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Friday, January 23, 2009

Insider stock purchases - a buying signal or an invitation to getting fried signal in the current market?

CNBC and other financial media are abuzz this week with the recent purchases of Bank of America shares by company insiders. Typically, insider buying is considered a bullish sign on stock since insiders are putting their own money on the line. However, as the Wall Street Journal article points out, in the current environment, be very careful and avoid following the insiders. The past few months have clearly shown that the current crisis is more serious that many of the value fund managers, insiders and other investors had imagined. Insiders from various companies, including Wachovia, Thornburg Mortgage and others rushed in to buy their company stocks thinking that their low valuations were unjustified and buying was the right thing to do. However, the current crisis has shown that insiders aren't better in identifying stock bottoms and if anything, they are often too early in buying. Moreover, these days, insiders seems to be engaging in stock purchase more as a show to encourage others to jump in but again, it pays to be careful since while insider executives have tons of money and can afford to make purchases, most of us don't have sufficient money to throw away, especially now when our bank and retirement accounts are already depleted.

Lewis and his compatriots purchased more than 513,000 shares of common stock Tuesday, as The Wall Street Journal’s Dan Fitzpatrick reported. BofA’s shares rose 31% Wednesday, fueled by a wider rally that also lifted Citigroup, J.P. Morgan Chase and other financial stocks.
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Let’s look at just a few, brief examples. Last November Citigroup Chief Executive Vikram Pandit and his deputies bought 1.3 million Citigroup shares after the stock had fallen below $9. Pandit alone spent $8.4 million. But that didn’t prevent a deeper rout in the stock nor the need of an additional $301 billion in government backstops for Citi’s toxic debt. Oh, and the stock closed Wednesday at $3.67, and that’s after rising 31% on the day.

Directors at Wachovia snapped up hundreds of thousands of shares in October and early November, only weeks before the bank was shoved into an arranged marriage, first with Citigroup and then Wells Fargo. At Washington Mutual, the bank’s decline was presaged by a months-long buying spree by directors and officers–none of which persuaded investors or depositors of WaMu’s viability long enough to forestall an FDIC near-seizure and fire sale to J.P. Morgan.
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The lesson? That investors believe that no one, including executives, know enough about the market these days to confidently predict all the factors that could affect the future of any company.

For complete article, see:

WSJ.com: Bank of America: Can a $15 Billion Problem Be Solved by Buying 513,000 Shares?

Related article:

SeekingAlpha.com: Lessons the Market Taught Us in 2008

posted by Ruby @ 10:56 AM

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