Insiders’ Buying Spree Says a Lot About Economy

The stock market feels bad and looks worse, but corporate insiders don’t buy the bearishness. Instead, what they’re buying is their own companies’ stocks--and at the fastest pace since early in 1991.

The Insiders newsletter of Ft. Lauderdale, Fla., which tracks corporate executives’ investment activity through the filings those insiders must make with the government, says its index of insider activity hit 52% in late July and stood at 48% this week.

The latest readings are the highest since March, 1991, and are up from 29% in April. At 48%, the index indicates that 48 out of every 100 insider stock transactions over the last five weeks were purchases, while 52 were sales.

Though sellers still predominate, they almost always do. That’s because the Insiders’ index measures only open-market transactions, and doesn’t count the purchases insiders make through below-market-price stock options--a primary means of acquiring shares for most executives.

Thus, when nearly 50% of insiders are buying their own companies’ shares at market prices, analysts figure real buying activity is much higher once you add in the untracked stock-option activity.

The clear message is that insiders see their own stocks as good buys, even though Wall Street’s mood is dour because of the weak economy and uncertain political climate.

Because the insiders know best about their own companies’ prospects, they have historically been savvy market timers. In December of 1990, for example--at the depths of the bear market--insiders were furiously buying their own shares, sending the Insiders’ index up to a stunning 75% reading. Stock prices rocketed one month later with the start of the Gulf War.

Is it deja vu all over again? Norman Fosback, editor of the Insiders, says that while his index still is well below December, 1990, levels, the renewed buying this summer shouldn’t be ignored. “So long as the current insider buying wave continues, the odds favor a market advance,” he says. In other words, “buy low, sell high” is a concept the insiders understand well.

Other analysts are more cautious. Robert Gabele, whose firm Invest/Net in Miami also tracks insider transactions, says the buying is “encouraging in the sense that it says things aren’t getting any worse” in the economy.

But he worries that the buying may already be waning. And his greatest concern is that insider optimism isn’t well distributed among industries.

The big insider buyers, for example, have been concentrated in businesses that are traditionally “defensive”--meaning companies that do well in an environment of weak economic activity and sliding interest rates. Those would include financial services firms such as banks and S&Ls;, gas utilities and grocery chains.

Meanwhile, insiders of firms in major consumer-dependent industries, such as autos, airlines and publishing, have been heavy sellers of those stocks in recent months.

So while the economic picture may not be getting worse, the lack of buying among consumer-company insiders tells you that things aren’t improving either, Gabele says. And that’s not a recipe for a broad stock market advance a la early 1991, he says.

The best way to read the insiders’ subdued bullishness, Gabele suggests, is like this: The market isn’t going to collapse anytime soon, but you don’t want to overpay now for stocks of industrial or consumer companies at risk from a weak economy. Better to wait for those issues to drop--as many have been doing in recent weeks--and buy when prices truly look too good to pass up.

Koll Sheds Wells Stock: Among recent corporate insider transactions of particular note, Orange County real estate magnate Donald M. Koll has sold all 23,488 shares he owned in California banking giant Wells Fargo.

Koll had been a Wells director for 12 years, and stepped down in the spring. Koll, in Montana this week, couldn’t be reached. An executive at his real estate operations in Newport Beach said the 57-year-old Koll has left a number of boards recently to devote more time to his firm’s expansive development efforts in Mexico.

Still, leaving the Wells board wouldn’t obligate Koll to sell his Wells stock. Given California’s slumping commercial real estate market--on which Wells’ future health may depend--Koll’s stock sale might raise a few eyebrows: Some investors might speculate that Koll either needs cash or sees problems ahead for Wells that less-informed investors don’t. Or both.

If there are surprises, no one will be more upset than Omaha-based super-investor Warren Buffett. While Koll sold his shares in June for prices ranging from $73.125 to $78.82 a share (versus $69.75 now), Buffett just boosted his stake in Wells by 613,500 shares last week, to 5.6 million.

Tracking the Insiders

Corporate executives have become more active buyers of their own companies’ stocks in recent months, despite the market’s doldrums. Here’s a look at the industries seeing the most insider buying--and the most insider selling--over the last year, according to rankings of 50 industries by the Insiders newsletter.

Buyers Active

Industry / Rank

S&Ls;: 1

Gas utilities: 2

Banks: 3

Food stores: 4

Confectioners: 5

Sellers Active

Industry / Rank

Broadcasting: 50

Publishing: 49

Computers: 48

Autos: 47

Airlines: 46

Source: The Insiders, Ft. Lauderdale, Fla.