CEOs cashing out

Jeff Tyler Dec 7, 2006

KAI RYSSDAL: It was, in some sense, all about stock today. We woke up this morning to find Rupert Murdoch’s News Corp had agreed to an $11 billion swap with Liberty Media. The deal will give Murdoch the 19 percent of NewsCorp he doesn’t already own.

Shares in Home Depot were off 2.5 percent today after news of 20 years worth of questionable stock option accounting. And we learned executives overall are selling more of their own company’s stock than they’re buying. A lot more. They cashed-out last month at a level not seen since 1987. Last time we checked, the major indexes have been having a pretty good run. So what does it mean when the insiders are going against the tide? Marketplace’s Jeff Tyler has some answers.

JEFF TYLER: Last month, according to an analysis of trading data by Bloomberg, corporate executives sold about $63 worth of stock in their own companies for every dollar spent buying shares.

So what, you say? Some rich guys got richer? Does anyone really care?

HUGH JOHNSON: I care a lot.

That’s Hugh Johnson, chief economist at the money management firm Johnson Illington Advisors.

JOHNSON: In this case, of course, it’s not good news when you see insiders — which essentially are American executives — are selling.

Johnson considers this an important indicator of where the market is headed. But it’s just one indicator, he cautions. Considered in context with the other, more positive economic roadsigns, he expects the stock market will continue to move higher. While troubling, Johnson says, the insider trades don’t necessarily signal that the end of the bull market is imminent.

JOHNSON: In other words it doesn’t tell you when the stock market will turn down. It kind of gives you a hint that at some time, the stock market may run into trouble. But it’s certainly not tomorrow. And it may be as much as three, six or nine months away.

Not everyone agrees that the insider trades necessarily herald any trouble on the horizon. Mark Zandi is chief economist at Moody’s

MARK ZANDI: It’s not a harbinger of a lot of bad things to come. It’s probably a harbinger of the fact that stock prices have come a long way, and they’re now back to where they were at the turn of the decade.

If executives continue selling high volumes of their company’s stock over the next few months, Zandi says he’d grow concerned. Otherwise, he says business executives are just doing what any smart investor would: selling while prices are high.

I’m Jeff Tyler for Marketplace.

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