One on One with Art Hogan, Chief Market Analyst at Jefferies & Company
Tuesday, August 18, 2009
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SUSIE GHARIB: Even though stocks rose today, many corporate executives are selling their shares. This up tick in insider selling is often seen as an indicator of market direction. Joining us now to talk about that and his market outlook, Art Hogan, chief market analyst at Jefferies and Company. Hi, Art.
ARTHUR HOGAN, CHIEF MARKET ANALYST, JEFFERIES & CO.: Hi.
GHARIB: So what's your take away on insider selling? Is this a sign that investors should also lighten up a bit?
HOGAN: It's interesting. We always sort of take that as a signal and if you go back in history and sort of look at the market timing ability of insiders and insider sales, it doesn't always correlate very well. What it does tell us, though, is that for the first time in a period of time there are a lot of insiders that feel they've gotten to a point where they're not underwater. We just talked about underwater in the last segment, but not underwater on share prices, meaning a lot of insiders get their stock because of compensation. You know, imagine, if you will, you received stock as compensation at $20 and you watch it go to $10, now it's at $22, and you're going to make a sale because you don't want to see it go back to $10. That doesn't mean the stock's going back to $10. It doesn't mean it's not going to $25. When you get the amount of dislocation between sellers and buyers that are insiders, typically the market senses that as a negative signal. Usually we're wrong about that, but it's certainly something to keep an eye on.
GHARIB: Over time, so many studies have been done, the trends in insider selling mimics what's going to happen. We saw in March, insiders started buying up and that was the beginning of the rally. Now we're seeing them selling and so people are saying this is the beginning of a bear market. Should we take it seriously?
HOGAN: Well, the combination of things we should take seriously certainly and insider selling is one piece of that mosaic. Certainly look at the short interest that's out there, you know, the entirety of the New York Stock Exchange and the NASDAQ marketplace. That shortage has just gone down and understand that that means that those folks who would have to cover those shorts are no longer in the marketplace as buyers. Also understand we're heading into September, which is historically actually the worst month for the market.
GHARIB: Right.
HOGAN: So I think there's a lot of things to keep our eye on. The largest concern we have away from those three items is certainly the consumer and how tightly the consumer's holding on to their purse strings.
GHARIB: Let me ask you, what's changed because there has been a shift in investor psychology it seems just in the last week or so. So what's changed?
HOGAN: What's changed is we've gotten out of an earnings season, the second quarter earnings season, which was a pleasant surprise. Everybody was caught off guard. I think people were under invested in the market coming into earnings. I think there's a lot of professional investors that were short this market coming into earnings. And I think the shorts got squeezed and people rushed into this market to catch momentum and to get involved, you know, when they were under invested in the marketplace. So I think we've gotten to a point now where we look at valuations and say, wait a minute, yeah, the second quarter earnings were better, yet we still haven't seen top line revenue. What we've seen is corporate America's ability to cut costs. So I think what's changed is we need a major catalyst to move us forward here or we're going to have to go through a consolidating period where we give back some of those gains that we saw over the last few days.
GHARIB: So what could be that major catalyst? What needs to happen for that positive buying to kick in again?
HOGAN: A few things. First of all, I think there's going to have to be a shift in psychology in the marketplace right now. I would argue that right now people have been pricing in the here and now. Maybe we're going to price in exactly where we stand in terms of earnings growth and as we look at multiples as they pertain to the present versus what the market historically does, which is forward pricing. We're looking forward to the first half of 2010, expecting economic growth and earnings growth and start investing now for that growth looking forward. I think what's happened, because of this economic slowdown, is investors have gotten used to the, OK, this company is not going bankrupt. I'll buy some of that now. OK, earnings were not as bad as expected. I'll buy some of that now. That's living in the past and the present. Investors have to start looking at the future. That hasn't happened yet, but that's going to be the significant shift that we see.
GHARIB: All right. So give us your advice on what investors should do with their money right now. Does it make sense to put new money into the market right now?
HOGAN: I would tell you three things. First of all, look at your investment time horizon. If you've got a two-year investment time horizon or longer, it's going to be a good time to get in the market, but there's not -- there's not an immediacy. There's not a rush. You don't have to rush into this marketplace. Take your time. Make your -- make your shopping list of stocks, buy on pullbacks or invest gradually. The other thing I would look at, too is look at your threshold for volatility, because we're going to have more volatility, not just over the next two months, but over the next two years. If you don't have the stomach for the kind of volatility you're seeing, understanding yesterday we were down 2 percent. Today we're up a percent, those are pretty big moves.
GHARIB: Right.
HOGAN: You might not want to be overexposed to that. The third thing is look at what you think is going to happen for the next 12 months. We think 2010 is going to have growth, but it's going to be slow growth. What's going to be important in a slow growth economy? What's going to do well? Technology always does well in a slow growth economy. We need more technology to make us more productive. That's going to be a leader and look at technology.
GHARIB: We have 30 seconds. So following those guidelines that you just told us about, give us one or two stocks that you think make sense to put money in right now.
HOGAN: Susie I thing it's very interesting. Look at technology as the top 10 market capitalization stocks in technology could buy the next 90 in the top 100. That's how much cash is on the top line. Look at that bottom 90 and look at some of these viable takeout candidate. Think of large cap, two stocks that we talked about today that we like very much, EMC and Cisco. We don't have any -- we don't have anything that we need to disclose in either one of those, but they're doing very well. They've got money to spend. They could make very smart acquisitions.
GHARIB: All right, EMC and Cisco. Thanks for the tip. Thank you so much, Art, for coming on the program.
HOGAN: Great to be on, thank you very much for having me.
GHARIB: My guest tonight, Art Hogan chief market analyst at Jefferies and Company.
