Y2K Stock Market Trend Indicator -- Internet Insider Trading???

At least we can surmise that some of the internet insiders are up on Y2K internet info. -- Diane

Note: ``I'm always looking for changes in behavior,'' Gabele says. And this time, Gabele, a veteran market watcher, thinks he has cited a profound one.

If Internet Stocks Are So Great, Why Are the Insiders Unloading? Since October 1, more than 300 insiders sold millions of shares MARK VEVERKA Tuesday, January 5, 1999

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/1999/01/05/BU29380.DTL

If Internet stocks are such compelling investments, why were insiders --those who should appreciate underlying value -- unloading their shares during the last quarter of 1998?

Mom-and-pop investors rang out the old year bidding up dot- com stocks like there was no tomorrow (perhaps you or yours took part in the party), but a bevy of paper-millionaires inside the virtual walls of these under-profitable wonders were doing just the opposite: converting their stock certificates into greenbacks.

Since the beginning of October, more than 300 insiders at some 24 Web-related companies unloaded millions of shares at prices frothier than the foam atop a double latte, according to CDA Investnet Technologies, a Maryland research firm.

The most eager of all of the sellers appears to have been Books-a- Million Chairman Charles Anderson, who told the Securities and Exchange Commission in November that he planned to sell 401,468 shares of BAM stock, CDA Investnet states.

BAM was a sleepy brick-and- mortar bookseller based in Alabama until it converted itself into an overnight Internet sensation by launching an ``enhanced'' e-tailing Web site in November. (I guess all you have to do is say ``books and Internet'' in the same breath and, presto, you have a world-beating stock.)

But what makes Anderson's decision to unload shares even more curious is that he was willing to pay a penalty to do so. BAM's chairman bought 22,500 shares in October at around $3 a share. (The stock peaked at $47 a share on November 30, and closed yesterday at $13.25.)

There is an SEC rule that prohibits insiders from selling shares at a profit until six months after they are bought. If they are sold prior to that time, the insider must give profits taken from those shares back to his company.

As a result, Anderson voluntarily opted to pay a $767,040 penalty in order to dump his October shares sooner rather than later. Does that mean Anderson believes that BAM shares might be worth less than three bucks come March?

``There definitely seemed to be some urgency there,'' says Bob Gabele, editor of CDA/Investnet's Insider Chronicle.

Of course, drawing conclusions from the buy-and-sell decisions of insiders can be dubious. For instance, cash-poor executives at startups often need to exercise options during certain regulatory windows and then sell those shares to avoid tax hits. The result: They are often sellers even though their firms are going like gangbusters.

At the same time, insiders are known to gobble up shares despite any evidence that their companies expect a boost in earnings or that their firms are takeover bait.

So why, then, bother to watch insider trading?

Because insider buying and selling emits a pattern of behavior. And any deviation in that pattern can sometimes signal a significant sea change in the psychology of the market, Gabele says.

``I'm always looking for changes in behavior,'' Gabele says.

And this time, Gabele, a veteran market watcher, thinks he has cited a profound one.

``We continue to marvel at a veritable explosion of insider selling at the Internet-related companies,'' Gabele says.

During previous quarters of Net mania, insiders virtually across the sector had held their shares. And when you consider some of the extraordinary gains these companies experienced, their decisions to hang on to their stock sent a strong message that these companies actually might be worthy of their lofty valuations. What's more, insider discipline was underscored during the market meltdown of last August.

``(Insiders) had been hanging on to their shares, and they were conspicuous by their absence from the sellers' list,'' Gabele notes.

With traditional stock valuation methods being tossed out the window, investors and analysts have been grasping for whatever metric (Street-babble for measurement) they could intellectually apply to justify sky-high Internet stock prices.

Thus, disciplined insider ownership was viewed as a cornerstone to last year's stock market recovery in general, and to the rebound of Web stocks in particular.

But the tide began to turn at the beginning of October, when insiders began to aggressively sell shares. Subsequently, there has been a ``landslide'' of additional selling ``as insiders appear remarkably and increasingly eager to get out while they can,'' Gabele warns.

``I'm fascinated by the timing of all of this,'' Gabele says.

Perhaps we all should.

-- Diane J. Squire (sacredspaces@yahoo.com), January 05, 1999

Answers

Diane,

The link that you reference above is returning an error. Please update if you have something current. I would be very interested in reading.

-- Beth Tams (lulu010101@aol.com), January 06, 1999.

http://www.sfgate.com/cgi-bin/article.cgi?fi le=/chronicle/archive/1999/01/05/BU29380.DTL

-- No Spam Please (anon@ymous.com), January 06, 1999.