Insiders have been pulling out of stocks just as small investors are getting in.
Selling by corporate executives has surged recently as the Dow Jones Industrial Average hit 14,000 and retail investors flooded into stocks. The amount of insider selling has usually preceded market selloffs.
“In almost perfect coordination with an equity market that was rushing toward new all-time highs, insider sentiment has weakened sharply — falling to its lowest level since late March 2012,” wrote David Coleman of the Vickers Weekly Insider report, one of the longest researchers of executive buying and selling on Wall Street. “Insiders are waving the cautionary flag in an increasingly aggressive manner.”
Goldman’s Alec Phillips has a great note out about the coming decline in government spending.
It turns out, we’re about to see a period of spending declines that is historically very rare. It’s all about the sequester and the decline in war spending.
In addition to sequestration, two other factors are likely to reduce real federal consumption and investment (i.e., the components of federal spending that is counted toward GDP in the national accounts) over the next few years:
Spending caps enacted in 2011. In addition to establishing the sequester, the Budget Control Act of 2011 also established spending caps that have already taken effect. These are expected to reduce real yoy spending growth by $20bn in 2013 and by another $10bn in 2014. Unless Congress designates spending as “emergency,” spending above the caps results in across-the-board cuts similar to but separate from the across the board cuts set to take effect March 1.
Reduced war spending. Congress appropriated roughly $160bn in 2010 and 2011 for overseas military operations; this has been reduced to around $100bn for 2013. The President’s most recent budget proposed to cap war spending going forward, which it estimated would reduce war-related spending by around $30bn in 2013, and by $50bn to $60bn in 2014. Although some war spending ends up being accounted for as transfer payments to the rest of the world–for example, when the US government reimburses foreign powers for joint military operations–the majority of it shows up as federal consumption and gross investment.
Following today’s sequester-delay-seeking, tax-hiking, close-the-loophole speech by the President, it would appear that fiscal policy debates will be balanced a little more to raising effective rates on corporates (as opposed to the ‘statutory’ rate so many discuss). The US has the second highest global ‘statutory’ tax rate but less than 10% of S&P 500 firms have paid this rate over the last decade. Somewhat shockingly, since 1975, taxes have had the largest cumulative impact on S&P 500 ROE as effective rates fell from 44% to 30%. They estimate each percentage point rise in effective tax rate would lower S&P 500 ROE by 22 bp and EPS by $1.50, all else equal. Closing all the loopholes would smash year-end 2013 expectations from Goldman’s 1575 to around 1300 with Staples and Tech the hardest hit. With the ‘market’ the only policy tool left, it would seem not even the Fed could monetarily save us from this fiscally fubar action.
Via Goldman Sachs,
Political dialogue in Washington, D.C. has turned squarely to the nation’s fiscal health. The temporary resolution of the ‘fiscal cliff’ focused mainly on raising revenues through changes to personal tax rates, but delayed decision-making deadlines on the sequester and the long-term path of Federal spending.
Corporate tax rates will likely receive scrutiny as the debate continues. Corporate taxes contributed 8% of 2012 federal revenues. A recent Congressional Budget Office report suggested that policy adjustments such as eliminating foreign tax deferrals could increase US tax revenues by as much as $100 billion over the next decade.
As the US and Japan debase their currencies, the head of Mexico’s central bank warns that asset bubbles will destabilize emerging economies. Playing with money is no different than playing with fire. The house might burn down.
A “perfect storm” may be forming in the world economy as signs of a recovery spur capital flows to emerging markets and some advanced nations that may lead to asset bubbles, Banco de Mexico Governor Agustin Carstens said.
“Risk appetite among investors has returned and the search for yield is in full force,” Carstens said in a speech in Singapore today. “Concerns of asset-price bubbles fed by credit booms are starting to appear.”
The risk of a “currency war” has surfaced as monetary easing from Japan to the U.S. spurs demand for higher-yielding assets and boosts inflows into emerging markets. Russia warned last month that Japan’s currency-weakening policies may lead to reciprocal action as nations try to protect their export industries, while South Korea and the Philippines have said they’ll consider how to reduce the impact of such funds.