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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:
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).
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:
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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