Financial sectors diluting inflows
Stocks inflows are generally what keeps the market afloat. High inflows mark times of good markets, outflows the opposite. While stocks don’t inherently rise and drop with money flow, mutual funds and hedge funds generally have to liquidate assets to afford withdrawals.
The financial sector is doing an interesting run around to bring in capital. Rather than issue debt, financial companies are issuing more common stock and preferred shares to bring in cash. The problem is that these new shares are like IPOs and diminish the shareholder value. This action is what creates stock inflation, something you rarely hear about but you’ll feel it when it happens to you.
The unfortunate part of the credit crunch is that banks are broke and they’re issuing new shares to fix it. What little inflows the market currently sees are going directly to banks in the form of new issues and preferred shares which do little to help the rest of the market. On the other side of new issues we’re also seeing lower dividends either as a result of dilution or due to a lack of revenue.
Lowered dividends are one thing that investors hate with an absolute passion. Value investing, a strategy that might favor financials at their current prices, puts a lot of decision making on the size of a company’s dividends. High dividend yields are well respected by investors who want the ability to roll over their cash into more stock.
This issue of stock dilution is no small game at all. The financial sector has raised $60 Billion in capital by diluting shares this year alone and its likely to continue throughout the rest of the year. The selling pressure put on by the banking industry does more damage than you’ll ever actually see, their tactics do have some responsibility in falling share prices.