What is Insider Trading? What should you know about it?

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From Wall St. Daily  |

What should you know about insider trading?  Is it good or bad?  Read this article from Wall St. Daily.

The Shocking Truth About Insider Selling

By LOUIS BASENESE, Chief Investment Strategist

Riddle me this, Batman...

In the last week, the Dow hit an all-time high. Yet corporate insiders are selling shares of their own stock at the fastest pace in over a decade.

As of late February, the ratio of the number of shares that insiders sell in a given week to the number they buy almost hit 10 to 1, according to Vickers Weekly Insider Report.

That must be a sign that a turn in the market is imminent, right? Or, at the very least, that company executives don't feel optimistic about the economic outlook.

After all, corporate insiders always know best.

Or do they?

Since Tuesday is as good a day as any to bust a Wall Street myth wide open, let's put this one to the test.

Newsflash: Insiders Don't Possess Superhuman Investing Skills

The rationale for following an insider's lead couldn't be more straightforward: No one knows a company better than a corporate insider.

So, if insiders are buying, then they must be optimistic about the company's outlook. And if they're selling, well... not so much.

Unfortunately, though, the data doesn't back up such simple logic...

As Jim Stack of Investech demonstrates with his annotated chart of the Dow, insider selling has been a terrible indicator of when this bull market is going to end.

More specifically, since 2009, every time insider selling ramps up, the mainstream financial headlines predictably urge caution. But the stock market ends up charging higher and higher.


Insiders: The Most Unreliable Stock Market Indicator?

Lest you think the chart above is some rare anomaly related to the current bull market - and that insiders are otherwise capable of predicting market turns - consider a more comprehensive history of insider buying and selling, courtesy of Stack...

Click here to continue reading...

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Get Out While You Can

By MARC LICHTENFELD, Investment Director, Wealthy Retirement

One of the reasons I've been happily married for 17 years is that my wife and I not only have complementary skills, but we also like to handle different aspects of our lives.

For example, she likes to cook. I don't. She hates to clean up the kitchen. I don't mind. So, most nights, she makes dinner and I clean up while she hangs out with the kids.

This came in handy when we decided to buy an investment property last year.

You see, one talent I don't have is the ability to walk into a home and see the potential. If it doesn't look great already, I'm not interested.

Fortunately, my wife is much more practical. So she was in charge of finding the property, while I handled the financing (which she despises).

The mortgage rate on the property was an important factor for whether or not the deal made sense. Rates had come off their historic lows, but were still very cheap.

As the deal matured, I watched every tick of the 10-year Treasury note. (Most mortgages are based on this key rate.) Finally, when I saw a move to the downside, I called the mortgage broker and told him to lock it in.

"We have time," he said, "There's no rush."

"Lock it in now," I shot back.

He tried to talk me out of it, saying that if the property didn't close when we expected it to, we'd have to pay to keep the rate. I told him we'd get the closing done and I wanted that 3.25% 30-year fixed rate locked in.

He locked it in... And rates went higher shortly after.

Back then, the 10-year note was trading at about 1.67%. Today, it's back above 2%. And I suspect it will stay above that key threshold.

Trouble Ahead

Unless you're in the market for a mortgage, you probably don't care about rates.

You should.

Many folks will see their retirement funds get slammed as a result of rising rates.

Remarkably, investors are still pouring money into bond funds. Granted, stock fund inflows get the most media attention, as investors are once again putting money into stock funds rather than taking it out - reversing a multi-year trend.

But money is still rushing into bond funds.

In fact, municipal bond funds have seen seven straight weeks of inflows - with $780 million flooding into the sector over the last two weeks. High-yield funds added $148 million in new money during the same period. And investment-grade corporate bond funds saw a whopping $1.6 billion come into their coffers.

In all of 2012, an astounding $227 billion flowed into bond funds.

It's sad to say, but investors would have been better off heading to a roulette wheel and putting that money on black.

Bond funds are deadly.

Yes, the Fed has pledged to keep short-term rates at zero. But the Fed doesn't control the market. (Sorry, Ben.)

Ultimately, if investors - especially institutions and foreign governments - stop buying our debt, rates will soar.

It's the simple law of supply and demand.

Currently, the 10-year Treasury is at 2.05%. Three months ago, it was at 1.65%.

What happens if China or Japan decides a return of 2.05% isn't worth the risk of holding a U.S. Treasury for 10 years?

What if they don't trust our do-nothing Congress to straighten out our exploding debt situation, and these key lenders decide they need 2.5%, or 3%, or 5% for the risk of holding a U.S. debt obligation?

Well, a lot would happen. But here's the most notable outcome for our discussion:

The quarter of a trillion dollars invested last year in bond funds (and the billions more from previous years) would suffer huge losses.

Think of it this way. What if you spent $100 today for a bond that paid 2%, but tomorrow, a new bond with a 3% yield goes for the same $100?

You'd pay a lot less for that 2% bond.

As rates go up, bond prices fall. And there are a lot of pension funds, sovereign funds and mutual funds that are stuffed to the gills with bonds - and in danger of losing big money if prices fall.

What to Do About It

If you have money in bond funds, sell them while you still can. They'll lose value over the coming years.

Put that money into stocks with a history of increasing their distributions. Like Exxon Mobil (XOM), which raises its dividend by 9% to 10% per year. That way, you ensure you'll get a pay raise every year.

Even in the best of times, that's a feat no bond fund can offer.

What's more, stocks that increase their distributions annually tend to be safer investments than other stocks. In fact, companies with track records of raising their dividends for 25 years or more have never lost money over any 10-year period going back over 32 years.

Keep a close eye on the 10-year bond yield. As it ticks higher, you're going to hear more and more about the devastating losses suffered by large institutions and sovereign funds.

And as those losses mount, bonds will be dumped - making the carnage even worse.

If you own bond funds, find alternative places to put the money before the selloff occurs. Otherwise, you'll be selling in the panic with everyone else.

They say it's better to be lucky than good. Fortunately, when it came to my mortgage, I was both. I got lucky that rates dipped, and I was smart that I locked it in.

You have the same opportunity now with bond funds. The steep losses haven't started yet, so take advantage of your good timing and get out unscathed while you can.

[Editor's Note: Marc Lichtenfeld is the Investment Director for Wealthy Retirement, a popular income-focused e-letter. He tells us this is a huge week for his followers. Marc just released a report that details exactly when he believes the bond market will implode. It will be a three-minute event that will forever change financial history. Be one of the first investors to get this report... click here to sign up for the Wealthy Retirement e-letter now.]