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It seems that a number of insiders are selling stock ahead of a steep drop; but it’s not what you think! Not quite.
According to a report in the Wall Street Journal, the trend has everything to do with an arrangement made by many executives years in advance to protect their holdings.
Known as prepaid variable forward contracts here’s how they work:
“The executive typically agrees to deliver to the brokerage a number of shares at a date several years in the future in exchange for upfront cash often equal to between 75% and 90% of the shares' value at the time of the agreement.”
”If the share price falls the brokerage absorbs the loss. If it rises, the executive shares in the gains up to a point,” says the Journal.
Nothing fishy here -- except for the fact that a new study shows that after executives strike these deals, their stocks tend to tank – that’s according to Carr Bettis of Gradient Analytics, a co-author of the report on the subject.
Lon Juricic of Streetinsider.Com also did a similar study and offered his results to Fast Money. Take a look:
Company Contract date Stock performance
since Contract
Smithfield Foods 10/19/2007 -58%
Monster Worldwide 9/25/2007 -63%
Pulte Homes 2/2008 -35%
In a nutshell, Juricic also found the stocks fell substantially after insiders entered into prepaid variable forward contracts.
Coincidence? Perhaps. The Journal has come up with an explanation. They say, “executives often enter such deals when their company's stock has been rising, and so (it) may be due for a fall.
However Juricic is less forgiving. He tells Fast Money, when executives enter these contracts it seems to me they are telegraphing our stocks have maxed out.
And it’s certainly worth noting that researchers have found no evidence that executives who use such deals are motivated by knowledge that isn't public.
Still, it is rather curious – don’t you think?
Read More:
WSJ: Executives' Stock Deals Preceded Price Drops
- HALFTIME REPORT: How to Trade Senator Dodd's Financial Reforms
- Your First Move For Tuesday November 9th
- Web Extra: The Dow's Only Loser
- Pops & Drops: Altria, Potash...
- Tech: The Trade of the Year?
- A Revitalized Credit Card Industry?
- Pure Plays For a Weak US Dollar
- Halftime Report: Retail - The Next Sector to Pop
- BEHIND THE MONEY: 'The Onion' as Trading Indicator
- Web Extra: The Final Trade
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Trader disclosure: On June 4th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Najarian Owns (BX) Call Spread; Najarian Owns (DELL) Calls; Najarian Owns (FCX) Call Spread; Najarian Owns (INTC) Call Spread; Najarian Owns (MOS) Call Spread; Najarian Owns (PALM) Calls; Najarian Owns (WNR) Call Spread; Terranova Owns (FCX), (TER), (XBI), (RIMM), (GENZ); Terranova Owns (X) & (X) Calls; Terranova Owns (BRCM) & (BRCM) Calls; Terranova Owns (DIS) Call Spread; Terranova Owns (POT) & (POT) Calls; Terranova Owns (JPM) & (JPM) Calls; Terranova Owns (BTU) & (BTU) Calls; Terranova Owns (MS) & (MS) Calls; Najarian Owns (ELN) & (ELN) Calls; Finerman's Firm Owns (FLIR); Finerman Owns (TBT); Finerman's Firm Owns (AXYS), (NOK), (PBR), (TBT), (RIG), (WMT), (MRO); Finerman's Firm And Finerman Own (BAC) Preferred Shares And Are Short (BAC); Finerman's Firm And Finerman Own (WFC) Preferred Shares, Finerman's Firm Is Short (WFC); Finerman's Firm Is Short (IJR), (MDY), (SPY), (IWM), (USO); Seymour Owns (TTM), (AAPL), (BAC), (BX), (EEM), (FXI), (TSO), (INFY), (MGM), (TIE); Seymour Is Short (NUE); Seymour's Firm owns (MBT)
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