what to do with all that money?

Businesses exist to make money. They spend some money to make some product, turn around and sell that. When they sell their product, businesses generally try to sell it for more than it cost. They can use this extra money to pay themselves well, or invest and grow, making more products or inventing new ones.

As an investor, I always like it when my companies decide to pay me. Returning money directly to shareholders either by buying back their stock or paying a dividend is usually quite rewarding. (I prefer dividends to buybacks, but thats another topic entirely). Business owners like the cash return of dividends, or the increasing share of profit that results from them sticking around through large stock buybacks.

More importantly though, is investing in the business. Companies need to spend money to maintain their operations, replace old machinery, develop new products, hire new talent. Some of these are short term expenses, and some are long term capital investments. Word on the street is that companies are paring back their stock buyback plans in favor of more spending. This is really great news, the companies are ensuring their long term sustainability and growth, and the economy gets a boost from the spending. The growing economy will be good for the companies, who in turn can invest more in their future... you see the pattern.

After a couple of green days, markets started off deep in the red. The EuroZone is preparing for a possible split with Greece. Talks are ongoing and will determine the fallout for our market. By the end of the day, things were calmer, and our markets gained back much of the loss for the day. The S&P and NASDAQ indices actually turned green by close. We are still going to be at the mercy of Europe for some time, as their rocky situation gets ironed out. It's times like these that make me regret ever hearing the term "globalization!"

In the meantime, the US economy continues to gain steam. Housing permits are higher. Foreclosure rates are lower, and today we received news that sales in new homes are better than expected. While many had long given housing its last rites, it was slowly healing. Could this be the mechanism for more widespread growth in the economy?

Good news for graduates... MBAs are getting hired at better rates than the last few years. I hear the same news from my undergraduate students. Slowly but surely, jobs are being added. Here in the good ole US of A, we're doing our part! Now, if we can just get Europe on track...

following the money

Stock indicies are down! The S&P 500 is a whopping 6% off its highs this year (NB: Up 26% off its lows of last year)! Everyone reckons the world must be ending.

Or do they?

Watching where the money is flowing is always important. Some money flows are automatic - if you sell a stock and don't immediately reinvest the proceeds, your money flows into a money market account, or a bunch of high quality short term debt investments, or a FDIC insured savings account - where you are fairly certain nothing bad will happen to it. Some people shift their money from one asset to another on purpose - if they are scared out of stocks, they may turn to gold, or other hard assets. If they are scared out of gold, they turn to US Treasuries (sometimes ironically).

Where is the money flowing now? Are people rushing out of the stock market and parking money in Gold, Treasuries and canned beans?

Not exactly. Some notable inflows have been to the junk bond and bank loan funds. These are very economically sensitive debt instruments, so if one was worried about the long term health of the economy, they would dump these just as fast (if not faster than) equities. It is easier to hang onto a high quality stock than a low quality bond or leveraged loan when things get tough.

The well known junk bond fund ETF has seen an interesting play lately. It appears that an institutional investor has spent the past few weeks acquiring about $800 Million of the fund, only to redeem it for the underlying bonds. Getting the bonds will allow them to have a more selective view, and they are no doubt dropping some from their portfolio, but it is also a more long term view. You don't hold large amounts of individual bonds for the liquidity - they would be very hard to get rid of if things got tight.

A newer fund, BKLN (Bank Loan, not Brooklyn) holds bank loans of highly leveraged companies. It saw $100 Million worth of shares created last week. This is not a massive vote of confidence based on the size of the market, but it is huge considering that was fully 25% of the fund at the time. This is a newer fund, and it is tracking a very illiquid sector. Again, this would be tough to dump if things went south.

People buy Gold and canned beans when they are scared. People by Treasuries when they don't have any ideas. People buy junk bonds and bank loans when they think that everyone else is more nervous than they should be. These two etfs are down only a blip compared to the money flowing out of equities.