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Several of the editors of my investment newsletters, paid and unpaid, seem to be at a loss as to what ails our market. In their opinion we are in a strong economy, job growth is decent, company earnings are good and companies are flush with cash and are using the money to buy other companies, reduce debt, buy back their shares or increase dividend payouts. Investor’s Business Daily (IBD) 8/4/05 featured a front page article titled “Pace Of Stock Buybacks Picks Up As Solid Profit Pad Firms’ Cash.” The article goes on to say: “With earnings strong and U.S. companies loaded with cash, corporate America is on a record pace to buy back its own stock. Companies announced buyback plans totaling $137.9 billion in the first half of the year. If that pace is maintained in the second half, buyback announcements would exceed last year’s record $238.5 billion.” The article also pointed out that “…through last month, 1,206 companies hiked dividends vs. 1,062 in the first seven months of 2004 and 971 in 2003…” If America’s companies are buying back their own stock or using their cash to acquire other companies then they must see value in the current stock market. So what’s the problem? The stock market should be roaring right now with all the liquidity the Fed’s been pumping out. In my opinion it’s all about the cash flow.  Mutual
fund inflows have been negative or flat for the last four years. There
are an infinite number of investors and traders all chasing the same
dollar profit and until more cash starts flowing back into the stock
market the pickings will continue to be slim.So where’s the cash? In my opinion it’s moved into real estate speculation. The following chart makes a nice correlation between the ups and downs of the stock market and real estate. The ‘Bear Mkt’ and ‘Bull Mkt’ flags on the chart refer to up and down periods in the stock market.
Until real estate cools off and the ROI for real estate dries up or heaven forbid – loses value, the stock market will continue to languish in a sideways trading zone. I must confess that I’ve contributed to the problem myself. I recently withdrew a significant amount from my taxable trading account to pay cash for a small distressed rental unit selling for $0.60 on the dollar, located close to a four year college that will generate a nice passive income check every month, regardless of what real estate prices do in the future. We spent more than six months evaluating the local market (which is just now starting to rebound from a localized real estate mini-recession) before buying the property, but with the cost of raw materials - lumber, cement, copper, PVC and steel all rising we believe the cost to build a home in our area will actually increase. We made a conscience decision to pay cash to maintain our debt-free status. We think we made a good investment BUT my stock investing activity has been significantly curtailed. Multiply our foray in real estate investing by several million like minded individuals and it becomes easy to understand the present state of our low volume moribund market. When will money flow change direction back toward the stock market? I think we’re close. I’m carefully watching the DJ REIT INDEX (IRY) and Philly Housing Index (HGX) which are both showing signs of negative divergence and topping patterns. When real estate speculators are no longer able to flip a condo for a quick buck I’ll be looking for Joe Sixpack to start buying stocks.
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