Why Is The Boss Selling?

By Daniel Kadlec

When the boss talks you're supposed to listen, or at least pretend to, right? Well, the boss has plenty to say about the stock market these days--mostly that it's too high--so pay attention. After all, the top dog must have known something to earn that office with a view.

What do corporate chiefs know about the market? Individually, very little. Star honchos like Jack Welch at General Electric and Bill Gates at Microsoft can't time the Dow any better than the Beardstown Ladies. But they clearly know more about their own companies than anyone on Wall Street. So their actions as a group say something about the market as a whole. That's why analysts monitor things like insider stock transactions, new stock offerings and corporate stock buybacks. Even for wealthy CEOs, the object is to buy low and sell high, whether in managing the company's coffers or their own.

Lately, corporate managers have been selling at a fever pace, a sign that they believe the market is vulnerable. For months, insiders (corporate officers required by law to report when they buy or sell their company's shares) have been selling more than three shares for every one that they buy--the highest level in a decade, says Bob Gabele, who tracks such activity for CDA/InvestNet. "The selling has been broad and active for several quarters," Gabele says. "It really does look like a trend." Even at such blue-chip companies as GE and Procter & Gamble, where insiders rarely sell, they've been dumping stock. There are many reasons for an executive to sell: new house, college tuition, balancing his or her portfolio. Still, most have some flexibility, and hard-core selling is never a good sign.

Meanwhile, the pace of corporate stock buybacks is slowing. In the first quarter, companies announced plans to repurchase $39 billion of their own stock, down from $52 billion during the same period last year. At the same time, companies are flooding the market with new stock: $34 billion in the first quarter, vs. $28 billion last year, according to Charles Biderman, president of Liquidity Trim Tabs, an investment newsletter. Buying less, selling more.

Another big (though counterintuitive) signal that executives believe stock prices have gone too high is the recent wave of bank megamergers. Little or no cash will change hands, only some high-priced stocks. Had any of the parties involved been required to lay out real money, they would have walked. Biderman also notes that the value of stock swaps relative to cash mergers is off the charts this year. "They don't want to buy shares with cash," he says of acquisitive CEOs. "They'd rather sell their own stock to make the deal." In similar fashion, companies now include hefty sums of stock options in the pay of an array of employees. Sure, it's what the people want. But technically, the company is selling. Biderman estimates there are $1 trillion worth of unexercised stock options out there, a staggering sum for the market to absorb when those execs cash out.

Could stock prices chug higher despite these signs? Sure. It wouldn't be the first time the boss was wrong. But caution in the corner office should at least serve as an antidote to the infectious exuberance at the barbershop.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at [email protected]