Recent director dealings show that company executives and wealthy families are getting nervous. Maybe we should be too.
One informal indicator market watchers like to keep an eye on is “director dealings”. When a director buys or sells a significant chunk of shares in the company they work for, it always draws attention. After all, who is better placed to know a company’s prospects than those who run it? This is why “insiders” are only allowed to buy and sell shares in their own firms at certain times – eg, a CEO can’t buy or sell in the run-up to their annual results coming out (this is known as a “closed period”). Big buys by an insider are obviously bullish. Big sales don’t look so good – yes, they might be needed to resolve a divorce or a tax bill, but it’s rarely good news to see top managers baling out of their own stock.
So it’s a bit worrying that sales by “insiders” across equity markets as a whole are now running at their highest rate in 20 years, according to data from Smart Insider, reported in the Financial Times this week. So far this year, insiders have sold around $19bn-worth of equity in their companies. If this continues until the end of the year, they’ll have offloaded $26bn. That would be the highest annual total since 2000, when the technology bubble peaked – back then, insiders dumped $37bn of stock. Insider sales then peaked again in 2007, just ahead of the global financial crisis. This latter high wasn’t surpassed again until 2017.
Taken individually, these sales aren’t necessarily due to bearishness. For example, more than $2bn (ie, more than 10%) in sales came from the Walton family, founders of US retail giant Walmart. This appears to be for primarily technical reasons: they’re not selling because they think Walmart is in trouble – they’re selling to prevent their percentage stake in the group from rising further due to share buybacks.
However, other research also hints that wealthy people are taking money off the table. The latest UBS Global Family Office Report (in association with Campden Research) found that a majority of family offices (each managing an average of more than $900m) reckon there will be a recession next year, while nearly half are boosting the amount of cash they hold, reports Bloomberg. And last month, a report from TrimTabs Investment Research found that in August, insiders sold more than “they have at any other point during the bull market, which began in March 2009”, notes CNN.
In short, insiders aren’t happy. It doesn’t mean a crash is imminent, but if you haven’t rebalanced your portfolio in a while, consider whether it’s time to take profits on any holdings that have grown out of line with your original asset allocation and perhaps top up your own cash reserves.
I wish I knew what goodwill was, but I’m too embarrassed to ask
Goodwill is an intangible asset, which means it can be found on a company’s balance sheet in its annual accounts. It is generated as the result of an acquisition. When one company buys another, it will typically pay a premium to the “fair value” (which is essentially an adjusted version of book value – the value of a company’s assets minus its liabilities). Goodwill is the difference between the acquired company’s fair value and the actual price paid.
Say Company A buys Company B for £10m. The fair value of Company B’s assets is £8m. The “excess” £2m paid is then listed in Company A’s balance sheet as “goodwill”. What does this difference represent? The value of certain intangible assets such as patents or intellectual property can be estimated, and potentially sold separately to the rest of the business.
However, other “soft” assets, such as a strong brand, a highly trained workforce, a solid record of research and development, or a loyal customer base, for example, are much harder to value. They certainly have value, but they arise from the business as a whole being more than the sum of its parts. Goodwill effectively represents the value of these assets to Company A. You could almost argue that goodwill is the value that Company A places on Company B’s competitive “moat”, or on its potential future growth.
Unlike most other assets, the value of goodwill does not have to be written down (amortised) every year. Instead, accounting rules state that the value of goodwill must be reviewed each year, and “impaired” (ie, written down) if necessary. Writedowns are deducted from a company’s profit-and-loss account, although they don’t affect cash flow.
If a company pays less than the fair value for an acquisition – perhaps as the result of a distressed sale – then it has negative goodwill. This happens rarely, as it implies that the acquirer has bagged a bargain.