You could hardly be faulted if you think the long bull market and spectacular the rise of the Dow ($INDU) and the S&P 500 ($SPX) in the last few years has unleashed a torrent of billions or even trillions of dollars in new investments in corporate America.
But just the opposite has happened.
The stock market may be a great way to make money, it may be a great way to value companies, it may be a great way to return profits to owners, it may be great for watercooler chatter, but it isn't a great way to funnel capital into companies.
According to the latest figures from the Federal Reserve, the household sector (that's you and me) was a net seller of $500 billion in stock in 1998. That's down a bit from the $513.9 billion sold in 1997. The trend isn't a new one, either. See complete data.
Who bought all that stock? About half of it was just recycled through mutual funds. And insurance companies bought some, so "we" still own claims on those shares. But a lot of it just disappeared. The corporate sector stepped up its net purchases of equities to $178.4 billion from $78.8 billion in 1997.
That's right, more than $250 billion has been sucked out of the corporate sector into private hands in the last two years.
The amount of money raised by corporations through public offerings is dwarfed by the number of shares obliterated by stock buybacks and mergers.
These numbers are no surprise to those who know the number one rule of corporate America: Increase shareholder value. The easiest way to do that is to reduce the number of shares outstanding.
To be sure, corporations are investing billions in new plant and equipment, but they're using retained earnings and borrowed money, not fresh equity from investors. In 1998, the nonfinancial business sector put $844.1 billion into fixed investments like buildings and equipment.
The system is working just as it's supposed to: Some companies use the stock market to raise money while most companies use it to give it away.
The stock market is a great place to buy a share of a corporation's profits, but if you want your savings to go directly into productive investments instead of straight into another investor's pocket, buy a corporate bond.
-- Enrique Diaz-Alvarez Office # (607) 255 5034 Electrical Engineering Home # (607) 272 4808 112 Phillips Hall Fax # (607) 255 4565 Cornell University mailto:enrique at ee.cornell.edu Ithaca, NY 14853 http://peta.ee.cornell.edu/~enrique