| Subject: | Re: [socialcredit] Unlike Consumers, Companies Are Piling Up Cash | | Date: | Wednesday, August 13, 2008 15:56:24 (+1200) | | From: | William Hugh McGunnigle <wmcgunn @.........nz>
|
I Believe that your interpretation of the real situation is correct Bill.
Over the last 50 years there has been a rapid expansion of the credit
industry paticularly credit cards. When coupled with the immense amount of
ctredit tied up in the mortgage market and time payment (Hire purchase)
industry this would explain the immense amount of finance being used to
support the consumer industry and hence the apparent affluence of industrial
companies based on that credit. It is a treadmill situation that demands
more and more credit to keep these industries going. Any decrease in
consumed spending causes great concern for the financial system. As I have
said before the banking system has used 'mortgage debts' as a positive asset
when in reality they are liabilities consequently any fall in real estate
prices immediately queries the financial stability of any banking or loan
institution relying on these 'assetts' to buffer them against a down turn in
economic activity. The practice is not confined to the USA, although in all
probability that country probably has the greatest degree of consumer debt
compared to other countries in the world. The same applies to people who
"speculate" on the stock exchange particularly those who trade in "futures".
Speculation of this nature led to the collapse of a major British bank some
years ago, when an employee used bank funds for that purpose and made a
series of bad choices. That episode pointeds out the fallacy of modern banks
being safe institutions for the deposition of your savings.
Bill Mc Gunnigle
----- Original Message -----
From: <william_b_ryan@yahoo.com>
To: <socialcredit@elistas.com>
Sent: Friday, March 07, 2008 3:40 AM
Subject: [socialcredit] Unlike Consumers, Companies Are Piling Up Cash
>I don't quite know how to explain this in terms of
> Social Credit theory. Perhaps someone can help.
> Thanks.
>
> In theory, cash on hand, being bank credit, represents
> debt that other parties have incurred to the banks.
> Entrepreneurial spending accumulates into cash account
> balances throughout the economy.
>
> But this article states that the "typical American
> corporation...has enough cash on hand to completely
> pay off its debts." This could be the result of a
> disproportionate increase in debt by the consumer
> sector, so that the cash held by corporations
> represents primarily consumer debt, long-term mortgage
> debt and credit card debt.
>
> What do you think?
> ---------------------------------------------
>
> F_A_I_R U_S_E C_L_A_I_M_E_D
>
> March 4, 2008
> Unlike Consumers, Companies Are Piling Up Cash
> By DIANA B. HENRIQUES
> Copyright 2008 The New York Times Company
>
> At least someone knows how to fill a piggy bank.
>
> Unlike most American consumers, whose failure to save
> has exasperated economists for years, the typical
> American corporation has increased its savings so
> sharply that it probably has enough cash on hand to
> completely pay off its debts.
>
> That should be good news in an economy unsettled by
> rising energy prices, tightening credit, gyrating
> stock prices and declining values for the dollar and
> the family homestead. Indeed, the Federal Reserve
> chairman, Ben S. Bernanke, cited strong corporate
> balance sheets as a bright spot in the darkening
> forecast he presented to Congress last week.
>
> Some analysts also speculate that these cash-rich
> companies may start sharing their wealth with
> investors through special dividends, providing welcome
> stimulus for the economy.
>
> Corporate spending on equipment and other capital
> expenditures has declined as savings have soared,
> suggesting that companies could stimulate the economy
> now by going on a hiring and spending spree. But that
> raises worries among some analysts that companies will
> spend their cash unwisely, making them more vulnerable
> in the future.
>
> The increase over the last decade in the amount of
> cash, as a percent of total assets, for the companies
> in the Standard & Poor's 500-stock index has been
> steep. One study shows that the average cash ratio
> doubled from 1998 to 2004 and the median ratio more
> than tripled, while debt levels fell. According to S.&
> P., the total cash held by companies in its industrial
> index exceeded $600 billion in February, up from about
> $203 billion in 1998.
>
> René M. Stulz, who holds the Reese chair in banking
> and monetary economics at the Fisher College of
> Business at Ohio State University, said research he
> conducted with two other professors on corporate cash
> levels since 1980 indicated that growing cash holdings
> over that period most likely reflected the simple fact
> that the world became a much riskier place for
> business.
>
> "Companies responded to those rising risks by saving
> more," said Professor Stulz, whose study excluded
> utilities and financial companies because their cash
> reserves are monitored by regulators.
>
> An even longer savings trend was spotted by Jason
> DeSena Trennert, managing partner and chief investment
> strategist at Strategas Research Partners in New York,
> who said his own rough examination of corporate
> balance sheets shows that "cash, as a percent of total
> assets, is as high as it's been since the 1960s."
>
> The ledgers of many individual companies bear out
> these findings. For example, the cash ratio at Paychex
> - cash and short-term investments as a percent of
> total assets - has more than doubled, from less than
> 30 percent in 1988 to more than 70 percent by last
> summer. Over the same period, Apple's cash ratio grew
> to more than 60 percent, from just over 38 percent.
>
> The cash ratio at Avon Products, just under 3 percent
> in 1988, was nearly 17 percent by last December. And
> Microsoft's savings account is so large that its chief
> financial officer has observed that the company could,
> if it wished, cover most of the $20 billion cash
> component of its pending $44.6 billion offer for Yahoo
> from its own reserves.
>
> This cash-saving trend may have a downside, though.
> Because companies can spend from their own account
> without scrutiny from the investment bankers or
> commercial bankers who might otherwise lend them
> money, corporate executives can do some really dumb
> things with their cash, said Amy Dittmar, an assistant
> professor at the Ross School of Business at the
> University of Michigan, who has studied corporate
> spending habits in the United States and abroad.
>
> "There is a subtle line between having enough money to
> do what you have to do versus having enough money to
> do anything you want to do," Professor Dittmar said.
>
> Manny Weintraub, a former managing director and
> top-performing money manager for Neuberger Berman who
> formed his own investment advisory firm in late 2003,
> agreed. "Like your mother told you, the rule should be
> that if you don't have anything nice to buy, don't buy
> anything," he said.
>
> The Stulz team's study showed that this trend of
> rising cash ratios was not limited to very large
> corporations - indeed, the average increase is more
> pronounced among firms below the top one-fifth of the
> sample.
>
> Over the same time, the study found, one measure of
> corporate debt - the net debt ratio, or debt minus
> cash as a percent of total assets - fell so sharply
> that, by 2004, it was below zero, where it stayed at
> least through 2006.
>
> "In other words," the researchers noted, "on average,
> firms could have paid off their debt with their cash
> holdings."
>
> Those who study corporate balance sheets suggest that
> several factors have contributed to this change in
> corporate savings patterns.
>
> In the last 25 years, the speed and scale of
> globalization have increased sharply. That shift to
> worldwide markets confronted companies with increased
> currency risks, political risks and new competition -
> all adding to the overall risk of doing business.
>
> During the same period, conglomerates and similarly
> diversified companies fell out of favor, as Wall
> Street looked for "pure plays" and companies narrowed
> their focus to a few core businesses - in effect,
> putting more of their eggs in fewer baskets.
>
> That left those companies more vulnerable to any event
> that shook those baskets, Professor Dittmar explained.
> "When firms become less diverse and more focused, they
> become more volatile," she said. And when that
> happens, they need cash to cushion the bumps.
>
> While rising risks may explain most of these changing
> patterns, other business trends may also have had an
> impact.
>
> For example, the Stulz team's paper shows that rising
> cash levels were, to some degree, influenced by a drop
> in capital spending on hard assets, which can be used
> as collateral for borrowing. Similarly, the study
> found, as companies increased their focus on research
> and development investments, which are not as useful
> for borrowing purposes, cash levels rose.
>
> Moreover, cash has traditionally been just one
> component of "working capital," along with inventories
> and accounts receivable. But innovations like "just in
> time" supply chains and faster payment systems have
> reduced the role of inventories and accounts
> receivable and, conversely, raised the role of cash on
> corporate balance sheets, Professor Dittmar said.
>
> Adding to that, the corporate universe now contains a
> higher percentage of the companies that have
> traditionally held lots of cash, notably technology
> companies. These companies now make up about 45
> percent of the economy, up from less than 30 percent
> in 1980. That would inevitably increase the overall
> averages for cash ratios.
>
> The study by the Stulz team, however, specifically
> allowed for that change - and found that even among
> technology companies, the ratio of cash on the balance
> sheets has grown sharply over that period.
>
> According to Mr. Trennert, the cash ratios at
> technology companies have doubled since 2000.
>
> With cash levels this high, Mr. Trennert said he
> expected that some companies - those that also have
> high levels of insider ownership - may elect to pay a
> special dividend in the coming year, ahead of any
> future change in the favorable tax treatment those
> dividends now receive. "If I were a C.E.O.'s tax
> lawyer, that would certainly be my advice," he said.
>
> As the Stulz team noted, this trend is in many ways
> paradoxical and unexpected. In the last 25 years there
> has been an explosion in financial products intended
> to help companies manage risk - from currency
> devaluations to commodity shortages.
>
> "We would expect improvements in financial technology
> to reduce cash holdings," the researchers noted.
>
> And yet, corporations have continued to cope with risk
> the old-fashioned way: by saving for a rainy day. That
> suggests that either corporations are not making
> sufficient use of risk-management tools, or that the
> tools themselves - while helpful - are inadequate to
> cope with the increased levels of risk that companies
> now confront, Professor Stulz said.
>
> Some veteran investors also suggest another factor
> that may have encouraged the growth in cash ratios.
> Mr. Weintraub, the money manager, pointed out that in
> the years examined in the Stulz team's study, Wall
> Street started giving greater weight to balance-sheet
> strength.
>
> Though that focus clearly faltered during the
> technology stock bubble of the late 1990s, it is
> coming back into vogue in today's uncertain times,
> said Quincy Krosby, an economist and chief investment
> strategist at the Hartford, an insurance and financial
> services company.
>
> With the markets so unsteady, companies with soft
> stock prices and solid balance sheets are attracting
> attention from institutional investors, she said, in
> part because the companies, especially in the
> technology realm, have enough cash to expand their
> market share through acquisitions.
>
> But won't big cash cushions turn these companies into
> sitting ducks for leveraged-buyout firms or foreign
> buyers spending today's remarkably cheap dollars?
>
> Maybe not - or, at least, maybe not yet.
>
> Professor Dittmar noted that the credit squeeze has
> made it less likely that highly leveraged private
> equity funds can go gunning for cash-rich companies,
> as they have in the past.
>
> Political pressures, meanwhile, are likely to protect
> American companies from hostile foreign buyers -
> certainly through an election year, and even longer if
> the Democrats take the White House and make gains in
> Congress, Mr. Weintraub noted.
>
> But, with the debt-burdened American consumer cutting
> back, wouldn't the risk of a recession decline if
> companies with overstuffed wallets took their cash out
> and spent it?
>
> Emphatically not, said Professor Stulz. Research
> strongly suggests that companies are holding more cash
> because they need it to operate more safely in a risky
> environment, he said.
>
> "If they spend it, they will become more fragile," he
> added. "And an increase in the number of fragile firms
> is not in the best interests of the economy."
> -
>
>
>
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