surveyed see inflation picking up steam in the coming years, which would could lead to more Fed rate increases than currently anticipated. (…)

Why Odds May Be Fading for a Near-Term U.S. Recession

(…) the odds are gradually declining, having dropped to 17% in The Wall Street Journal’s latest monthly survey. That’s still about one-in-six odds over the next year, which is somewhat higher than we’ve seen in recent years. But it’s accurate to say that many economists are slowly lowering their warning flags.

(…) economists are now forecasting higher rates and inflation than they were before the election. But many share the assessment that inflation, in particular, has been too low in recent years, and that somewhat higher inflation would be a welcome development. (…)

Typically, the wealth effect of rising stock prices provides some lift to consumption and should provide some pep for the economy. (…)

CEOs and CFOs See Greater 2017 Risks Than Other Executives

(…) Nearly three quarters of 735 executives surveyed, or 72%, said developments around the world had created a riskier business environment than in previous years.Of those surveyed, 78 were CEOs and 100 were CFOs. (…)

Protiviti and the university surveyed executives and board members in a variety of industries globally this fall, before the U.S. presidential election. (…)

Respondents cited economic conditions most frequently as constituting a risk for 2017—with 72% of executives saying they expected conditions to have a “significant impact” on their businesses in the new year. (…)

In last year’s survey, by contrast, executives most frequently cited regulatory changes as a risk that they would face in 2016.

This year, regulatory changes are the second most frequently cited risk: 66% of the executives cited such changes as likely to have a “significant impact”  on their businesses in 2017.(…)

OECD LEIs Tick Ever So Slightly Higher as the OECD Trumpets Gaining Momentum

The OECD itself reports the following analytical assessment of its release this month:
* Signs of growth gaining momentum have emerged in the CLIs for the United States, Canada, Germany, and France. In the United Kingdom, there are also signs of improvement in the short term, although uncertainty persists about the nature of the agreement the U.K. will eventually conclude with the EU.
* Growth is expected to gain momentum in China and India, in particular, and also in Brazil and Russia, albeit from low levels.
* In the OECD area as a whole, Japan, and the euro area as a whole, the CLIs point to stable growth momentum.
* In Italy, the CLI show signs of easing growth.

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High five But Haver Analytics’ Robert Brusca is less enthused:

On balance, the OECD CLI indicators can be construed to be showing some improvement or gain in momentum as the OECD has chosen to do, but when placed of a scale of truth the real story is how meager and nascent this improvement is and that weak the growth continues to be in train. In the case of the U.S., the CLI has ticked up by a net of 0.2 points in the course of two months after being stuck at a reading of 99.1. The ratio of the current U.S. CLI to its value of six months ago is higher by just 0.1 and that is a very sour note on which to hang a song of improvement.

The OECD is a membership organization. I very much get the impression that members are trying to put the best spin possible on the interpretation of these readings. I do not find the OECD report encouraging in the least and find the ‘improvements’ posted this month as in the range of normal variation and unconvincing as yet as to the ongoing nature of improvement.

Household Net Worth Hit Record $90.2 Trillion

Stockholdings—both directly and through retirement accounts like 401(k)s—climbed by $494 billion last quarter while real estate, which is primarily people’s homes, rose in value by $554 billion, according to a Federal Reserve report released Thursday.

The report shows that U.S. households, in aggregate, had tremendous assets at their disposal, about $105 trillion against about $15 trillion of debt. That wealth has likely grown since the report was released because the stock market has rallied dramatically over the past month. (…)

OPEC’s Historic Deal Won’t Be Enough to Drain Oil Stockpiles

(…) Bloomberg News calculations based on OPEC data show that across the whole of 2017 there will be little overall reduction in record oil inventories — even if the group convinces non-members to join supply curbs at a meeting on Saturday.

“Even with 100 percent compliance from both OPEC and non-OPEC producers global stocks are unlikely to fall in the first half of 2017,” said Tamas Varga, analyst at brokerage PVM Oil Associates Ltd. in London. “That should keep oil prices in check.” (…)

OPEC’s track record shows the group only delivers 80 percent of promised cuts. While Russia has pledged to come to the party and lower output by 300,000 barrels a day in the first half of 2017, other non-OPEC producers, such as Mexico, Azerbaijan and Colombia, are likely to dress up involuntary production declines, already factored in by traders, as cuts. That scenario would leave largely unchanged the 300 million-barrel global stockpile surplus Del Pino and his colleagues are targeting. (…)

The Dream Stock Market

It’s the season when Wall Street strategists dust off their crystal balls and predict what markets will do for the year ahead, while conveniently forgetting what they said 12 months ago. (…)

History suggests investors should ignore these year-ahead guesses. The average strategist hasn’t started a year predicting a stock-market drop in any of the surveys carried out by Bloomberg since 2000, while shares fell one year in three. (…) Strong gains were forecast in 2008, when the market had its worst year in generations. Strategists then became cautious, making their lowest forecast in 2009 since the survey began, only for the market to rebound 23%. (…)

Insiders Send Wrong Signal on Bank Stocks The rally in bank shares has coincided with insider selling that is on pace to set a record.

Bank and industrial stocks have been among the biggest winners in the postelection stock rally, but some are swimming against the tide.

Corporate insiders in these industries have been selling into the rally at an unusually strong pace, according to research firm InsiderScore. At first glance, it is easy to view this as bearish. If high-ranking executives are unloading stock, perhaps investors should consider doing the same. (…)

High five But insiders might choose to sell their stock for reasons that don’t necessarily match the incentives of the typical individual investor.

Some insiders could be locking in profits or exercising options that are close to expiration. Many banking executives in particular have held underwater options in the years following the financial crisis. Bank of America Corp. and Morgan Stanley, for example, have rallied back to mid-2008 levels. If this postelection rally was the first chance to sell, it is hard to argue against doing so no matter how they feel about the future. (…)

The recent banking rally might be overdone for a number of reasons. Insider selling isn’t one of them.

If you missed the Dec. 5 Edge and Odds, you missed this:

(…) A total of 3,500 insiders at Russell 3000 companies have unloaded their own stock in the last three weeks, while 467 purchased shares, according to data from The Washington Service, a Bethesda, Maryland-based provider of insider trading data and news. The number of sellers was higher than the monthly average of 1,832 sellers this year through October. Sellers have also increased from the comparable year-ago period, and buyers have decreased. (…)

Insider buying and selling doesn’t necessarily presage gains or declines in a given firm’s shares, of course. But Wall Street watches the data because insiders are understood to have the best information about their companies’ prospects, and are also typically veterans of their industries with longer-term horizons.

While they have historically tended to sell more than buy, their behavior since the election diverges from investors, who have exhibited a rapid shift in sentiment and poured money into equities. (…)

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“The big increase in insider selling makes sense because we’ve been making all-time market highs,” said Aaron Jett, the Los Angeles-based vice president of global equity research at Bel Air Investment Advisors, which oversees about $8 billion. “A huge portion of their wealth could be tied up with that one stock so they could want to sell to diversify.”

It is normal for executives to sell into market strength, according to Mr. Jett. That said, a prolonged period of outsize selling by insiders would be concerning, he noted.

(…) in the last month, 891 insiders of U.S. financial companies sold shares, compared with 425 executives who added, data from The Washington Service show.

Both Mr. Clissold and Mr. Jett said it is more valuable to pay attention to a pickup in executive buying rather than selling, since sales can occur for personal, idiosyncratic reasons, while stock purchases tend to indicate confidence in the company. (…)

Punch Where the big increase in insider selling makes much less sense is that it is occurring at the end of 2016:

  1. why not wait just a few weeks to defer tax payments by 12 months to April 2018?
  2. why not wait just a few weeks to potentially avoid the 3.8% Obamacare’s net investment income tax which the Trump camp wants to eliminate?
  3. why not wait just a few weeks to potentially benefit from lower capital gains tax rates promised by Republicans?

Insiders’ use of the trading window following quarterly earnings reports has been rising as the year progressed. Sellers steadily increased while buyers became fewer and fewer. Note that the November data on the chart only includes trades after the election.

Contact: edgeandodds [at] gmail.com