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Is The Massive Corporate Cash Stash Bullish Or Bearish? at Trader’s Narrative

In last week’s sentiment overview, I briefly touched on the huge pile of cash that US companies are sitting on. According to the most recent numbers from the Federal Reserve, us non-financial companies have in aggregate cash and liquid assets totalling $1.84 trillion. A recent video from FT’s Short View discusses both the bullish and bearish case:

corporate cash hoard record Jun 2010

Although the chart shows the data in nominal terms, the record cash hoard is still there when we normalize by looking at it relative to total assets. In fact, it is the largest amount since the 1960’s by that measure.

It is easy to make the bullish case; cash after all, is the next best thing to Aladdin’s lamp. It can be used in a number of ways that would not only give a boost to the US economy but also to the stock market. The most obvious is to set up or accelerate share buy back programs. And already from the current year to date data we see this is happening. If the same pace continues for the next half of the year, buy backs will be the largest in total since 2007.

The other uses for the cash are hiring of new workers, which would invariably help consumer confidence, and capex spending, which would establish the foundation for a new business cycle. Another common use of cold, hard cash is mergers and acquisitions. There are lot of companies with cheap valuations and a bulls-eye on their shares (for the right acquirer).

The bearish case is not as obvious but it is still compelling. For starters, if the economic recovery does continue, some of that cash will be used to replenish the depleted levels of inventories:

US corporate cash and inventories Jun 2010

But since the chart only shows a brief look back, it is difficult to draw definitive conclusions. It would be helpful to know just how much cash was used during previous economic recovery and how much inventories that cash bought.

Just as it is helpful to normalize total cash by total assets to be able to compare things through history Andrew Smithers (of the Q-Ratio fame) suggests that we normalize cash by debt. Comparing the total amount of cash with total debt suddenly changes the picture entirely:

US cash relative to debt long term chart Jun 2010

This means that currently US companies balance sheets are leveraged and it isn’t realistic to expect them to leverage themselves further. On the plus side, the current level is very close to the long term average. The video from FT’s Short View can be found here: Back with Cash

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5 Responses to “Is The Massive Corporate Cash Stash Bullish Or Bearish?”  

  1. 1 john k

    i’d like to see a chart of cash broken out by market cap/weightings. curious if it would look like the haves/have nots in our overall economy.

  2. 2 Naa Laa

    According to the most recent numbers from the Federal Reserve, us non-financial companies have in aggregate cash and liquid assets totalling $1.84 billion.

    It should say “$1.84 TRILLION”

  3. 3 stormy

    this is ALL obama’s fault .. the only reason he got elected president is because people got excited for their being a “byracial” president. His dad isn’t even american and Obama is muslim … ughhhh !!!!

  4. 4 Sigh

    Stormy… do you actually believe that parroted stupidity? I thought Obama was elected because he was running against a man whose age was higher than the IQ of his running mate. Well, that and the fact that the Bush presidency was so loathed that “God” could have run on the republican ticket against a retarded sloth and still lost. Don’t vote for that retarded sloth it’s a Muslim!! *rolls eyes*

  5. 5 Treasury Strategies

    Subject: President’s Working Group

    We regularly read your articles and enjoy your content. Below is a statement that we issued Friday morning that you may find of interest.

    President’s Working Group Report Extends Uncertainty for Money Fund Managers
    The President’s Working Group on Financial Reform issued an unusually inconclusive report on Money Market Mutual Funds. Published thirteen months after it was originally expected, the report simply encourages the newly formed Financial Services Oversight Committee to take up the matter.

Treasury Strategies partner, Anthony J. Carfang, notes that conspicuously absent from the report were a ‘conclusions’ section and a ‘recommendations’ section. It was, rather, an enumeration of the pros and cons of already widely discussed policy options. Carfang suggests that this omission was a tacit acknowledgement that none of these options are superior to the status quo.

Importantly though, the report concedes that all these options, ranging from a floating NAV, to insurance, to a two-tiered fund structure, have serious unintended consequences. The primary concern stated in the report is that corporate and institutional investors can easily move their money out of money market funds and into instruments or geographies that are beyond the jurisdiction of U.S. regulators. It would be unwise for regulators to drive this important funding source for public and private sector borrowers offshore.

Treasury Strategies, a consulting firm specializing in treasury management and liquidity for banks and corporations, has reported consistently over the past two years that onerous regulation of money funds would push capital offshore. Corporate treasurers and institutional investors understand the risk – reward tradeoff and they have the tools and technology to manage their funds from any point around the globe.

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