The Breakdown - Did Corporate Insiders Perfectly Predict the Market Top?

Episode Date: September 25, 2020

Today on the Brief: Initial U.S. jobless claims up to 870,000 Partial lockdowns begin in earnest in Europe and Israel The global demand for American stocks Our main discussion: Did corporate insiders perfectly time the market top?  August saw the largest volume of insider selling since 2015, with more than 1000 corporate officers offloading $6.7B in stock. Subsequently, the market has seen a 10% decline since the S&P500 all time high of Sept. 2. What’s more, according to new statistics, insider selling is happening at the fastest pace since 2012.  The question is: What do these executives know that the rest of the market doesn’t?

I think we'd do well to pay attention to what people do, not what they say. Last month, no matter what people were saying, no matter what the narrative around the great American recovery was, the leaders of the companies at theoretically the top of that recovery were selling hand over fist and getting out as fast as they could. Make of that what you will. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDess.

What's going on, guys? It is Thursday, September 24th, and today we are talking about insider selling and whether corporate insiders perfectly timed the market top. First up, however, let's do the brief. First on the brief today, initial jobless claims rose this week. Every Thursday we get the jobless claims reports which give us a picture of the economy as it's being experienced by the average sort of worker. Economists expected there to be 840,000 claims this week and instead we got 870,000 claims, which was 4,000 more than last week. Now, the total number, aka continuing claims, fell, but it fell by last. less than forecast, and that number is still twice the high from last recession.

These jobless claims are, of course, the inverse flip side of good news from the stock market, although, as we'll see, the stock market isn't doing great either, and more than anything, it suggests that perhaps we're in a different phase of the quote-unquote recovery. Ryan Sweet from Moody's put it like this. He said, we're getting to that point where the easy hiring is behind us. This next leg of the recovery is going to be much more driven by the underlying strength of the economy rather than by businesses just recalling workers. Next week, the monthly payroll report comes out and it's expected to show slower gains in September than in August. Economists are currently predicting something like 900,000 payrolls added in

September compared to 1.37 million in August. The story overall is, one of a lot of give and take, push and pull, and stops and starts, fits and spurts. Now, the payrolls report coming out tomorrow is particularly important in the context of the upcoming elections. I think that if we do see slowed growth in jobs, you're going to see incredible pressure grow for more stimulus of some kind. As Sven Henrik has said, Noble Market without stimulus. Next up on the brief today, let's look at the return of lockdown. and this obviously has dramatic implications for the future of those jobless claims numbers. So what's happening?

We are seeing the emergence of more restrictions, particularly in Europe. The Wall Street Journal featured an article this morning called Europe Fight Second Wave of COVID-19 without full-blown lockdowns. What's been happening is an increase in coronavirus cases. The seven-day rolling average of confirmed cases per 100,000 people is up significantly in the UK, France, and Spain, with a significant resurgence in the last month. Now, within these countries, cities are trying targeted local interventions, things like 10 p.m. curfews, limits on social gatherings. In the UK, there are currently about 13 million people who are under some form of restriction. And while there have been some successes like Aberdeen and Scotland who are able to reduce infections sufficiently to remove restrictions,

others have seen much patchier success. Perhaps more concerning, however, are places where the resurgence is severe, such as Madrid, where 23% of tests currently are coming back positive, where they're seeing 11,000 new cases a day, and one in four hospital patients is there with COVID. For the next two weeks, the 860,000 residents of that city can leave only to go to work, to go to school, or go to the doctor. They've also banned gatherings of more than six people. Paris is also likely to impose banning of gatherings of more than 10 people. Israel, meanwhile, has announced an even stricter second lockdown. In that country, cases are up to 7,000 per day, and they have shuttered all non-essential workplaces. There's also huge fights over communal worship and in particular protests.

There have been mass demonstrations against Netanyahu, and of course this is a political football now, as it is becoming a question of politics, not just public health, around whether these protests are allowed to continue. The reason I think it's worth tracking this on the breakdown is that this is the X factor that could absolutely wreck markets and wreck our economic expectations over the next few months. It's hard for me to see how the American public would accept even a mild wave of secondary lockdowns,

but still, this is obviously the biggest thing lurking behind the lack of strength in the economy. Last up on the brief today, just a quick one that I think is a great reminder of how hungry the world remains for American stocks. Bloomberg featured the story today of a 32-year-old billionaire in their piece, a 32-year-old finance tycoon looms in obscure stock market. It's the story of a financier who built his business in Kazakhstan and Russia and then used a reverse listing to get public in the U.S. Since then, he has become one of Russia's 10 largest brokers and the largest in Kazakhstan with 152,000 clients as of June.

The big thing here is that a lot of that popularity has to do with the access that he provides to American IPOs. A lot of our conversations these days have the background subtext or geopolitical context of America's withdrawal from the world, right? Questions of the USD's place as the world's reserve asset. However, stories like this are reminders of just how much the rest of the world covets American markets. It's a really interesting one. I recommend you go check it out. With that, let's shift to our main discussion.

Did corporate insiders perfectly time the market? top. First, let's acknowledge that it has not been a good month for stocks. This morning, stocks fell again at the open, and this represented a 10% drop from the S&P 500 September 2nd record high. Concurrently, 10-year treasury yields are lower and the dollar was higher. This, of course, suggests more demand for those safe haven assets. Now, there have been a lot of interpretations for why September hasn't been good for equities. One obvious one is questions about the underlying real economy. It's hard to argue for a full V-shaped recovery when you have 870,000 jobless claims in a week. That said, markets have been watching this sort of persistent unemployment for a really long time in not

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Israel, and I do think that markets have a genuine and justified fear of something like that happening here in America. Another reason has to do with election volatility fears. We are entering the last and most aggressive, strange, confusing, nerve-wracking phase of the American elections. And if nothing else, the media environment around them is incredibly heightened. That expectation of volatility could absolutely be a factor in why stocks have been going down this month. Fourth and finally, we live in a world where markets are accustomed to growing stimulus, not the retreat of stimulus. And so far, it hasn't seemed that the fiscal size has been willing to get itself together to actually make something happen.

The drag down could be in part the market expecting that we're simply not going to see another wave of fiscal stimulus before these elections actually happen. Of course, all of these potential explanations are radically different than the narratives that we saw in August. In August, it was all about the triumphant return of the American economy and the stock recoveries and blah, blah, blah, right? That said, as it turns out, not everyone was telling those stories and living by those narratives in August. On September 4th, the Financial Times published a piece called Downbeat U.S. executives dump most stock in a month since 2015. So in August,

U.S. executives sold 6.7 billion of their own companies. This represented 1,042 chief executive CFOs and company directors. As I mentioned, the total amount was the highest since 2015, and the number of executives selling was the highest since August 2018. This represented a huge cross-section of industries and companies. It wasn't just one industry that maybe thought that it was a little bit overvalued. Separate data from the Stone X brokerage showed that insider sales in Q2 from the NASDAQ 100 were at 10.4 billion, which was a 171% increase. from the same quarter the previous year. Keep in mind, all of this was happening the same month that total market capitalization to GDP reached its highest ratio ever, higher, in fact, than the dot-com

bubble. This was the picture we were getting about August at the very beginning of this month. Subsequently, we've seen this continue. On September 18th, Zero Hedge published the ultra-wealthier selling billions of dollars in stock, and just today, new research came out. from sentiment trader around SEC numbers that shows that corporate insider velocity is the fastest in eight years. Over the past four weeks, executives sold their companies at the fastest rate since 2012. What's more, this rate is accelerating. Last week, according to these numbers, those executives unloaded 975 million, which was more than double the previous week. So how should we look at this? I think that broadly speaking, there are two ways to

interpret it. The first has to do with upside opportunity capture. As Vincent Delard, who's a macro strategist for Stonex put it, these executives were harvesting a once-in-a-millenium bonanza. So this way of interpretation is saying that, look, these guys are savvy, they're in the business of making money, and they saw an opportunity to make some money by taking some wealth off the table, not something that we should be particularly concerned about. There is, of course, a very different way to interpret this, which is a belief that market valuations were completely out of whack, and a belief that what's to come could get very gnarly. Put differently, if you believed that markets were going to continue to go up, you wouldn't sell unless you had an immediate short-term need. It is unlikely that all 1,042 of these

chief executives that the Financial Times was looking at had some sort of immediate need. It is far more likely, that when they surveyed the market, when they looked at valuations, when they looked at the fundamentals underlying the rally or lack thereof, that it made sense to them to take advantage of this absurd high market capitalization, these absurd high valuations, and get money out before the other shoe dropped. Ultimately, we don't know. Executives aren't forced to say why they sell when they sell. What I can say, however, is that I think we do well to pay attention to what people do, not what they say. Last month, no matter what people were saying, no matter what the narrative around the Great American Recovery was, the leaders of the companies at theoretically the top of

that recovery were selling hand over fist and getting out as fast as they could. Make of that what you will. Anyways, guys, that's it for today. I appreciate you listening. And hey, Hey, if you are enjoying this show, head on over to iTunes or wherever you listen to podcasts and hit that rating button. It makes a huge difference if you like the show specifically or if you want to give me feedback on it. Use the reviews. I really appreciate hearing from you, and I'm so excited that you decide to spend this time with me each and every day. I've got a great interview coming for tomorrow, so keep your eyes out for that. And until then, guys, be safe and take care of each other.

Peace.