New York, NY – Often, readers of Integrity’s ResearchWatch blog disagree with the perspectives or conclusions we reach in our posts, and they express these views in an online response. The following is such a response to our post last week about how insider trading analysis might have been useful in averting the problems that arose in the Countrywide situation.
The following is the full text of this response and the writer’s thoughtful rationale for his conclusion.
The Countrywide situation doesn’t seem to provide a very good showcase for the predictive value of insider trading research. Particularly when you consider how many supposedly smart institutional buyers with big research budgets got buried in the stock.
On September 29, 2007 there was a very good article in the Los Angeles Times titled, “Countrywide CEO Sold Big as Stock Dropped” written by Kathy Kristoph. The article describes the number of times Angelo Mozilo modified his 10b5-1 “plan” over the last year. But the article doesn’t mention how in May of 2007 the Countrywide Board of Directors approved a 26 million share buyback of Countrywide stock (the buyback was financed by convertible debt issue). A couple of the retrospective articles that I have seen imply that the buyback was designed to provide support for the stock while Mr. Mozilo sold his substantial options holdings.
It’s important to note there are also several investment research services that use stock buyback announcements as a leading indicator of stock strength. These services recommend purchasing the stocks of companies which display confidence about the future of their stock’s price by implementing buyback programs. So the Countrywide buyback undoubtedly attracted other buying from investors who believe in this theory on buybacks. It seems reasonable to conclude additional source of demand for Countrywide stock may have added support to the stock’s price in the face of the decreasing profitability in the mortgage origination market.
I seem to recall that even as the sub-prime market began to unravel and several mortgage originators sought the shelter of bankruptcy Countrywide continued making very rosy statements about their position and the future; that was right-up until the day Countrywide drew down its entire line of bank credit (which was 11.5 billion dollars) and admitted its problems.