Many, big name, high quality stocks are down significantly off of their 52 week highs. If the recent guests on the financial channels are correct, then why are insiders NOT buying?
No one knows the prospects of a companys future earnings better than the insiders. This being said, I take offense to someone trying to tell me the market is a great buy. Instead, I want someone to show me the market is a great buy.
In other words, show me the money.
So, what is the real story?
We need to focus on an important component of the June CPI. On July 19th, the CPI rose 0.2%, while the core rose 0.3%.
The blame for the core being higher was the increase in owners equivalent rents. Many have speculated that the rents number overstates the core inflation rate.
Given the rise in energy prices, the rise in prices for consumer services (due to higher energy prices), and the escalated prices investors paid for real estate, I dont know how anyone could say that the core rate was overstated.
First of all, the rents portion of the core CPI is not a one time phenomenon. If it is, then investors who paid inflated prices for investment real estate are going to have to come down on what they are charging for their rental properties.
Lets try and look at this logically;
If an investor paid $650,000 for an investment property that was selling for $400,000 three years ago, even the densest person knows that the mortgage payment on $650,000 is going to be more than the mortgage payment on $400,000.
So, to cover the mortgage payment on recent $650,000 purchase, the investor has to charge more rent.
Lets go a step farther, lets assume the investor who made the $650,000 investment let the bank talk them into an adjustable rate, or interest only loan. As short term interest rates rise, so do the payments.
To believe that the rents portion of the CPI is overstated or a one time phenomenon is at best, really naïve.
On the flip side, if the rents portion of the CPI is overstated, then the investor who paid $650,000 for their investment property will need to charge the same rent as the person who owned the property for $400,000. This means that the new investor would lose money every month on their investment.
See what Im getting at here?
So, if I can see what is happening, Im sure that company insiders who buy and sell their company stock can see the effects of the deflating in the real estate bubble as well.
Some investment gurus are predicting that investor cash will ultimately be moved out of real estate and into the stock market.
Since real estate is not as liquid as stocks, the timing of this move is questionable. If, due to a slowdown, an investor cannot sell their property at the asking price, ultimately they will have to significantly lower their price to attract a buyer.
To assume that the current asking price for real estate currently on the market will ultimately end up in the stock market is again naïve.
If an investor wants to gauge the effects of what real estate has done to the consumer, one needs to look no further than the cyclical areas of the stock market.
Restaurant stocks, the home builders, and even technology are getting creamed. Should real estate investors begin to capitulate; the strength in the financials will be the next to go.
To believe that the fed will quickly reverse course and begin lowering interest rates when the first signs of a slowdown appear is also very naïve. Believe it or not, this is what the Wall Street Gang is trying to lead us to believe.
We expected, and were hoping for a summer rally. There were a lot of shorts on the sidelines. While we are glad to see todays rally, and hopefully a little more, we will continue to believe that this market will form a significant bottom in the months ahead.
When we begin to see a pick up in insider buying, we will once again get interested in this market.
But for now, Bullish Calls do not match up with Insider Selling.
