Investors all have sure signs for market tops. Lately, the equity crowd is watching an inverted yield curve as a harbinger of recession and the inevitable market correction. Other savants point to the disconnection between the market movements of Facebook, Amazon, Apple, Netflix and Google and the rest of the stocks in all three equity markets. Private investors look at the excessive debt to capital ratios in private capital structures and the resulting spike in valuation multiples. Debt guys are spooked by a US central bank that is pulling liquidity out of the system by raising rates and shrinking the Fed’s balance sheet. Free traders bemoan the effect of tariffs on globalization and the possible return to trade cartels among regional trade allies. All of these are signs of something big, but they are too theoretical for me. I need something much simpler and closer to someone’s wallet to convince me it portends a certain market reversal.
Directors Are Buying, But Not With Their Own Money
A recent snippet in Barron’s, however, identifies a trend that I think is foolproof advice about the market top. US public companies have announced $835 Billion of stock buy backs so far this year after $810 Billion in all of 2017. Barron’s thinks the buy backs could exceed $1 Trillion before the year is over. By itself the buy backs are bullish– the Boards of Directors think their stocks are enough of a bargain to use their corporate cash and debt (their liquidity) to buy up their own shares thereby, in many cases, substituting debt for equity in their capital structure. That is a bold bet and one that smart people won’t make without either huge conviction or else they are using other people’s money.
So what if I also told you that Barron’s believes that executives at those very same companies are selling their shares and options into those massive buy backs approved by directors and financed with shareholders’money? This may be a better indication of a market top because managers are doing just the opposite from the company directors – they are liquidating equities and options and putting shareholders’ money in their wallets. Here is how Barron’s sees it in their October 8, 2018 edition:
“ In light of the big jump in corporate stock purchases, it is notable that executives at those companies are doing the exact opposite: dumping their shares at a record clip. Again, according to TrimTabs, corporate insiders sold $10.3 Billion worth of stock in August. That is the highest amount of selling in the month of August over the past 10 years…The previous high was $9.3 Billion in August of 2017.
I have always thought it was a better measure of conviction to see how someone is betting his wallet than how he is betting his reputation. Should we call a market top?