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Wolf Richter: What Do They Know That We Don’t?

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By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

Friday evening when no one was supposed to pay attention, Google announced that Executive Chairman Eric Schmidt would sell 3.2 million of his Google shares in 2013, 42% of the 7.6 million shares he owned at the end of last year—after having already sold 1.8 million shares in 2012. But why would he sell 5 million shares, about 53% of his holdings, with Google stock trading near its all-time high?

“Part of his long-term strategy for individual asset diversification and liquidity,” Google mollified us, according to the Wall Street Journal. Soothing words. Nothing but “a routine diversification of assets.”

Routine? He didn’t sell any in 2008 as the market was crashing. He didn’t sell at the bottom in early 2009. And he didn’t sell during the rest of 2009 as Google shares were soaring, nor in 2010, as they continued to soar. In 2011, he eased out of about 300,000 shares, a mere rounding error in his holdings. But in 2012, he opened the valves, and in 2013, he’d open the floodgates. So it’s not “routine.”

Liquidity, Google said. In 2012, he reaped about $1.2 billion from stock sales, and if he can sell this year’s portion at the current price, he’ll reap $2.5 billion. $3.7 billion in total. What exactly would he need that kind of liquidity for? He could buy a Boeing 787, if it ever becomes airworthy again, plus a few castles, dozens of handmade exotic cars…. And it would barely scratch the surface.

Diversification, Google said. Sure, don’t put all your eggs in one basket. Though he didn’t need to diversity from 2008 through 2011, he now needs to diversify urgently. The landscape has changed. And he is reacting to it.

He could diversify into treasuries, for example, which would guarantee him a loss after inflation, thanks to the Fed-imposed financial repression that governs our crazy lives. Or he could buy lots of gold or a myriad of other assets that he thinks make more sense than holding Google stock at the current price.

So, we’re left wondering if there’s something waiting to happen at Google that prescient execs with a phenomenal understanding of the company and the industry can see on the horizon. Google has plowed a lot of money into startups, green energy, and other mind-boggling projects. He might be worried that they won’t pan out, that they’ll have to be cleared off the balance sheet with a huge write-off. He might be worried about a million things.

Yet the fact that he sold practically nothing during the bull market of 2009-2011 suggests that he may see something beyond Google: the hoped for Great Rotation, for example—from those who know to those who don’t. From the Eric Schmidts to mom-and-pop retail investors. And once that’s accomplished….

Small investors lost a bundle in the last crash. At the end of their wits, they got out at the bottom, and stayed out during the subsequent run-up. But now, they’ve been driven to desperation by the Fed’s zero-interest-rate policy, as inflation has hammered their CDs that yield almost nothing. In order to stop losing money slowly but surely, they’re jumping into the stock market once again, buying the very shares Schmidt is selling—or so the smart money hopes—only to face once again the risk of losing a lot of money fast.

That was the Fed’s policy every time. They didn’t care in 2000 that the market demolished a bunch of young upstarts that had gotten unjustifiably and unnecessarily rich. Let them crash. They did it again during the financial crisis. Let them crash. Only when it started taking down their cronies, did they get nervous—and handed them trillions.

Mr. Schmidt isn’t alone. Corporate insiders were “aggressively selling their shares,” reported Mark Hulbert. And they were doing so “at an alarming pace.” The buy sell-to-buy ratio had risen to 9.2-to-1; insiders had sold over 9 times as many shares as they’d bought. They’d been aggressive sellers for weeks. That they dumped shares in December, when the sell-to-buy ratio was 8.38-to-1, could have been the result of the fiscal-cliff theatrics, but the latest sell-to-buy ratio was even worse.

Instantly, soothing voices were heard: “don’t be alarmed,” they said. But Mr. Schmidt and his colleagues at the top of corporate America, multi-billionaires many of them, are immensely well connected, not only to each other but also to the Fed, whose twelve regional Federal Reserve Banks they own and control.

For the mere public, there have been vague and mixed signals that the Fed might finally stop its drunken printing frenzy—that the only thing it is waiting for is the completion of the Great Rotation of equities from the smart money to mom-and-pop money. Once that’s completed, to heck with the markets. But for Mr. Schmidt and his buddies, the signals might not have been vague and mixed, but clear and actionable.

At the other end of the income spectrum: with the average cost of attending college at $120,000, a family of four should expect their children’s college to cost more than a home. Optimism about the value of education provided justification for students to borrow $42 billion from the US this year. Yet many of them will end up as student-loan debt slaves. Read…. College Graduates Are The New Debt Slaves.

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39 comments

  1. fresno dan

    maybe he doesn’t want to support an “evil” company….
    http://www.ritholtz.com/blog/2013/02/governments-move-to-destroy-online-anonymity/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

    “Some of the more high profile and highly trafficked sites being monitored include the comments sections of The New York Times, The Los Angeles Times, Newsweek, the Huffington Post, the Drudge Report, Wired, and ABC News.”

    Being on Nixon’s enemy’s list was a badge of honor – c’mon NC commenters – you got to up your game if you want to be monitored….
    ;)

    In addition, social networking sites Facebook, MySpace and Twitter are being monitored.

    ???MySpace??? doesn’t give me a lot of faith in government being up to date…

    “In other words, Schmidt acknowledges (in the first quote above) that authoritarians want to destroy anonymity … and Google will help them do so.”

    1. different clue

      The stakes are higher now. Nixon might have had you tax-audited. But he wouldn’t or couldn’t have had you drone-striked, or suicide-engineered, like Obama does. The “enemies list” of yesterday is the “kill list” of today. Do you know anyone eager to get on the Kill List? Or the Engineered Suicide list?

      1. Nathanael

        Schmidt may, alternatively, be beefing up his private security against exactly such an eventuality. We ordinary folk can’t defend against a violent, authoritarian government, not individually.

        A man with $3.7 billion? He CAN.

        Schmidt has already described some nasty dystopian scenarios for the future (…google to find his speech.) Perhaps he has decided to invest some money in a different future, but doesn’t feel that he can just spend Google’s money on it.

  2. Lafayette

    But why would he sell 5 million shares, about 53% of his holdings, with Google stock trading near its all-time high?

    Silly question, n’est-ce pas? He should sell whilst the market is low?

    Or maybe he figures its the right time to diversify – like the announcement said.

    Or maybe Google is heading towards the Deep Doodoo because the French government forced them to sign an agreement by which, in order to index publications, they must pay royalties to the publishers. Which is likely to be a precedent for other countries as well.

    (Ah, those French … quel je-ne-sais-pas-quoi! Aka Chutzpah. ;^)

    But imagine if Google had to pay royalties in order to index all copy-written public documents made available on the Internet. After all, is indexing without permission not an abuse of copyright laws? Maybe not in US, but that seems to be the case in France.

    How many other countries will not see likewise … ?

  3. Clive

    Not just Google. The TBTF I am acquainted with has seen the C-suite making a big public en masse “buy” of its equity about a year ago and a (natch) much more surreptitious selloff in the past couple of months. One or two individuals, 50 or 100,000 shares at a time, that sort of thing. Also a large number of next tier departures. Could simply be taking profits and career decisions. But then again…

    1. jake chase

      This morning I noticed substantial recent executive selling in Honeywell, also at an all time high. Much of it was coupled with stock option exercises which resulted in a 50% profit. Years ago, this ran afoul of SEC Rule 16b and the profit would have been recaptured to the company. Of course, these days there is no securities regulation and this kind of thing is also routine.

      I am browsing for big cap stocks to short. Of course this is dangerous and you need stops, but any small fry buying at these prices can only be insane IMHO.

  4. Maju

    Thanks for this info, Wolf. It’s very interesting.

    I wonder anyhow why would you expect any half-successful businesspeople to sell in bull market? You hold and resist if you can and then sell when stocks are up again.

    I am a bit concerned that these sales of key Internet-related assets (Facebook last year, now Google) may imply also transfer of these online utilities to people more interested in control and censorship.

    But it seems that it is a broader movement towards cash (can cash withstand the debt crisis?, are they buying gold or some other refuge asset instead?) so I guess that the economy and markets are the thing to watch first of all. Any chance that the euro-crisis will finally evolve into euro-collapse? Or is this more about the sustainability of the dollar floating on infinitely expanding debt? Or then, is it about a war about to begin in East Asia?, Iran?

    What do they know that we do not?

  5. William

    Q: Why is Schmidt selling when Google stock is at an all-time high?

    A: Because Google stock is at an all-time high.

    1. Art Eclectic

      Exactly. There does come a point where it makes sense to cash out, build your dream retirement and park yourself there.

      Not everyone is a gambler addicted to “one more roll of the dice.”

  6. Paul W

    Isn’t that what investment is about, buying low and selling high? With insider information you can even get the timing right.

    Of course a cynic might suggest the market is a giant pyramid scheme. Insiders are in and out first, while everyone else gets the Albanian treatment. Still, for people to lose money in 2008 then return to the market really is asking for trouble. There are other options. Maybe not great options but better than taking a second voyage on the Titanic.

    1. different clue

      Well, no. Buying low and selling high is trading or speculation, not investment. Investment is paying to buy some kind of resource or revenue pump which one can then use to extract revenue streams or revenue-izable resource streams for a long time to come.

  7. j.s.nightingale

    Yes, but what is he buying with it? We should worry if he is holding cash, and worry more if he is buying bonds and treasuries. Whereas if he is diversifying equities that is surely a good sign for (his take on) the general market.

  8. R Foreman

    [In 2011, he eased out of about 300,000 shares, a mere rounding error in his holdings. But in 2012, he opened the valves, and in 2013, he’d open the floodgates. So it’s not “routine.”]

    The difference between these recent years and the start of the crisis (2007-2009) was that initially he didn’t understand what was happening, as many people didn’t. 5 years of discussing this with his broker gives him an idea what’s happening.

    I’m sure he wouldn’t admit he didn’t have a clue in 2008. Hell, in 2008 Buffet was trying to figure out what all the excitement was about. Global economics and monetary systems must not be required knowledge for mogul-dom.

  9. Mel

    What’s the structure of Google shareholding now? ISTR Mr.Facebook, whatever he sold, holding enough shares to keep control of the company, so when hungry investors told hime to get busy monetizing those customers, he might tell them to get stuffed.
    Schmidt’s selling could cause the decline if it lets investors gang up to kill the gold-egg-laying goose.

    1. Chauncey Gardiner

      Re: … What’s the structure of Google shareholding now”?

      Yes, I agree. To whom the shares were sold is a material question to what is really going down here. The sale wasn’t necessarily to Mom & Pop. Take a closer look at who the largest shareholders are now at many of America’s largest corporations in the wake of repeal of the Glass-Steagall Act, market crashes, neutering of federal regulatory agencies, and unlimited Fed QE.

      Not making a bullish argument here, just observing who has garnered control of significant resources through their control of the issuance and distribution of Money, and their control of the Markets and Media (“The 3M’s”).

      There are sound public policy reasons why enormous accumulated wealth should be regulated and taxed. And I say this reluctantly.

  10. MacCruiskeen

    “He could diversify into treasuries, for example, which would guarantee him a loss after inflation”

    Starting from a position of $3.7 billion in cash, how many lifetimes of inflation would have to pass before he begins to notice? You’re right that no one needs that much cash for practically anything you could buy for yourself, but at that point you don’t really need investments, either. If you don’t really need that money for anything, why worry about investments that will just give you more of something you don’t need?

  11. Rich R

    Isn’t everything proceeding on schedule…? The “smart money” (insiders) are about to fleece the “dumb money” (everyone else).

  12. KFritz

    So, to summarize the article (as I understand it) Schmidt may be selling because the current configuration of the equities markets and government regulation/management will prevent stocks from rising much further and then drive them down.

    Another reason may be that he sees that Google’s business model has peaked, and that its position in the internet/tech world will weaken over time–Microsoft looked bullet-proof 10 years ago!

    A combination of these reasons would be a VERY compelling reason to sell big.

    1. Mark P.

      @ kfritz: The former, likely. The latter, unlikely.

      Android is the dominant OS in mobile, with 70 percent of the market. So it’s arguably the dominant OS in the world. Moreover, it’s going to keep growing as Google plugs in new AI tricks, especially exploiting speech recognition.

      How that plays out I don’t know. But it obviously isn’t bad for Google, is it?

      And there are other things. Google is an advertising company now. But it’s the one stack-type company that’s totally capable of morphing

  13. different clue

    If big holders of all kinds of stocks in all kinds of unrelated companies are selling off big stockblocks, what are they buying? Are they buying the sort of “cash equivalents” which can be very easily sold again to raise pure money to buy back stockblocks with if the stockshares go way way down in price?

    If Google goes to some inert doldrumy fraction of its current price and stays there for some years even while Google continues to be a well loved and widely used function on computer machines, will Schmidt buy big blocks of Google again after he thinks it has been down enough for long enough? Time will tell.

    Mom and Pop should pay all their debts down to zero if they can, and then buy hundreds of cans of canned fish in cans to spend the next few years eating it back down. Mom and Pop should really stay of the PumpenDumpen hamster wheel if they can.

      1. Skippy

        Abstract

        Over the past several decades, and particularly during the last 10 to 15 years, there has been a rapid increase in the accessibility of legalized gambling in the United States and other parts of the world. Few studies have systematically explored the relationships between patterns of gambling and health status. Existing data support the notion that some gambling behaviors, particularly problem and pathological gambling, are associated with nongambling health problems. The purpose of this article is to provide a perspective on the relationship between gambling behaviors and substance use disorders, review the data regarding health associations and screening and treatment options for problem and pathological gambling, and suggest a role for generalist physicians in assessing problem and pathological gambling. A rationale for conceptualization of pathological gambling as an addictive disorder and a model proposing stress as a possible mediating factor in the relationship between gambling and health status are presented. More research is needed to investigate directly the biological and health correlates associated with specific types of gambling behaviors and to define the role for generalist physicians in the prevention and treatment of problem and pathological gambling.

        Keywords: addiction, pathological gambling, treatment, prevention, substance abuse

        http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1495100/

        Gambling is an activity that causes considerable harm to many Australians due to its negative impact on individuals, families and communities through problem gambling. It is essential that gambling and problem gambling are well understood, and that the regulation of gambling – at individual, community, industry and government levels – is well informed. Psychology, as a science and profession, has much to contribute to understanding gambling from the perspectives of theory, research and practice. Recognising the critical role of psychology in addressing this important public issue, in 1997 the APS developed a Position Paper, Psychological aspects of gambling behaviour.

        Much has changed in the subsequent decade – opportunities for gambling have expanded and embraced sophisticated new technologies, the scientific understanding of gambling behaviour has grown, and problem gambling has become acknowledged as both a public health and mental health issue. The APS has consequently commissioned a new Review Paper, which provides an overview of major developments in understanding gambling from a psychological perspective.

        http://www.psychology.org.au/publications/statements/gambling/

        Skippy… Pokie machines for the poor (lambasted for smoking – drinking and playing and not paying bills), yet the well heeled institutionalize it as a way of securing ones future… who really needs their head shrunk?

    1. Chauncey Gardiner

      Thanks, different clue and Skippu (below). Any other thoughts on how to protect one’s health and welfare from the Squid’s tentacles?

      I learned something as a result of your posts, but don’t know that I have the self discipline to stay “on diet”:

      … “Both the canned albacore tuna and wild king salmon have shelf lives of approximately 8-10 years! In fact, the longer you are able to store your cans before eating them the better! By letting the cans slightly age, the natural juices and oils can settle into the fish, which increases its soft flakey texture. The shellfish we carry have a shelf life of 2-3 years. There is no apparent expiration date on each can; the expiration date is found within the cannery code.”

      http://answers.yahoo.com/question/index?qid=20080127100009AAUP8A9

      1. different clue

        Albacore tuna is supposedly one of the “bigger” species of tuna which often live longer and get bigger before they are killed for us to eat their dead meat from cans. They are higher on the food chain and may be richer in mercury than whatever tuna it is that provides us the utility “chunk light” tuna meat. I settle for the “chunk light” because it is cheaper. Imagine my pleasure upon learning that it may have less mercury than albacore. Hopefully it will last as long in the cans as the albacore and king salmon you referrence.
        I first began buying many cans of tuna when I thought I was about to get fired from my job many years ago. I happened to see tuna on special sale in Krogers and thought I’d better buy a bunch as I prepared to “camp out” in my little dwelling unit. I never thought I would see such a price again. And each of several times after that when I saw such a price again, I thought “this must be the last time. They can’t do this over and over”. So I ended up with a lot of tuna. It held for years in the cans as I slowly ate it down. Out of several hundred cans I have eaten so far (some from more recent purchases), only two cans were swollen. One smelled/looked bad inside so I threw that away. The other gassy-hissed when opened but it looked/smelled okay so I boiled it awhile and then ate it.
        Lesson learned: if the can is swollen throw it out, even if it looks/smells okay.
        How to stay on diet? Stock up on several different kinds of canned fish and eat different kinds on different days . . . cooked different ways. And have other stuff in the house so you can eat other stuff if you feel like being fishless that meal.
        Here’s an ethical dilemna which I stumbled across and then thought my way out of. I read recently that Pacific Jack Mackerel is being strip-mine fished to commercial extinction off the western coast of South America. If I buy so much as one can, I help cause that extinction. But if I don’t buy any, then there will be none for me to buy shortly after the fish goes commercially extinct. What to do? I will try my best to pay attention to the status of Pacific jack mackerel. IFF! I read/hear from reliable sources that it has alREAdy BEEN driven commercially extinct, THEN I can buy some legacy cans if any remain with a clear conscience, because buying legacy cans will not further contribute to an extinction which has already happened. And if my refusal to be even one can somehow prevents the jack mackerel from going commercially extinct to begin with, then I will have done a good deed.

          1. different clue

            Yes, I eat sardines too. But I do like my tuna and I do take that risk.

            Salmon are supposed to be low-mercury because they supposedly eat very small things low on the food chain, rather than eating barely-smaller fish who ate barely-smaller fish and so on down.

      2. different clue

        How to protect one’s health and welfare from the the Ripoff Squidustrial Complex? I suspect there is safety in numbers and strength in organized numbers too.

        So one protects one’s own meager wealth and health as best as one can in the immediate now and then looks around for other people who seem to be doing versions of the same.
        Perhaps there are enough of them findable in different places that they could be interested in the Social Collective Survivalist Economic-Lifeboat/Economic-Fortress work being pursued by Catherine Austin Fitts, Woody Tasch, and hundreds of others. Perhaps whole suburban neighborhood-loads of people try to create some neighborhood-wide unmonetized unmonetizable foodgrowing capacity. Perhaps then modest water-harvesting and energy-harvesting capacity.

        But people will be watching those who talk a good collective survival game to see if those people are living a good personal survival game first. So visible personal subsistence-ism or semi-subsistence-ism is an important first step.

        And there is still a real chembio-physical economy buried and struggling under the Financialist Ripoff Economy.
        Buying and/or selling and/or bartering and/or gifting as appropriate the things that are done and sold within that economy will keep people in jobs and/or in bussiness within that economy. Its dull and unromantic, just like millions of self-identified progressives cancelling electronic payment and going back to billpay the mailway to keep the USPS alive. If you want some sardines in the future, buy and eat enough sardines in the present to keep sardine workers working sardines in the present, so they will be there for the future.

  14. Jay

    If I recall correctly, James Montier illustrates in his book on behavioural finance (original research is probably Kahenman or someone similar) that while execs suck at predicting the short-term fate of their own companies, and aren’t particularly good in aggregate at calling market bottoms, calling market tops (in aggregate) is where they really excel.

    I believe that the insider buy/sell ratio is among the only indicators exhibiting a high-correlation to the broader market’s future movement.

    1. different clue

      You are correct. I tried boiling the okay-smelling/looking tuna from inside a bulged can once and I got pretty sick for several days. No more chances on bulging cans no matter how okay they look/smell.

  15. Dennis Redmond

    Why did Schmidt sell? As a digital media scholar who dabbles in political economy, my best guess is there are two reasons.

    One is called Yandex, and the other is called Baidu.

    Less cryptically: the post-Americentric era of the internet is dawning. The industrializing nations of the world have huge audiences (necessary to generate significant network effects), tons of cash, savvy entrepreneurs, and lots of smart coders. Still don’t believe me? Ask Ebay about Alibaba.

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