If Insiders Know What's Happening, What Does It Mean When They Sell?

Because executives in public companies have access to data that the rest of the public does not have, any time they buy or sell their own stock, they are required to file notice of those transactions with the SEC. This lets the rest of us know what the insiders are doing, and - by extension - be able to make informed guesses about what those transactions mean.

Multiple news sources report that insider selling - as reported to the SEC - outnumbers insider buying by a 30:1 margin.

Here, Trim Tabs CEO Charles Biderman discusses what it means for the retail stock purchaser. (Trim Tabs actually tracks this data for investors.)

You DO have Stop-Loss orders in place now, don't you?

Income Up and Tax Receipts Down. Huh?

According to this chart from the Department of the Treasury, income tax receipts were down substantially in July. In fact, it's the 4th straight month of declines and we are now well below levels seen at the bottom of the 2002 recession.

According to this report from the Bureau of Economic Analysis, personal income was up in July, albeit marginally.

How can income be up marginally while income tax receipts are down significantly?

I guess it makes sense in a world where the cure for a hangover is more whisky.

Weekly Update 29 August 2009

Before I get to the meat of today's update, I want to bring your attention to an article at Zero Hedge regarding the price of the S&P 500 as a ratio of money in the economy. Here's the link to the article.

For those of you who don't get off on all things financial-geeky, here's the gist of it:

The Federal Reserve is responsible for "...conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates,".

The S&P 500 is a proxy for the entire stock market, because it is an index composed of the 500 largest publicly traded companies. You can see the exact make-up here.

When the value of the S&P 500, (and by extension - the overall value of the stock market), is expressed in terms of the money supply, (which is controlled by the Federal Reserve), then the market has actually done nothing since the crash of 2000 and is in fact significantly lower than it was during the depths of the 2002 recession. In other words, all the extra money that the Federal Reserve has pumped into the economy has done NOTHING for real values.

On to the News Of the Week

WHAT IT IS: As I mentioned last week, the S&P 500 is currently trading at about 143 times earnings. At the height of the dot com bubble in the late 90s, the highest the S&P ever traded was 45 times earnings.
WHAT IT MEANS: Historically, the S&P trades at an average of 15 times earnings. In other words, this market is grossly overheated and a massive correction is due.
WHAT YOU CAN DO ABOUT IT: Many of you lost a lot of money in your portfolios last fall, and have watched in relief as the market has regained some of that lost ground. I want you to protect yourself this time, and not make the same mistake when the market collapses again. Here's how: You must place a "Stop Loss Order" for every stock you own. So what is a "Stop Loss Order"?

A Stop Loss is an order to sell the stocks you own IF and ONLY IF the price falls to your Stop Loss price. So for example, if you own 100 shares of FroBozz Corp, and it is currently trading at $45 a share, you might want to enter a Stop Loss order for 100 shares at $40.50, which would be 10% below the current price. If the price falls to $40.50, then your Stop Loss will be executed. If it doesn't fall that low, then you will continue to own the stock.

How do you calculate the price at which to enter your Stop Loss? That is a matter of personal preference. William O'Neill, in his classic book How to Make Money in Stocks, recommends using an 8% stop. Another way to calculate a stop amount is by looking at a chart and finding historical support levels, then placing your stop just below those levels. A more sophisticated form of stop-loss is the trailing stop. A trailing stop trails the price of the stock as the price rises, but does not move if the price of the stock falls.

Returning to our previous example of FroBozz Corp, let's again assume it is trading at $45. You could place a $4.50 Trailing Stop Order. If FroBozz rose to $50, then your Trailing Stop would rise with it, and would now be at $45.50. If the price of the stock then falls back to $45, your Trailing Stop would be executed at $45.50.

The subject of Stops is a little more complex than this, but that should give you some idea of how to protect your profits rather than take a huge loss. Make no mistake - a massive correction is coming in this market. Don't get caught this time.

Monday morning - call your broker - place Stop Loss orders. Don't let him talk you out of it.

Till next time.

DHS - Surfing to Protect Us

Some of you may remember that last spring, the Department of Homeland Security issues a threat assessment about rightwing extremism. The title of the report was alarming all by itself: Rightwing Extremism: Current Economic and Political Climate Fueling Resurgence in Radicalization and Recruitment.

Your federal government, diligently looking out for your safety. And how did they arrive at their conclusions?

[wait for it]

[wait for it]

By surfing the web!

That's right, kids. The same people who can give $700 billion dollars to Hank Paulson so he can make sure his buddies on Wall Street still get their bonuses can't spend any more than the cost of a web connection to research threats to the republic. Thanks to a Freedom of Information Act request, we now have a list of all the "research" Janet Napolitano's DHS did before labeling half of America "security threats".

Don't these people have the CIA, FBI, NSA, ICE and god-knows-what-other police and paramilitary forces at their beckon call? And they best they can come up with is a list of websites?

This is what it has come to: Government of the clowns, by the clowns and for the clowns.

[Janet Napalitano on a bad hair day]

The Stratified US Consumer

The money quote from a post at Zero Hedge today:

...so far the lower and middle classes have borne the brunt of the recession. Is it safe to say that the wealthy have managed to game the system yet again and avoided a significant loss of wealth, while maintaining sufficient access to credit?

You bet it's safe to say that.

Other interesting facts from this report:

A sobering observation is that while 90% of the population holds 50% or more of its assets in residential real estate, the Upper Class only has 25% of its assets in housing, holding the bulk of its assets in financial instruments and other business equity...The other observation is that only 10% of the population has truly benefited from the 50% market rise from the market's lows: those better known as the Upper class.


And to add insult to injury, the segment of housing that has been impacted most adversely in the current downturn, is lower and middle-priced housing: that traditionally occupied by the lower and middle classes. The double whammy joke of holding a greater proportion of net wealth in disproportionately more deflating assets is likely not lost on the lower and middle classes.

Weekly Update 22 August 2009

About That Bull Market...

Hello folks. I hope this note finds you well. I literally have too much news to summarize this week, so I am going to give you lots of appetizers instead of one big entree'. Here's the headline we will start with.

Housing Gooses Stock Market

WHAT IT IS: The market rose on Friday on news that sales of existing homes jumped at the fastest rate in 10 years.
WHAT IT MEANS: The WSJ article I linked here has a side-bar with this odd headline: "...But Prices are Still Falling..." They make it sound as if the link between falling prices and increasing sales is mysterious. Quick economics lesson: When prices are too high, buyers stay away. When prices come down far enough, buyers come back. It's that whole supply & demand thing. So what this story means is that housing is finally starting to get affordable.
WHY IT MATTERS: Well, here’s where it gets tricky. The perma-bulls, talking heads and government shills say that it means that the economy is stabilizing and things are looking up. But that is deceptive. For every positive sign the economy is stabilizing, there are hundreds that say we are not nearly through the storm yet.

This week I read an excellent analysis called "The New Bull Market Fallacy". It is a lengthy read, but well worth the time. Here are some juicy tidbits I pulled from it.

Housing

• Wells Fargo, via their purchase of Wachovia, now holds about $115 billion in Option ARMs on their books. They are valuing this stuff at 85 cents on the dollar - a 15% mark down.
• The Fed took a bunch of mortgages onto their books as collateral when they swapped Treasuries for Mortgages with the big banks. They took a 30%-40% markdown on the Maiden Lane properties.
• JPMorgan-Chase has $90b of Option ARMs on their books.
• Citibank is marking their residential and commercial real estate loans at 90% of loan value.
• Housing prices nationwide have fallen an average of 50%.
• The International Monetary Fund says that there will be $4.1 trillion in real estate related losses in 2010. So far, only $1t of that has been marked.
  

If Wells values their Option ARM portfolio at $115b after a 15% mark down, in reality it is probably worth something in the neighborhood of $67b. If that were the case, Wells Fargo would be insolvent under the banking rules prior to April 1st, but since the FASB changed the rules on that date, Wells gets to carry this stuff on their books at any value they want to, rather than at market value. Thus, they get to pretend to be solvent. Same situation with JPMorgan. Same with Citi and most of the other big banks that got all the government money are in the same situation. It is nothing but accounting tricks and collusion with regulators that keeps these giant banks afloat.

Here's Professor Elizabeth Warren explaining on MSNBC how the banks cheat.

23% of all single family home mortgages are greater than the value of the homes. Deutsche Bank analysts have predicted that such "underwater loans" could reach 48% of all mortgages by Q1 2011.

Finally, the "second wave" of mortgage resets - Option ARMs and Alt-A's - is scheduled to start in 2010. The dollar amount of mortgages scheduled to reset in this second wave is actually higher than the amount of resets during the sub-prime wave.



What are those banks gonna do then? We the people have already been soaked for well over $2 trillion because these vampire banks were supposedly "too big too fail". What happens next year when they are in even worse shape?

Oh, and the FDIC - which as recently as April said they'd need no more money - is bankrupt as of last Friday with the failure of Colonial Bank. Prior to the failure, they had $641m in assets. Colonial alone had over $2b in deposits which the FDIC had to cover. Betcha didn't hear about that on the news, did you?

Jobs

The number of jobs lost in July was less than the rolling 3 month average, but the reason for the drop is that the number of people who have quit looking for a job increased dramatically. These people are not counted in the government's new unemployment statistics.

Growth?

The federal government increased spending by 11% year over year in the second quarter. Many states are bankrupt. Tax receipts at the federal level are down 28% year over year, while the federal deficit has tripled.

Over the last several weeks, as the market makes new high after new high, insider selling outnumbers insider buying by about a 23:1 margin. In other words, the people who know what is coming are selling.

The S&P 500 as of the close Friday is valued at 143 times earnings. By comparison, the historical average of the S&P 500 runs about 15, so the S&P 500 is currently valued 10 times higher than its historical average. Is this supposed to be a bottom? Historical values for market bottoms run about 8 - 9 times earnings.

According to this chart, China is starting to divest themselves of US Treasury debt. Since they are the largest holder of US debt, if the US defaults, they have the most to lose. If the US economy is strong and growing, it's kinda stupid to divest themselves of treasuries.

By every possible definition, the stock market is once again a bubble. The government and the bankers, (**cough** Goldman-Sachs 8*cough**) have succeeded in creating yet another bubble. The 90s bubble was dot coms, the early 2000s was real estate, and this one is nothing but government money. It will end badly.

WHAT CAN YOU DO: This is important. If you are invested in the market, please please please protect your profits. That means put a Stop-Loss order into the market now. When the correction comes - and it WILL come - it will be mean, nasty, ugly and fast. A lot of people lost a lot of money last fall, and it will happen again - likely sooner rather than later. Don't get caught short.

WHAT ELSE CAN YOU DO: Save like crazy. Get out of debt. Don't buy on credit. All those things our grandparents learned in the 30s, we get to learn again.

Till next time...

Whistling Past the Graveyard

Today I am laughing - yet again - at the grand farce that passes for "law" and "justice" under the federal government. The theme of today's entertainment is banking. I know, you’d probably rather gnaw off your own leg than read about banking, but trust me – you’ll get a kick out of this.

Our banks - at least the ones who took all our tax money last fall - are members of the Federal Reserve system. It's called Federal because its territory is the entire country. It's called Reserve because it is a banking system based on reserves.

Reserves is the word used to describe the money that a bank is required to keep on hand to cover the deposits made by their customers. The idea behind a reserve is that if you deposit $100 in the bank, you might want to withdraw that $100 later. If you show up at the bank wanting to withdraw your money, the bank better have money to give you. It may surprise you to know that the banks are not required to keep a dollar on hand for every dollar that is on deposit. They are required to keep some fraction of that money on hand. That is why our banking system is called "fractional reserve banking".

In the Federal Reserve system, that fraction ranges between 3% and 14%. In other words, for every $100 deposited with the bank, the bank is required to keep between $3 and $14 on hand.

(By the way, I am simplifying quite a bit here. If you are really interested in the arcana of reserve requirements, there are some interesting links here and here. And God bless you if you are.)

So what happens to all the rest of the money? The bank loans it out. This is where the alchemy of fractional reserve banking occurs. Watch carefully now - nothing up my sleeves.

Assume we have two people, you and me. I buy things and take out loans, and you sell things and make deposits. And finally assume we have a bank, Bank A, that will take your deposits, will make loans to me and has a reserve requirement of 8%.You deposit $100 with the Bank. Bank A keeps $8 on reserve, and loans me the balance, $92.

I buy $92 worth of goods from you with that money and you deposit that $92 in Bank A. Bank A keeps 8% of that money on deposit and loans me 92% of it, about $85. I buy $85 worth of goods from you with that money I borrowed. You take that money and deposit it in Bank A.

Bank A takes your $85, keeps 8% of it, and loans me the remaining 92% of it, about $78. I buy $78 of stuff from you with the money I borrowed. You deposit that $78 in the Bank. They keep 8% of it and loan me the remaining $72. I buy $72 worth of stuff from you, and the game goes on and on and on...

So from a single $100 deposit, Bank A can make over $1000 in loans. If I repay those loans, then the bank has magically created profits of over $1000 on a mere $100 worth of deposits.

Pretty sweet little business, huh?

But what happens if I don't pay those loans?

Ah, here's where the magic goes all wanky. Instead of creating $1000 in profit out of thin air, the banks have created $1000 in debt out of thin air.

Most banks require that you put up some collateral before they give you a loan. If they loan you money to buy a car, they keep title to the car until you pay off the loan. If you don’t pay the loan, they take your car and sell it to satisfy the loan. Sometimes the car fetches enough to pay off the loan, sometimes it doesn’t.

You pays yer money and you takes yer chances.

This is where the Big Banks got caught. They loaned money to people who couldn’t repay it so that they could buy houses that were overpriced in the first place. Who would have ever imagined they'd have problems?

So why did they make such stupid loans?

Greed, plain and simple. They were lusting after the profits they could create out of thin air and were ignoring the risks that they were creating debts out of thin air instead.

Of course, it wasn’t $1000. It was more like $4 trillion.

According to Federal Reserve rules, if the amount of money a bank actually has on reserve falls below the minimum required amount to cover deposits, then that bank is - by definition - insolvent and must be shut down. There is more to it than that, but that is the important part.

Last fall, the Big Banks were insolvent. But since they are big, and since they own most of Congress, most of the executive branch, and probably several judges, they maneuvered their way out of that tight spot. They arranged it so that you and I – people who had nothing to do with the loans – would bear the losses.

Like I said, it’s a pretty sweet business.

News of the Week coming up tomorrow...

Weekly Update 1 August 2009

This week we've got a doozy, and it is related to the Cash for Clunkers program. Congress appropriated a billion dollars - Yes, it is tax money. Yes, you are paying for it. - to pay car dealers extra money when they take an old car on a trade-in for a new car. The theory is that by taking money from the middle class taxpayer and giving it to GM and Chrysler, everyone benefits. (Don't try to understand it - it is so stupid only the extremely educated and the extremely powerful can pretend to get it.)

"The course of history shows that as a government grows, liberty decreases. – Thomas Jefferson"

The program has been so popular in its first week that billion dollars has already been soaked up. Congress, in its infinite stupidity, has added another two billion dollars to the program.Oh joy.

But that's not the real reason for the update this week. No, the real reason is the website that the government has established to provide information on the Cash for Clunkers program: cars.gov. I am intentionally NOT providing a link because you REALLY don't want to go there.

WHAT IT IS: If you use the cars.gov site, your computer then is considered to become the property of the Federal Government and they assume the right to access anything and everything on that computer.

This is not an exaggeration.
This is not a scare tactic.
This is not a mis-reading or twisting of information to suit my own purposes.

Here is the actual text from the cars.gov website describing the terms of use for the site:

"This application provides access to the DoT CARS system. When logged on to the CARS system, your computer is considered a Federal computer system and is the property of the US Government.

Any or all uses of this system and all files on ths system may be intercepted, monitored, recorded, copied, audited, inspected, and disclosed to authorized CARS, DoT, and law enforcement personnel, as as authorized officials of other agencies, both domestic and foreign."

WHY IT MATTERS: My simple goal for this weekly update is to highlight the news of the week that affects our freedom. I focus on the ways the government, (and their masters on Wall Street), steal our freedom by stealing our wealth. So, do I really need to spell out why this matters?

The federal government has now ceased to even pretend to be the servant of the people. They now treat us as slaves.

• They take our property when they want: cars.gov.
• They take our money when they want and give it to whomever they wish: the bank bailouts.
• They take our liberty when they want: habeus corpus is suspended for anyone suspected to be a “terrorist threat".
• They even take our lives whenever they want: Waco, Rudy Ridge and who knows what else that didn’t make the headlines.

WHAT YOU CAN DO: Two things - both very simple, but one easy and one very difficult:
First, refuse to use cars.gov. This is for your own protection. Tell everyone you know about this property grab by the government. Forward this link to your mailing list.

Second, make the decision today to be a free person and not a slave. A slave has only whatever freedom the master chooses to give it. If you acknowledge the government as your master, then you are already their slave.

But if you instead claim that your freedom belongs to you simply because you are human, and - most importantly - if you live that out, then you are a free man.

Just because they don’t use the terms “slave” and “master” doesn’t mean they don’t act as if they are the masters and we are the slaves. It doesn’t matter what they say, it matters what they do.

Freedom starts between your ears. No one can MAKE you be free, nor can you VOTE yourself freedom. You must choose to be free and then live that way. Starting today, choose to be free. Choose to live, think, work, act and play as a free person and not as a piece of property that the ruling class in Washington and Wall Street can move around and dispose of as they wish.

Do I sound like an extremist to you?

Perhaps I am. If so, I am in good company. A couple of quotes from Barry Goldwater.

"A government that is big enough to give you all you want is big enough to take it all away."

"Extremism in the defense of liberty is no vice. Moderation in the pursuit of justice is no virtue. "

Yours for Freedom...