Get Ready to Buy the Insiders' Favorite Sector
By Graham Summers
September 06, 2007
Corporate insiders are betting that we've hit bottom…
As of August 25, insiders bought $290 million worth of stock for the month. This is the most buying we've seen so far in 2007. The last time we saw this much buying was in August 2006, right before the massive rally that closed out the year.
Likewise, the insider sales/purchase ratio has fallen to $12.35 to $1. In today's world of massive options grants and stock compensation for executives, anything below $20 to $1 is in bullish territory. And anything around $10 to $1 is in extremely bullish territory.
Another positive sign is that insider bulls most favor the finance sector, which usually leads any big market moves. Up through August 25, finance insiders had bought $133 million worth of stock. That's 45% of the total insider buying for the month. It's also more than two times the insider purchases in the second-most bullish sector, consumer discretionary (at $55 million).
Last Friday, Fed Chairman Ben Bernanke said that it's not the Fed's policy to "protect lenders and investors from the consequences of their financial decisions."
Perhaps I'm wrong, but Bernanke's attempt at maintaining a hard line is a load of nonsense. The Federal Reserve has already lowered the discount rate from 6.25% to 5.75%.
On top of this, the Fed has pumped nearly $150 billion into the banking system in the last three weeks. It's obvious to everyone that the Fed will step in when things really go haywire. Not to mention the fact that this is Bernanke's first real challenge as Fed chairman. Is he really going to let the U.S. enter a recession in his first two years of office? Somehow I doubt it.
So my view is that we're likely to see the Fed make another cut, this time in the federal funds rate, at the next Fed meeting on September 18. (If the terms are confusing, think of it this way: The discount rate is the interest banks pay to borrow directly from the Federal Reserve on a short-term basis, which they usually do only in emergencies. Banks can also borrow from one another, paying the Fed funds rate.) Should we see a cut in the Federal funds rate, a bull run is an almost sure thing.
But regardless, the finance sector has become one of the most compelling buys of the last five years. Let me explain...
In spite of all the market mayhem, most major U.S. indexes are still up for the year. In particular, the S&P 500 is up 3.9%. In contrast, the S&P financials sector is down 8.7%. And the S&P investment bank index is down a whopping 16%.
According to the Financial Times, the finance sector is trading at its lowest book value in a decade. And both insiders and investing legends are piling in:
Legend |
% of Portfolio
in Financials |
Mohnish Pabrai |
48% |
Richard Pzena |
43% |
Marty Whitman |
42% |
Warren Buffett |
38% |
Arnold Schneider |
31% |
David Dreman |
25% |
|
I'm sure you all know who Warren Buffett is. Lately, the Oracle of Omaha has been plowing into financial stocks, buying $1.2 billion of U.S. Bancorp and $400 million of Bank of America. However, Buffett's favorite financial stock, hands down, is American Express. Buffett owns $9 billion worth of the company.
Pabrai, who's averaged 26% a year over the last eight years, owns Buffett's own Berkshire Hathaway. He's put 12% of his portfolio into Berkshire, along with CompuCredit, Fairfax Financial Holdings, and Delta Financial.
The others have bought big into Annaly Capital, Fannie Mae, Freddie Mac, and Citigroup, among others.
Over the next month, we're going to be looking into these companies and their peers in the finance sector. Once we find a bottom, a ton of first-rate finance firms will be trading at bargain-basement prices.
Good trading,
Graham
