The Hazard of Morals

Who do I sue?

I admit to being pretty darned pleased about my bearish-leaning market stance on Sunday, March 16, when the extent of Bear Stearns' (BSC - commentary - Cramer's Take) troubles became apparent. To heck with Schadenfreude. There I was, sitting on 50% cash, and lots of shorts to offset my long exposure. I was well positioned to take advantage of the market capitulation that should logically follow the bankruptcy, or orchestrated salvage, of such a large financial institution. Either way, the Bear Stearns event was bound to disturb investors about the state of the U.S. financial system.

Yeah, right.

As we all now know, the historic level of support given to the financial system by the federal government and related bodies stopped the market from collapsing. The argument is that the bailout (not of Bears Stearns, perhaps, but definitely of every other financial institution that would have suffered if capitalism had taken its course) is best for everyone. But anyone with the sort of bearish stance I had going into March 17 certainly didn't fare better. Instead of sitting on a massive outperformance vs. my benchmarks, my lead this year against the indices has shrunk instead.

Nonetheless, the Bear Stearns event does appear to have been a milestone marking a near-term market bottom -- just not the sort I expected. There was capitulation, but it was by our federal institutions. The discussion about "moral hazard" is over. Our government is for it -- and for our own good.

Pardon My Digression

It seems to me, though, that the biggest beneficiaries by far of the taxpayer-financed initiatives are the same financial execs who made megabucks deriving the crud that is now threatening the financial system. Not only are their stocks' prices much higher than they would have been without the massive government intervention, but the avoidance of a crisis based on their toxic products will allow these "smartest guys in the room" to dodge the inevitable outcry for them to disgorge the immense profits they reaped when clogging the wheels of finance in the first place.

But -- to turn the five-decade-old, misquoted phrase of GM's (GM - commentary - Cramer's Take) old CEO -- our regulators obviously believe that what's good for Goldman Sachs (GS - commentary - Cramer's Take) is good for America.

Insiders on the Fence

Insider-Based Market Indicators

Click here for larger image.

Annoyingly, insiders have not been as vocal as they have in the past about whether the bottom is in for this market correction. Although there has recently been a high level of insider buying vs. selling relative to the past three years, the direction of my insider-based market indicators must also be taken into account with a market call. And sideways (e.g., noncommittal) has been the dominant direction of my Indicators for months -- see the yellow oval on the chart at right.

I had been adamant that the rolling four-week average of my weekly buy/sell ratios would rise back into positive territory before this market correction was over. My rationale for expecting this indicator to rise back into its pre-2003 range was that, since the unprecedented negative readings in the indicator corresponded with the advent of the numerous economic imbalances built up since 2003, the indicator should be expected to rise back to more "normal" levels now that those imbalances are finally unwinding.

Well, my indicator did turn finally turn positive. It hit 3% during the week ended March 21, signifying that there had been an average of 3% more companies over that trailing month with insiders purchasing their shares in the open market vs. those selling them. Since then, it's been falling.

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At the time of publication, Moreland had no positions in the stocks mentioned, although holdings can change at any time.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback; click here to send him an email.