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Director trades show bull run may hit brick wall

Source: Reuters - Tue 25th Aug 2009

European company directors have turned bit-part players in the stock market's recent bull run - a sign the rebound could yet founder on a lack of corporate support.

While investors rushed back into equities as the market rallied from distressed levels, company management, as shown through director share dealings, have proved more cautious on both the buy and sell side.

According to 2iQ, a Frankfurt-based research firm which monitors directors' dealings in 17 European countries and covers around 5,000 companies, buying volumes have dramatically dropped so far this year, and particularly during the May-July period.

"Volumes have decreased on both the buying and the selling sides, but the buying volumes have plunged" said Patrick Hable, managing partner at 2iQ.

"We have to go back to mid-2004 to find such low buying volume for a rolling three months period. Directors are definitely not buying much. It's 'wait-and-see' for the moment" he said.

The fact that company insiders have not been buying into the market's recovery could be seen as a red flag, said Pierre Sabatier, head of strategy at Prime View, in Paris.

"Companies are still in the middle of the storm, and managers are definitely not buying into the stock market's recent euphoria" he said.

"This is a sign that company managers remain cautious on the outlook for their own firms. They are not buying, even as a number of stocks are still at bargain prices." 

The trade in a company's stock by its executives and directors is one of many indicators tracked by equity strategists to determine where the stock market is heading, with strong buying volumes generally seen as a "buy" signal.

Over the May-July period, buying volumes reached 685 million euros (592 million pounds) in Europe, down 85 percent compared with the same period a year earlier, when buying volumes reached 4.7 billion euros, according to 2iQ data.

Over the same period, selling volumes dipped 11 percent, to around 1.3 billion euros from 1.5 billion euros a year earlier, 2iQ data shows.

"It indicates that the stock market rally has been more a technical rebound after last year's free fall while the macro landscape has been stabilising, than the result of a real improvement in companies' day-to-day business" Sabatier said.


According to UK financial information website, there were 255 million pounds of buy orders from directors of UK firms during the past six months, compared with 763 million pounds over the same period in 2008.

"It's not a surprise" said Emmanuel Morano, head of equity management at La Francaise des Placements.

"Non-financial companies in the S&P 500 index have seen revenues falling around 15 percent, probably the biggest drop since World War Two. Managements are busy cutting costs and downsizing their businesses to weather the downturn, while visibility remains poor" he said.

European stocks plummeted 45 percent in 2008 and reached a floor in March 2009, but have been rising sharply since then, driven in part by better-than-expected corporate results and a gradual freeing up of the credit markets. 

Both the FTSEuro first 300 index and the wider STOXX 600 index have gained nearly 50 percent since early March and are still down around 42 percent from their mid-2007 multi-year highs, before fears over banks' balance sheets started to torpedo stock markets worldwide.

According to 2iQ data, directors' buying was brisk in the first half of 2008 in spite of the market turmoil.

"It's logical that directors were buyers last year, when there was still economic growth in emerging economies and a lot of people believed in the decoupling theory" Morano said.

"At that time, the crisis was mainly affecting the financial system and had not yet spread to the real economy. But since then, the slowdown in economic activity has been very serious" he said.

After marking a pause in June, stocks resumed their rally in July, as a flurry of second-quarter corporate earnings pleased investors with forecast-beating results.

According to Thomson Reuters data, out of the STOXX 600's 219 companies that have already reported quarterly results in the current earnings season, 112 beat estimates, 2 matched and 105 missed the estimates.

Analysts and strategists have warned, however, that the improvement in earnings mostly came from cost-cutting efforts, and that companies continue to face major headwinds.

"We've got better-than-expected earnings for the second quarter, but if you look close enough, you'll see that this was mainly due to layoffs and cuts in capital spending" Sabatier said.

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