Cash Pile Still Growing

January 12, 2010 at 12:01 am Leave a comment

Despite the sluggish economic reports, corporate cash piles have been expanding (see “Nest Egg” chart), thanks to aggressive cost-cutting, stabilization in GDP numbers, and meager capital programs. As part of stingy CFOs and executives controlling expenses, companies have been slow to hire despite an expected two quarters of economic growth. Job hiring is likely to remain scarce since capacity utilization and capital expenditures will probably remain priorities before job payrolls expand. It may be that jobs were the first area cut as the crisis unfolded and the last aspect to rebound in the economic expansion.

Source: The Wall Street Journal and Capital IQ

As the saying goes, “A bank only lends to those people whom do not need it.” Common knowledge has it that most jobs are created from small and medium sized businesses (SMBs). Unfortunately, the inaccessibility of loans for these SMBs has contributed to the lackluster job recovery. The hemorrhaging of jobs has slowed to a trickle, but sustainable recovery will eventually require new, substantive job creation. Rather than fund what appear to be risky loans to SMBs, banks are choosing to repair their weary balance sheets to reap the benefits of a very steep yield curve (borrowing at low short-term interest rates and lending at relatively high long-term interest rates). Bankers are not the only people stockpiling cash (see other article on cash). On the capital raise side, larger corporations have had more success in tapping the capital credit markets since bond issuance has been flowing nicely.

Source: Haver Analytics and Gluskin Sheff

As multi-national corporations continue to benefit from a relatively weak dollar and Wall Street persists to underestimate the trajectory of the U.S. corporate profit rebound, banks are hoarding more capital, which is leading to a larger cash pile. When will all this cash reflow back into the marketplace? The timing is unclear, but if the profitability and hoarding trends continue, the low-yielding cash piles spoiling on the balance sheets are likely to be released into the economy in the form of capital expenditures and rehiring. Job seekers will breathe a sigh of relief once these corporate wallets become too uncomfortably fat.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (such as VFH), but at time of publishing had no direct position in any company mentioned in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Banking, Financial Markets, Themes - Trends. Tags: , , , , , .

Lessons Learned from Financial Crisis Management 101 Short-Termism and the Destruction of Wealth

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