🎙️ Shadow Insider Trading

[5 minutes to read] Plus: Americans spend a record amount on food

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By Matthew Gutierrez and Shawn O’Malley

After a “parabolic” stock rally, all eyes were locked on Nvidia earnings this evening.

The chipmaker recently surpassed the market capitalizations of both Alphabet and Amazon — no big deal or anything — as its stock price has soared fivefold since 2022.

On Wednesday after the bell, Nvidia did it again, crushing Wall Street estimates and growing sales 22% from the previous quarter.

Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

  • China’s new stock measures

  • The first ‘shadow insider trading’ case

  • Food’s share of income near all-time high

All this, and more, in just 5 minutes to read.

POP QUIZ

The space company Intuitive Machines is on track to complete a moon-landing mission by Thursday. As its mission has continued successfully, its stock has surged. How much has it increased in the last month? (The answer is at the bottom of this newsletter.)

Chart of the Day

In The News

😵‍💫 China Implements New Measures to Stem Stock Selling

Generated by DALL-E via ChatGPT

Drama in China’s stock market continues to dominate investors’ attention globally as officials race to boost sentiment and prevent a fourth year of consecutive declines.

Their approach has been multi-faceted, from promising tighter supervision of algorithmic “quant” funds that tend to follow momentum spikes and can accelerate sell-offs to restricting institutional investors from selling at the beginning and end of the trading day.

  • As Bloomberg reports, “While authorities have been ratcheting up curbs on bearish bets (i.e., short selling) for months, the ban on net selling at the open or close represents a notable tightening of the government’s grip on market activity.”

  • One quant hedge fund that received a temporary trading ban after dumping $350 million of stock in a few minutes on Monday said it had learned its lesson and would “resolutely comply” with regulators, commenting in its apology that it has always been “bullish and long on the Chinese equity market.”

Why it matters:

Still, shaming bears, restricting high-frequency trading, and adding limits on when investors can sell probably isn’t enough to re-inspire long-term confidence in Chinese stocks.

  • But they’ve had success in at least temporarily turning the tide, with the Hang Seng index staging a ~13% rally in recent weeks.

Big picture: For officials, a recent five-year low in China’s benchmark CSI 300 stock index conveys waning confidence in President Xi Jinping’s ability to keep the economy growing and mitigate further fallout from an ongoing real estate bubble.

  • Consequently, efforts to support Chinese stocks have become increasingly forceful, with state funds being used to purchase shares directly.

  • Meanwhile, the country announced its biggest-ever reduction in mortgage rates on Tuesday, hoping to revive property markets.

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📊 An Executive Bought a Rival’s Stock. That’s Insider Trading?

What happened when a biotech executive bought options on another drug company’s stock, earning $120,000

The SEC came knock, knock, knockin’.

The SEC says the executive committed insider trading, even though he didn’t buy his employer’s stock and had no inside info about the company he bet on. 

  • The case goes on trial next month as the latest test for insider trading law.

  • Congress hasn’t officially defined an insider trading law, leaving regulators and courts to decide what qualifies.

  • This case might be the first involving “shadow insider trading,” which happens when executives make well-timed bets in the shares of other companies. 

Case study: In this example, the SEC alleges the executive bought options tied to the shares of a rival drugmaker because he knew they would pay off when the market heard Pfizer was buying his own company, Medivation. 

No precedent: No court has yet addressed the idea that executives can go too far when “they deploy their specialized knowledge or expertise to trade in the shares of rivals,” one law professor observed. 

  • Noted another law analyst: “I do think this is a push of the law and they are seeing if they can get a court to bless what is a bit of a stretch of the existing parameters.”

  • But on the flip side, the SEC notes that the employer forbade employees from trading other companies’ shares when they have nonpublic information, and, second, the executive traded the options on his work computer only seven minutes after he learned Pfizer would buy his company.

  • The SEC wants to set a precedent with a fine equal to about $360,000, then bar him from serving as a director at any public company. 

Why it matters:

In recent years, the SEC has tried to take a bigger stand against insider trading overall, especially as insiders have more access to information than ever. 

Exploiting secrets: Academic researchers say shadow insider trading is widespread in the stock market, and “executives with nonpublic information about their companies can easily exploit those secrets by trading peer stocks that tend to move in the same direction as their own stock,” according to a paper published in 2021 by University of Michigan researchers.

 

More Headlines

⚾️ Apple unveils new sports app

🏠 Latinos and Asian Americans see the biggest homeownership gains 

🛑 Ahead of tax season, how the IRS targets top earners for audit

🤬 FuboTV sues ESPN, Fox, Hulu, and Warner Bros over new sports-streaming venture

✔️ The tax loophole that helps Temu and Shein keep prices so low

📉 Palo Alto Network’s stock drops the most since its 2012 IPO

🥕 It’s Been 30 Years Since Food Ate Up This Much of Your Income

The last time we spent this much of our income on food, C+C Music Factory was thriving on the Billboard charts. 

Staying sticky: Though inflation has cooled from its blistering pace in 2022, restaurant prices rose 5.1% last month, while grocery costs increased 1.2%. 

  • Restaurants and food company leaders say they’re not raising prices to make more profits; they’re still dealing with high labor costs, growing costs of ingredients, and other ancillary costs.

  • Some food companies say they’re the ones getting pinched, not consumers. Go figure. But it’s possible: Prices for sugar, beef, french fries, and vegetables are still rising for several reasons, including extreme weather and supply chain hiccups. Companies are also facing heightened labor costs.

  • “If you look historically after periods of inflation, there’s really no period you could point to where [food] prices go back down,” said one food executive. “They tend to be sticky.”

Begrudgingly accepted: In 1991, Americans spent 11.4% of their disposable income on food, part of the steep food price increases U.S. consumers felt after the 1970s inflationary period. 

Three decades later, food spending has retained that level: In 2022, consumers spent 11.3% of their disposable income on food.

  • Analysts believe that price psychology is at play, and consumers will eventually adjust to the new normal at the grocery store. Higher prices at the supermarket (and on menus) will just “be accepted.”

  • “Just like a gallon of gas, it becomes the new price and people get begrudgingly used to it,” he said.

From The Wall Street Journal

Why it matters:

For the past couple of years, Americans have felt squeezed at the gas pump (especially in 2022), the housing market, and the grocery store. 

  • Meanwhile, some food makers have shifted from improving healthy options to providing more affordable options for families. 

The bottom line: It’s unusual for prices to skyrocket as much as they did in recent years. Some analysts expect grocery prices to decline this year as food makers come under pressure from consumers and retailers. That remains to be seen. 

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Quick Poll

Sentiment in the stock market now is...

(Leave a comment to clarify your thinking)

Login or Subscribe to participate in polls.

Yesterday, we asked: Where is your go-to credit card from?

— After selecting Chase card, one reader said: “Use it for travel points and benefits.”

— On team “other,” answers varied from Alaska Airlines to United Airlines and Fidelity.

TRIVIA ANSWER

Intuitive Machine’s stock is up over 230% in the past month as it seeks to deliver 12 government and commercial payloads to the moon, partly via a $118 million contract with NASA.

See you next time!

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