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The Federal Reserve national flow of funds accounts (Tables F 100, F 102, and L 102), show that over the last five years, net sales of corporate equities by US households proceeded faster than corporations could match with buyback programs.

Americans Sell Equity Holdings

Incomplete flow of funds data

The breakdown between sales by individuals exercising stock options and sales of those simply reducing net holdings of equities is not known.

• The influence of short sales by individuals on the household figures is not disclosed;
• The possible inclusion of hedge fund data in the household statistics is also unknown.

However, the relative size and correlation between household stock sales and corporate equity buybacks indicates that most liquidations by individuals are related to executive option programs.

We know that most ordinary investors hold stocks through funds and pension plans, rather than directly.

The total number of stocks outstanding has not changed significantly, because stock buyback programs have been designed to neutralize the dilution of equity by options.

Therefore, we may infer that the dollar value of net sales by households is a fair indication of the profits obtained by executives and company insiders on stock option programs.

In the five years 2001-2005, net equity sales by households totaled $1,156 billion, which suggests that corporate profits transferred to option holders in half a decade may have been on the order of one trillion dollars.

Selling out America — Big Time!

Corporate executives and their flacks justify buybacks by claiming that to buy a company’s stock shows that they have faith in the future of the enterprise.

See “The Great Misleading” for the flawed logic in this claim.

Corporate pigs at the trough

However, for the sake of argument, let us say that executives are sincere in their belief in the future of their enterprise.

Why would it be, then, that while they are receiving vast sums through exercising stock options that they are not re-investing this money in their companies?

Another way to look at it is this: in five years, net sales of corporate stocks by individuals amounted to over ten percent of market value of all equities!

For those of us who believe that what insiders do with the stock they own is evidence of their opinion as to the true value of the stock, the massive sellout of over a trillion dollars in just five years should send a signal to even the most naïve stock booster.