RE: Thursday''''s "strength"Dear L4, I beg to differ on two of your assumptions. First, your comment:
"Chances are good that the buying was set up for him [Len De Melt] to get rid of these shares." Please let me know how that is done, because I want to get in on that too. Finding one or more buyers who would be willing to pay .34-.35 a share, even though it traded at .27 the previous day, is no small trick. How does one go about that?
"Hey, Charlie, do me a favor. I want to dump a few hundred thousand shares at .34-.35, but it's trading at .27. Be a good guy and buy it at 7-8¢ (25%!) above the market so I can get out." Somehow, I don't think so. As the saying goes, "Finding someone to suck the poison out of your butt after you've been bitten by a rattlesnake is finding a true friend indeed." I have some good friends, but I think their loyalty stops at the trading desk. For some reason or other, some speculators have a theory that companies can run their stock up and down whenever the mood suits them. Maybe it's a speculator's way of explaining otherwise unexplainable (by them) moves in a stock.
"Damn, ASD just — [ ] jumped [ ] dropped (check one) — 7¢ a share!" It must be Don Gee and his gang of thieves again!" I prefer to think it's just the Law of Supply & Demand in action. But that's probably too boring for some people; it lacks the sizzle that makes speculation so interesting. Look, guys, when they take their pants off, insiders look just like we do. They curse the market when things go down and pat themselves on the back when things go up. If they have a true larcenous streak, they'll be trading through a secret Swiss bank account and you'll never know. You can be sure that insider transactions reported to SEDI (System for Electronic Disclosure by Insiders, operated by Canadian Securities Administrators) are squeaky clean.
Recent ASD Insider Transactions Any evidence of impropriety would be cause for investigation. Insiders like to make money, but not from behind bars. I'm sorry, but you'll just have to find another reason why stocks go up and down — it certainly isn't because insiders are so smart. Which brings me to your second assumption that insiders' transactions are such meaningful indicators.
The Myth of Insider Trading by Greg Forsythe, CFA, Senior Vice President, Schwab Equity Ratings®, Schwab Center for Financial Research July 25, 2006 [extract] Investors have long been intrigued by the idea of profitably mimicking the legal (and highly regulated) trades of corporate insiders. The rationale is that nobody should know the future prospects of a company better than its top executives. So, the logic goes, if these knowledgeable insiders are using their own cash to purchase shares, they must know that the current stock price does not fully reflect future company results or other positive announcements. Sounds plausible. But don't confuse anecdotes with systematic research. Numerous academic studies on the predictive power of insider trading data have produced mixed results. Some have found insider buying to be relevant. Others have found the trades of chief executives to be more noteworthy than those of lower-level executives. But none have found insider trading to be the Holy Grail of stock selection indicators. Insider trading: overrated signal So why is insider trading data an overrated signal for investors? First, we must question the common assumption that trades by corporate executives are strictly motivated by the desire to earn trading profits from inside information. Securities and Exchange Commission (SEC) regulations prohibit obvious examples of such behavior. In fact, many insider purchases are driven by factors such as company loyalty or rules that require executives to purchase and hold a certain amount of company stock. On the sell side, insider motivations are even more ambiguous. Many insider sales are driven by the desire of corporate executives to diversify personal portfolios that are overweighted in their employer's stock. Finally, the popularity of stock option grants over the last 15 years has introduced new insider trading signal distortions when executives exercise their options. A second problem with insider trading signals is the blind assumption that they represent new and unique information. I can think of at least 10 investment research and newsletter vendors that report or interpret insider trading activity. Such data availability almost ensures that any new information reported to the SEC is quickly reflected in stock prices. A more subtle point is that insider trades often provide little or no incremental information to the astute investor. Recent academic studies show that insider trading is highly correlated with various equity valuation measures. For example, insider buying is more prevalent among stocks with low price/earnings (P/E) ratios than high ones, while insider selling is more prevalent among high P/E stocks than those with low P/Es. Schwab's own research has found that insider trading signals add little or nothing to the valuation criteria already incorporated into Schwab Equity Ratings.
The Use of Information System Technology to Develop Tests on Insider Trading and Asymmetric Information James R. Marsden, Y. Alex Tung Management Science, Vol. 45, No. 8 (Aug., 1999), pp. 1010-1025 [extract] Results indicate that insiders were able to outperform the market in cases where penalties for being caught using inside information were not considered. In cases where penalties were considered, however, no significant performance differences between insider and non-insider trading performance were observed.
Whose Advice to Follow by Greg Forsythe, CFA, Senior Vice President, Schwab Equity Ratings®, Schwab Center for Financial Research June 24, 2004 [extract] It's logical to assume that corporate insiders buying stock think it may be undervalued, though insider selling may or may not reflect a view that the stock is overvalued. After all, a corporate officer may sell shares for reasons such as option exercises, portfolio diversification, or buying a new house. Empirical research on insider trading has been mixed, but most studies conclude that insider buying can be a useful indicator, while insider selling offers little predictive power.
L4, I apologize if I criticized your post too harshly. After years of reading similar comments, I couldn't help but shake my head in dismay. Those are common misjudgments and they can point away from the true nature of open markets; they way they trade, the way prices react, and the forces that move them. Don't let your judgment be clouded by misconception. —Staylorpi
About Acero-Martin