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Is the Sky Really Falling?

October 12, 2010

The blog Zero Hedge reported last week that the ratio of insider selling to buying had reached an astonishing 2,341 to 1.  (The ratio dropped this week to 1,169 – 1, still a very high number.)   Three related questions come to mind:

1)  Are these numbers accurate?

2)  Should you care?

3)  Who/what is Zero Hedge?

Our answers:

1)  Yes.   As it notes, Zero Hedge is getting its data from Bloomberg, and Bloomberg in turn is pulling it straight from EDGAR Form 4 filings, then doing some simple addition.  The numbers are accurate.  (In a post on the subject in the Seeking Alpha blog, analyst Asif Suria calculates an “adjusted” ratio of only 99.84 — but his methodology is clearly different, and seems partly based on the number of transactions as opposed to their dollar amounts.)

2)  Hard to say.  Zero Hedge implies the eye-raising ratio is perhaps the most ominous sign yet for an economy that’s been on life support for the last few years:  “is anyone wondering why JPMorgan is reopening its gold vault?” And judging by the comment thread, most of Zero Hedge readers embrace this apocalyptic interpretation.  The basic idea, of course, is that insiders, having knowledge the rest of us don’t, must anticipate the value of their shares dropping precipitously.

 


Photo by Alvesgaspar. Some rights reserved.

 

But there is a counter-argument.  It’s nicely articulated in the Zero Hedge comment thread by a reader named HarryWanger: “ I think it’s rather meaningless other than people inside saw their options/performance shares, etc. getting hammered so they’ll sell on any big upticks. Wouldn’t you? . . . You don’t sell when the market’s going down, you sell when it’s going up. And what has it been doing a lot of recently? Going up. Therefore more selling.”

That seems about as plausible as Zero Hedge’s alarmist premise.  Moreover, there is the question of context.  One week, perhaps even one month or several months, is a small enough sample size that numbers are going to be prone to volatility.  And any ratio is really only meaningful in the context of comparable historical data.   How, for example, did the ratio look in 2006, when the economy was prospering; or in late 2007, as things were beginning to unravel?  (We don’t know the answer, not offhand.)

3)  In its “Manifesto,” Zero Hedge identifies itself as skeptical, critical, contrarian.  It seeks to agitate against “the tyranny of the majority, to “skeptically examine and, where necessary, attack the flaccid institution that financial journalism has become.”  Its anonymous founder, and the author of the posts on the insider trading ratio, goes by the moniker of Tyler Durden, a reference to Brad Pitt’s character in “The Fight Club.”

In other words, Zero Hedge is a fringe blog with an axe to grind.  That’s fine — blogmosaic could probably be described the same way — but one wonders why other financial news outlets have shown such tepid interest in the ratio.  Is it really because they are part of a “flaccid institution” who refuse to “liberate oppressed knowledge”? Or could it be it’s simply that there are more accurate and meaningful ways to know whether the sky is falling?

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