What if the Gainful Employment Rule Gets Weakened?

Reuters announced that The Department of Education new regulations, known as the "gainful employment rules" were sent to the Office of Management & Budget (OMB) on  May 3rd. It is the last of many rulings on how to regulate for-profit education schools  so that they are more accountable to their students in regards to U.S. government dollars spent on school loans. Already finalized are new rules to regulate recruiting practices, graduation rates & job placement.

According to MSN,
"For-profit colleges are facing scrutiny from regulators and lawmakers who say some universities aren’t adequately preparing students for employment and graduates can’t repay their federally backed loans."
"No additional information regarding the potential timing of a final ruling was made available; however, we note that when the initial draft of the gainful employment rule was submitted to the OMB last October, its review took approximately  10 days."
"Finally, department officials have been silent on the ultimate implementation date in recent months, despite a six-month delay in its ruling. We assume that adoption of the gainful employment proposals will remain at the current July 2012 date."

For-profit schools have been lobbying to get the final ruling deferred or weakened.  There is a movement  to get the legislation delayed.  They have even impuned  Steven Eisman lobbying for the passage of this regulation to short this sector. A citizens group has written, "Given the ongoing IG investigation, the potential for an SEC investigation, and the significant congressional concern, why rush the regulation out?  What if the IG investigation reveals the regulation was, as it appears, improperly promulgated?  Would it then be revoked?  Public confidence in Education’s regulatory process has been shaken.  The department would do well to wait for the results of the IG investigation before deciding whether and when to publish the gainful employment regulation."

What happens if they succeed in delaying or scratching these rules?
Many schools have already implemented new pilot programs for these regulations. Many have already taken the initial disruptions early and will see improvement throughout the year as things stabilize.

Lincoln Educational Services Corp. (LINC) has the best Benjamin Graham Value number but it's profits fell for this last quarter and guidance was restated downwards. They took the pain early and will see improvement throughout the year as the disruption stabilizes. They have no buyback program & instead offer dividend 6.20% yield.

Bridgepoint Education, Inc. (BPI) bucked the trend. Their last quarter was a beat, although this company is not as good a value play. For-profit colleges are permitted to get as much as 90 percent of their revenue from U.S. student grants and loans.

But BPI enrolls very few student who use grants and loans. 
[Edit: There is a perception floating around that BPI has fewer Title IV students than other for-profits. According to their 10K filing, "In the years ended December 31, 2010, 2009 and 2008, Ashford University derived 85.0%, 85.5% and 86.8%, respectively, and the University of the Rockies derived 85.9%, 84.6% and 80.8%, respectively, of their respective revenues (in each case calculated on a cash basis in accordance with applicable Department regulations) from federal student financial aid programs"  

But that doesn't negate the premise, necessarily. ]

Articles:
http://www.fool.com/investing/general/2011/05/07/a-fool-looks-back.aspx
http://us.rd.yahoo.com/finance/external/forbes/SIG=145cov765/*
http://www.forbes.com/2011/05/03/tuesday-sector-leaders-music-electronics-stores-education-training-services-marketnewsvideo.html?partner=yahootix

Found this week - May 6, 2011

In the news this week was a Milken Institute Conference on Social Media and the effects on trading by Facebook, LinkedIn, Twitter and others.

From the Milken Institute website about page:

"A 501(c)(3) public charity, the Milken Institute is a nonpartisan, independent think tank whose work makes a difference in the lives of people worldwide by helping create a more democratic and efficient global economy."

Eye-opening conference video about social media - http://www.milkeninstitute.org/events/gcprogram.taf?function=detail&eventid=gc11&EvID=2872

Follow Twitter Trends - http://mashable.com/2009/04/04/twitter-trends/

Trading Myth #4 Insurmountable Technical Barriers to Trading

Trading Myths debunked - http://www.uatinc.com/content/docs/Trading_Myths_and_Realities_4-12-10.pdf

Multiple Parallel Universes

I'm not telling you to try multiple trading styles. Consistency in methodology is essential for success. What I am saying is that we build intellectual walls around our lives. We have a standard set of friends, we read the same blogs as our peers, and we gravitate towards people with the same interest and opinions as ours.

But it's not only our own cognitive bias we have to be aware of.

Even google search gives us results cultivated from our tastes, opinions and location. If you visit only one financial site, do you know what topics and information they are not writing about?

When I start to explore and study a new financial topic or tool I'm always blown away. My findings always lead to new vibrant independent and self-sufficient parallel universe of people, blogs and ideas. Small blog lead to blog rolls of sites I have never heard of. Articles lead to professional experts I never realized existed. I don't know why these sites are hidden or anonymous. These forums are hidden away in small niches and small worlds. Can you use this new data in your trading? Maybe, but you'll have to go look for it. Multiple Parallel Universes exist that hide from us until we are ready to find them.

Sell, Sell, Sell!

In such perilous times, caution and circumspection is most important.  Be cautious how you choose your words, as Jeb Handwerger, editor of GoldStockTrades, teaches us via this Barron's article:

"Now’s the time to transition out of precious metals ETFs,  Jeb Handwerger, editor of GoldStockTrades, told clients in a note today.

Gold has reached overhead technical resistance and overbought conditions are apparent, he wrote.

Handwerger also pointed out that he’s not alone in repositioning his portfolio."

Transitioning, repositioning, and not being alone amongst professionals in one's actions.  Best not to say "sell, sell, sell!".

..TS. 

Experimenting with Insider Transactions

This is experimental and I have no expectation other than hope to think that this thought process will work. I am experimenting with a method to use insider transactions as a way to pick stocks to watch.

Reasoning:  According to Motley Fool , "Executives who own 30% of a company, for example, are motivated to make it succeed. The best employees and executives work harder when they work for themselves. As shareholders, they can see a significant correlation between their efforts on the job and their compensation. Insiders buying shares is also usually a good sign, as it means they expect the shares to rise."

Investors believe corporate insiders may have better insights into the health of a corporation than analysts or the general public. "Further, insider buys are especially useful. Since insiders have exclusive information on the company performance, if they are risking their own money on the stock, usually they should have good reasons, especially when several insiders buy the stock at the same time"

First Attempt:
-- Using Finviz.com stock screener, I set inside ownership to [ over 30% ] and left everything else as [ any ].  I went to the Ownership Tab and sorted in descending order the owner's insider transactions field.

Result: I found the insider transactions were not broken down into individual specific data and showed aggregate totals.

Second Attempt:
-- Find a screener that gives good line item transactions --
I found several websites that had good screener programs and large databases with significant historical transactions. All seem to have their own proprietary methods of aggregating and differentiating insiders.

http://www.vickers-stock.com/

http://www.insiderinsights.com/detailed/screens.php -- jonathan moreland methodology

http://www.insider-monitor.com/resource.html (real-time website)

http://insidercow.com/

http://www.secform4.com/i-ratios.htm (real-time website)
http://finance.yahoo.com -- general finance site

From www.secform4.com:

Number of Insider Buy/Sell Ratio: Ratio between the total buy filings and the total sale filings. Daily Insider Net Buy/Sell Ratio: Ratio between daily net buying and net selling (in dollar amount).

Result:

Finding that the information is inconsistent and varies from site to site. I believe that these transaction should be filtered through more subtle means.

Yahoo defines insiders as:

"An insider is an officer, director, person with a policy-making role, or beneficial owner (holder of 10% or more) of a company's stock. Insiders are both individuals and corporations, and are required to report these holdings:

• Direct Holdings: Holdings that are held in the name of the insider.
and
• Indirect Holdings: Holdings that are indirectly controlled by the insider, and are held by another entity, such as a family member, a trust, a company plan, or even a corporation to which the insider is affiliated. In many cases, the same block of indirect stock might be claimed by several insiders, such as a group of trustees over the same trust, or several partners in the same partnership. Some insiders hold all of their stock indirectly."

Jonathan Moreland goes into significant subtle detail on how different transactions are meaningful.

George Muzea has also written a book about the subtle different types of insiders. Just as there exist value & momentum investors, there also exist value insiders & "catalytic insiders".


Third Attempt:
-- Read and study --
In reading and studying about insider transactions, George Muzea - "The vital few vs the trivial many" gave us six insights to consider:
look for de
"1. Insiders normally buy into price weakness and sell into price strength; therefore it is important to look for deviations from this behavior.
2. Stocks that have insider selling (three or more insiders) into price weakness should be considered seriously as candidates to sell.
3. Insider trading by operating officers is more predictive than those of other insiders, especially outside directors.
4. When analyzing insider trading, it is important to observe previous trading patterns to see if the current trade is in line with or a divergence from normal behavior.
5. When insiders buy stocks that are depressed in price and out of favor, much of the time the buying is a sign of value, but sometimes it is simply designed to ignite investor confidence. The best way to determine which is which is to review carefully the dollar value of the purchases. If the insiders had sold previously at higher levels, they should be buying back at least 25 percent of what they sold; otherwise, they could be window dressing.
6. Most of the time one should look for clusters of insider buyers who have all made decisions to buy stock in their companies. However, sometimes a single trade can be predictive, especially when the buying insider has a good trading history in that stock or the purchase is an unusual divergence from past behavior."

Insider Information Video -- Experts


Reaching a Conclusion - Ratios: As in all things, there is more to a inside transaction than just comparing past numbers. Most of these database website are deriving their information by comparing trading patterns from 2 year or longer past history. You could not duplicate their effort from a simple stock screening. You cannot match the power of the different website historical data mentioned above.

George%20Muzea states, "It is important to understand that insiders really have only about a six-month visibility on their company’s prospects. They have a good handle on business conditions for about two quarters. However, beyond that they are guessing just like everyone else."

Therefore a simple ratio would be better to quantify the transaction size and significance, after doing due diligence on the individual insider. www.secform4.com ratios were a good start, but what if you did the following?

1) Just as a "short interest ratio" is derived by dividing the number of shares sold short, divided by the average daily trading volume. You could take a insider transaction and create a ratio of number of shares transacted, divided by average daily trading volume. 


or


2) Float is the number of shares not owned by insiders, therefore  what is the % transaction to the float shares?

The Greeks Had a Word For It: ὕβρις

The Greeks had a word for extreme overconfidence: hubris (ὕβρις).  This is the overconfidence that silver bulls are currently showing, as they just KNOW that silver will hit $100/oz, and the type of overconfidence of those who just KNOW that the silver parabolic move has hit the wall.  Bellerophon tried to ride Pegasus to Mt. Olympus, Icarus tried to soar too high, and silver bulls saw silver replacing the Space Shuttle in regular orbital maneuvers.

Tone it down folks.  Go for a walk.  What does it take to see hubris for what it is, and avoid it?

..TS.

Traders Can Watch Large Block Trades Purchased in the Dark

Dark pools are separate markets from the larger exchanges with all the same rules, except the volume is deliberately hidden or posted with as much a delay as possible from the public. This is done to limit the affect or impact of the market trade. Anybody wishing to dispose/purchase a large block of equity will want to do this quickly and anonymously to get the best deal.

Fair Price discovery and the removal of liquidity are two criticisms of these markets. Are any price improvements given by the system taken away from the rest of us because of the removal of liquidity? Favorable rebates are given to promote liquidity and usage. The "gaming of the system", which happens to some extent on the major exchanges, is also mentioned because of the deliberate concealed actions taken by the participants.

The Myth of Large Trading Blocks
"The average size of an order executed on the New York Stock Exchange (NYSE) and NASDAQ continues to decline, from 1,400 shares per trade in 1998 to 600 shares in 2003. By 2009, the average order size executed on the NYSE declined to 275 shares, and over 99% of orders executed are less than 2,000 shares. The average order size executed on the NASDAQ in 2009 was 270 shares. Meanwhile, some media outlets report industry average trade sizes of less than 200 shares." according to the UAT thought document

Using sell-side/buy-side algorithms the larger trading blocks are broken down into smaller transaction shares and sold throughout the day on large board markets without the public knowledge.

The ubiquity of free [or almost free]   level 2 websites  and brokers-dealers has caused the disappearance of large block market trades. Retail investors only see the smaller blocks listed on their computers. 

Even Professional Investors Want to Know What & How Much Was Traded
As a retail investor, I don't have access to group deals, dark pools or great commission prices. In the news yesterday there was a press release about a new dark pool aggregator. Direct Edge has added access to 7 dark pools by using Connect Edge.  On their website homepage they have a combined total of shares traded for their most active stocks. You could probably do this on any platform. I like anything that's free, so I began my snooping around.....


Silver
Since SLV is on the most active list, the combined total shares exchanged in this dark pool on May 2 were $15.5M. The total volume listed on Yahoo for SLV was $184M. That's approximately ~10% total SLV volume on this site, alone. Yahoo has listed SLV's 3 month average volume as 47M.  $15.5M over $47M is ~32%.

Nasdaq's After Hours volume on SLV WAS $2M shares UP
What about Nasdaq's unusual volume list? SSRI, a mining stock, was DOWN ~10% and had a change in volume of 89%.

In conclusion, these pools don't affect the day-traders or scalpers much; Neither does it harm the long term investors with a long time-frame horizon. But momentum traders, trend followers and shorts are affected. Finding alternative websites with lists of shares traded off the public exchanges would be a way to uncover hidden advantages. Do you know of any sites that have dark pool equities listed?

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Dark Pool directory:
Dark Pool PDF by Advanced Trading Reports
Dark Pool Wiki List