Corporate Cash Hoard in the Trillions: Moodys

[Parsad]

Piles and piles of cash and everyone afraid to use it.  Contrary indicator?  Cheers!

 

http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwise/corporate-cash-hoard-in-the-trillions-moodys/article2111286/

[ubuy2wron]

Parsad, US corporations balance sheets are in the best shape in my lifetime. Companies in North America by and large are in no way capital constrained they have nothing to invest in if they increase their plant who will they sell to most have excess capacity right now. They should either buy back shares or pay a dividend. It is interesting who is capital constrained. Govts and the middle and lower classes. They would love to spend the dough or invest it perhaps ,if you can consider bridges and roads and airports etc. an investment (some consider any expenditure by govt a waste) The rich by and large are also not capital constrained but they ARE afraid and they are buying gold and silver. The countries that are doing the best right now are ones that have not been involved in destroying the middle class or where a new middle class is emerging. Instead of trickle down we need trickle up. Give the money to govt and the not fabulously wealthy they will spend it on stuff it will create more wealth for EVERYONE because the pie will get a lot bigger a lot faster. We are doomed to a dull future if the best the "wealth creators" can do with their dough is buy a brick of some shiny metal.

[Parsad]

Totally agree with you!  But that is what is happening.  At some point...the tipping point...you will see confidence restored and money come pouring back into the economy.  Thus creating jobs, consumption and stabilization in demand for housing.  But it will only happen over time and as these companies and savers become comfortable. 

 

It still hasn't happened in Japan after 20 years, but I think things are different in the U.S.  You have a significant influx within the population, thus you will eventually have increased demand for goods, housing, etc.  Japan is a country mired in stagnation.  They need to open the flood gates and increase immigration over there, as the general population is aging with few youngsters coming up to carry the load.  Cheers!

[prunes]

Parsad, where do you stand on the debt deflation issue? Have you read Mauldin's book / the piece Ray Dalio had in the CFA Journal?

[Parsad]

I don't think deflation is likely.  If anything, we will continue to see a stagflationary environment, especially if China doesn't slow. 

 

The deleveraging process at the soverign level won't allow a full-blown recovery...just too much in frictional costs from increased taxes, fees, regulation, etc.  At the same time, you've got devaluation occurring for many currencies, including the U.S. dollar and Euro. 

 

For the U.S., it means that it's citizens will consume less as the cost of importing goods becomes prohibitive, but it also means that much of the rest of the world, will probably purchase more U.S. goods and assets.  So economy recovers, but we spend carefully thus no blowout recovery.  A "recovery" nonetheless! 

 

But this is all conjecture.  Buy cheap, sell dear and forget about the rest!  Cheers! 

[Uccmal]

re: Japan, Would you really want to move there to support their old people.  I know I wouldn't.

 

Anyway, the position in the US is one where the government has deliberately set up the corporations to succeed.  Recall Prem's 20%/80% formula of two years ago or so.  The US government will continue to supply cheap money to companies as long as it is needed.  The purpose ultimately is to reflate private sector spending.  It will work eventually.  If companies start to pay dividends there are tax benefits for the government, income for individuals etc.  If they start to hire thats even better.  I dont believe that a jobless recovery is a permanent state.  The US is undergoing a massive deleveraging and are somewhat through the process.  I expect the jobs rebound will be in full force by early 2012, just ahead of the election.  You dont want it coming too soon if you are a Dem in office.

 

There is likely to be overkill in the other direction, just in time for a new Republican spendathon in 2017.  

 

[JEast]

Japan may not have had 20 years of essentially no growth if they were not so xenophobic. On the other hand, that is the strength of North America as immigration is relatively robust.  Though there are some parts of xenophobia in the US, the current economic downturn has cleared some of the concern of the central and south american influx as many have either gone home or gone to Europe were they can make more money.

 

I too am optimistic about the future as in a year or two.

 

 

Cheers

JEast

[ragnarisapirate]

If and when they start dumping money into the economy, prices will likely rise... no?

 

If prices rise, then, that puts a damper on demand..... and around and around we go.

 

And, let's say that these company's declare a huge cash dividend, or buy back shares, mightent there be a chance that the stock price gets bid up to obscene levels? If we would get dividend payments, what would we do with the cash?

 

Just throwing some scenarios out there...

[Uccmal]

If and when they start dumping money into the economy, prices will likely rise... no?

 

If prices rise, then, that puts a damper on demand..... and around and around we go.

 

And, let's say that these company's declare a huge cash dividend, or buy back shares, mightent there be a chance that the stock price gets bid up to obscene levels? If we would get dividend payments, what would we do with the cash?

 

Just throwing some scenarios out there...

 

Then we, value investors, sell, and wait it out.  Take a trip.  Pay off the house.  Buy a cheap vacation home.  Develop a costly drug addiction - the answer to all your excess money problems.  :-)

[bookie71]

Since, I suspect, that a large amount of the cash is in T bills, what happens if we go over the brink, and the gov't doesn't pay??

[biaggio]

Since, I suspect, that a large amount of the cash is in T bills, what happens if we go over the brink, and the gov't doesn't pay??

 

That's kind of ironic?

 

If we go over the brink---They will probably sell (and buy equity? Which makes the most sense to me. As has been said here it is better to on a great business long term than cash). interest rates will go up.

 

 

 

[bookie71]

How can they sell if no market?

[Uccmal]

You need to look at the breakdown of expenditures.  There would be a hierarchy of those who get paid in decending order.  I would think it would operate similar to when a private company runs low on cash and cannot borrow.  I went through this with a company once.  Stop paying bills to outside suppliers first - anyone notice that GE stock has taken a hit even with improved earnings.  Then cut transfers to municipalities/states for repair and infra projects; somewhere in the middle would lie social security payments which is the big daddy, and interest on the debt, and at the very bottom lies military paychecks, and military operating supplies.

 

[biaggio]

How can they sell if no market?

 

Oh, that brink, then we re all dead.

[bookie71]

I think you are missing my point, it is cash and cash equivalents.  If the cash equivalents aren't available then the companies suddenly don't have this big cash hoard.

[biaggio]

Bookie, dang you re right I was not looking it that way.

 

Supports notion to keep some cash on hand, +/- other tangible assets. I  think this was recommended by economist/hedge fund manager on another thread.

 

I am not that pessimistic.

 

I love the quote that they will try everything else but eventually they will do the right thing.