For Investors, There Are Worse Things Than Insider Trading

Sure, Wall Street is slightly rigged, but that’s better than tired trustees or busybody bureaucrats supplanting current corporate governance.   It’s a lot better than Schumer and Sanders attempting to link stock buybacks and dividend issuances with corporate wokism, or arrogantly deriding every billionaire as a policy mistake.

When executives have a vested interest in company performance, some degree of insider trading based on non-public information is possible.  However, trading while drunk, computer algorithms run amok, and, worst of all, professional stock trading analysts pose a more insidious risk to one’s portfolio.

Some insider trading, at least on the buy side and executed under the aegis of a predefined plan, may indicate that executives’ interests are aligned with general stockholders who take long positions.  This is likely one reason the SEC brings so few insider trading cases; in 2019, for example, the agency brought only 32 actions, the fewest in 20 years.  Unless officials impose draconian trading rules or forbid executives from receiving stock-based compensation, insiders are positioned to benefit from corporate knowledge before it infiltrates the public domain.    

Liberals stoking envy impute negative connotations with corporate privilege, but sometimes it’s earned, especially by employees working tirelessly to get products to market, then sell them. Their noses are to the grindstone, their ears to the ground. It may manifest as intellectual property, and outsiders can hitch a ride by reviewing their required Form 4 stock purchase filings or jump off the bandwagon altogether.  

What may be more detrimental to the public’s stock investing interests are momma’s basement drunks, conspiring computers, and stupid stock analysts.

More than half of Gen Z investors admit to trading while drunk. That may partially explain the irrational exuberance of the so-called MEME stocks, whose wild price fluctuations often stagger from company fundamentals.  At least there’s some trading democratization as bands of potentially inebriated stock purveyors on Reddit and Robinhood give the traditional stock manipulators (such as the “shorts” who bet a stock will go down and contrive to ensure that outcome by concocting rumors) a run for their money.    

Speaking of insobriety, I wonder what spirits occupy the cloistered cabinets in those plush Federal Reserve buildings.  For supposedly smart money people, it took Federal Reserve members a long time to catch on to the inflation trends.  Under our persistently transitory inflation, even the dollar stores are raising prices – it makes me wonder where they shop… if they shop.

Also conspiring against prudent investors are those computers with their malicious algorithms.  They execute trades with reckless abandon at the drop of a keyword -- like “recession” -- by the Treasury Secretary, or when Fed officials lament that inflation is structural.  

If the word “taper” -- as in the Fed reducing its bond-buying activities – gets encoded into computer digits, then look out below.  Those misbehaving machines are likely to throw a taper tantrum or instigate a flash crash. Imagine how berserk they’d go if progressives’ plans to tax unrealized gains were to be realized.  They might even short-circuit, then trading circuit breakers would join the party and provoke even more mayhem.  

Hmmm… drunk trading, Robinhood and its merry traders, or runaway computer trading.  Suddenly, insider trading, especially when they put their money on the line, doesn’t seem so malfeasant, especially when compared to professional stock analysts with misguided intuitions.

Consider these bizarre stock recommendations from analysts with no shame, or sense:

  • 10/5/21:  Lordstown Motors, ticker symbol RIDE, was downgraded from equal to underweight at Morgan Stanley.  Well, thanks for that -- RIDE (electric truck maker) was already down a few hundred percent for the year, and now you downgrade it.  The analyst must be one of those drunk Gen Z’ers.
  • 09/22/21.  Ambarella (AMBA).  After gaining 200% or so, a KeyBanc analyst finally decided to raise the semiconductor maker (esp. video and image processing solutions) from sector to overweight.  Now they tell us. This analyst seems to have forgotten that picking a stock is only half the trade equation, the other part is all about timing. I bet they were loading up beforehand.
  • 07/23/21 Twitter (TWTR).  Atlantic Equities fortuitously raised their target price to $70 from $63.  The thing is, at the time of this call TWTR was already trading above $70.  Ironically, as of 10/10/21, it’s now exactly at Atlantic’s original target of $63.
  • 06/29/21 XOMA.  Started at buy with a $20.68 price target.  Wow, that’s precise… down to the cents, but also totally wrong! At the time, XOMA was at $37 per share, so, by definition, $20.68 would be a sell.  Interestingly, as of 10/10/21 XOMA is at $25.78.
  • 12/31/20 AMBA.  Roth ups price target from $70 to $95, maintaining a neutral rating.  Huh? They were neutral even as AMBA went up hugely, then raised the target to what it was trading at on 12/31/20.
  • 03/02/21.  Plug Power (PLUG).  Barclays raises price target to $29 from $21, but cuts from equal to underweight.  I must be missing the logic on this one:  raise price target but cut recommendation.
  • 05/05/21.  Pfizer (PFE).  JP Morgan did us all a favor -- not! -- by raising the target price to $40 from $36, even though already trading at $40 on that date.  Even quid-pro-Joe could’ve figured that out.
  • 10/11/21. XOMA.  Wedbush actually did something good -- they suspended coverage.  I’m not saying XOMA deserved it, only that we don’t have to be misguided by the analyst’s mental contortions.

I could go on… and on since that’s just a glimpse into their absurdity.  In fact, the stock analyst community has recently underappreciated the acceleration in corporate profits, thereby skewing a key fundamental attribute known as the price-to-earnings multiple.  Whether peevishly pessimistic or overly optimistic, turns out that Wall Street analysts aren’t skilled at forecasting corporate profits.

And yet, they are sometimes given access to a company’s internal workings. Results of channel checks and business conditions with company management may not be widely distributed until after the analyst’s company has taken a position.  Overall, that has to be more detrimental to stock trading equity than enthusiastic insiders cheerleading their company’s prospects, perhaps with a bit of front-running.

The following quote has been attributed to Will Rogers: “Good judgment comes from experience, and a lot of that comes from bad judgment.”  By this measure, the professional stock analysts have a lot of experience, one can only hope that good judgment catches up.


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