All I hear about insiders is that they're selling in record amounts. Then yesterday, Barron's comes out with a headline saying a Bank of America director bought $1 million worth of stock. That was the largest recent insider buy reported. The largest sell was $15 million... Phil Knight of Nike cashing in some more stock. In fact, the smallest sell transaction Barron's reported was almost four times larger than the largest buy transaction.
The real headline, the real story, isn't that some director of a "too-big-to-fail" bank bought $1 million worth of stock. It's that insiders have been terrified, selling like crazy throughout the entire rally since March. The market has risen and risen... but the insiders have sold and sold.
Maybe all those insiders have been watching the Dow Jones Transportation Index, aka "the transports," a widely followed bellwether for stocks. Even Warren Buffett says his favorite indicator is rail data. The transports (DJT on the chart below) were hit worse in March and have come back weaker than any of the big stock indexes...
I don't know if the transports are any great indicator. But I know the lower volumes those businesses have been moving means the economy is depressed.
The rally has definitely left some stocks behind. At the Value Investing Congress last week, Zeke Ashton of the asset management company Centaur Capital gave out three companies he believes are undervalued: Alleghany (Y), Laboratory Corp of America (LH), and MVC Capital (MVC). Ashton is a smart, conservative investor who has achieved excellent results. Morningstar says he's got the No. 1-rated mid-cap mutual fund.
But the most dramatically undervalued stock I heard about last week in New York wasn't any of the ones he recommended. It was a company that took $5 billion to build and actually went bankrupt because it overloaded with debt. Today, it's past that, has little debt, virtually zero competition in 90% of its markets, and is selling for less than $700 million, less than four times all the cash that'll come into the business this year before interest and taxes (EBITDA). I'll have all the details in the November issue of Extreme Value, out in two weeks.
On Friday, when gold closed at a high of $1,061.75 an ounce, Jeff Clark alerted readers of his Direct Line blog that the precious metal was a good short at those prices. Two trading days later, gold has fallen more than 2% as investors' appetite for risk continues growing. If you shorted gold stocks, you could have easily doubled that return. Finding irregularities in the market and exploiting them for quick gains is Jeff's specialty... And today's market is rife with irregularities.
Jeff dropped me this note yesterday:
I feel like I'm seeing things clearly for the first time in five months. If there was ever a time to pay $4,000 for my market calls... This is it... The market is slowly creeping back into the realm of normal ebb and flow. That's perfect for traders.
Jeff is releasing his latest trade tomorrow... The stock in his sights got crushed when it reported earnings last quarter and has since rallied all the way back to where it was pre-announcement. But according to Jeff, "There's almost always a second shoe that drops. Just as good news follows good news, bad news usually follows bad." He's expecting another miss, and he thinks the stock will get hit equally as hard... His recommended trade should double.
If you sign up for the S&A Short Report before Friday, you can get Jeff's research for half the normal fee. Learn more here...
Two of the biggest gurus in the investment game support Jeff's bearish view, though on a more widespread level... PIMCO's Bill Gross said the six-month rally in riskier assets is likely at its peak, as U.S. growth lags behind the historical average. Gross also said an end to the government's bond-purchasing program will pressure Treasuries:
It's obvious that the programs in the United States, the Federal Reserve buyback programs ... those purchases and that purchasing power will cease within the next three to four months. So, to the extent that that's gone, then perhaps the upward influence in terms of those longer-term Treasuries will be felt more strongly in the next several quarters.
And in his latest letter to investors (published October 25), the ever-prescient Jeremy Grantham, chairman of Grantham, Mayo, Van Otterloo, predicted the markets would fall around 20% from today's levels. Grantham went "all in" on the long side when he published Reinvesting When Terrified within days of the March low... Now, he thinks the rally is overdone:
Fair value on the S&P is now about 860 (fair value has declined steadily as the accounting smoke clears from the wreckage and there are still, perhaps, some smoldering embers). This places today's market (October 19) at almost 25% overpriced.
And the reason for this "irrational exuberance," to borrow a line from the man who started this whole mess:
[L]ow rates and generous liquidity are, if anything, a little more powerful than we thought, which is a high hurdle because we have respected their power for years. And what we thought were powerful and painful investment lessons on the dangers of taking risk too casually turned out to be less memorable than we expected. Risk-taking has come roaring back.
New highs: Keyera Facilities (KEY-UN.TO), Microsoft (MSFT), Sprott Resources (SCP.TO), Jinshan (JIN.TO).
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Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
October 27, 2009