Want to know why the U.S. economic recovery isn’t producing more jobs?
For part of the explanation, look at where companies are putting their cash. With record levels of cash on company balance sheets U.S. companies aren’t putting it into expanding production, buying new equipment, or building market share.
Instead they’re buying back their own shares or simply leaving the cash sitting on their balance sheets, the Financial Times reports.
So far in 2010, companies have announced 33 new buy backs for $178 billion, according to Bank of America’s Merrill Lynch unit. If buy backs were to continue at the same rate for all of 2010, the total would come to almost $900 billion. That would be the most since 2007.
But that level of buying, high as it is, isn’t enough to soak up all the cash companies are generating. Because companies have cut costs and reduced inventories even as profits have recovered, cash balances have climbed to $1.84 trillion, according to data from the Federal Reserve. (The Fed’s data excludes cash at financial companies.) That puts cash at the highest level as a percentage of assets since the 1960s.
Two things seem to be generating these trends.
First, companies are worried enough about the financial markets seizing up again that they want to sit on more cash. Ratings companies such as Standard & Poor’s are contributing to the tendency by paying close attention to cash balances in their credit rating reports. (Now, they’re getting tough!)
And second, companies are announcing buy backs to give themselves more flexibility in an uncertain economy. Announcing a buy back scores points with investors and Wall Street and usually companies don’t pay any penalty with that audience if they quietly don’t actually buy all the stock they announced they would. The result is a boost to share prices that still leaves the company free to actually put its money elsewhere if the economy turns out to be either better or worse than projected.
Why were cash levels high in the 60s? Did it take until 20 yrs after the Depression to regain trust in/between the economy/banking system? If so, what does that say about our current situation?
Well said Kelvinator. In theory, both capitalism and socialism can work, but in reality they don’t work out that way. Some sort of comprimise is going to produce the best outcome. Getting that balance correct is going to be extremely difficult under the best of circumstances.
Neal- To me, the notion that a “socialist” agenda in the US is ruining capitalism is a view pretty out of touch with a much more complex reality: Of course, there are many smart and beneficial “capitalists”, but capitalism is doing a pretty good job of wrecking itself in tandem with government. Just dig into the actual but as yet unprosecuted criminal fraud that took place at Lehman and elsewhere that helped tank the global financial system, the unregulated capitalism that tanked the US in 1929 and brought on the unions, or the unkeepable pension promises in the US and Europe, which I’m sure you’re already familiar with. Just check out the stats showing the huge concentration of wealth in the US toward the top 1% of households over the last two decades – if this is a socialist agenda to redistribute wealth, it’s redistributing in the wrong direction: right to the absurdly wealthy people who need more money the least.
Both that capitalist and socialist models are in for extremely tough sledding now that the global debt bomb is bursting and global cheap energy is over with. If we’re lucky, we’ll hear less about ideologies now and more about very realistic and practical approaches on how to deal with times that seem quite likely to get tougher going forward. IMO, that’s not going to be either a pure capitalist or socialist ideology, because neither pure view has proven itself realistic in practice.
I give the smart execs in the private sector a lot more credit than they get from liberals/socialists. When you’re operating in an environment where the government can, in a heartbeat, take away creditors rights and give them to labor, you have to be cautious about what you do and when and how you do it. In addition, bank credit under the “regulatory reform” agenda being pushed by the socialists is virtually non-existent. So it’s only natural that a company would hoard cash, in case they need it. Wo be it for those companies that don’t have cash because they are going to stagnate. The current political environment is VERY anti-business and we haven’t even seen the corporate tax proposals designed to further redistribute the wealth. We are, in my opinion, in a very precarious period of time for capitalism as we know it. Without a change in Congress and at the top, our private sector, stock and bond investments and real estate markets are doomed. I’m sorry to be so pessimistic but have to be a realist. This Country is in as much if not more financial trouble than the European union.
I think they are waiting for a contrasting political environement. This recession has given them a chance to strip away the unnecessary load caused by affirmative action and other hiring “tax incentives”; they are too smart to let this happen again. Hopefully old fashioned “earn it” has returned. PLEASE VOTE RESPONSIBLY.
but would’t buyback mean that companies are putting more money in the investors hands,, which can be spent on other investments opportunity or simply buy things with it.
so that is more cash in the circulation right,,
Jim,
Thanks for the update. I knew cash balances were high compared to the last decade, but I didn’t realize they’re the highest they’ve been since the ’60s.
My prediction, stated frequently in my posts, is that buybacks and dividend increases will continue, as the immediate reaction to high cash balances. With all this cash, the companies want to first give something back to the shareholders, many of whom are still “down” since 2007.
Later this year and next year, we’ll see increased CAPEX spending and M&A activity, as cash balances remain high after these shareholder bonus programs are announced. The companies will realize they’ve got to do something with the cash, and that now is the time to sieze the opportunity.
Buybacks are a surefire approach in this world of unknown assassins, internal or external.
P.S. On buy backs, I think most companies think of their announcements sort of like their authorizing of stock options. They are authorizing the maximum, but how much they will really do will be based on just how things play out over the period this was authorized for, not any kind of guarantee.
I would think a large part of this is also just simple supply and demand. If you are a company that is already supplying your market with all it needs now, why would you expand? The bubbles have all been about putting out way too much supply for demand that wasn’t really “demand”, but was instead just speculation that XXX would continue going up forever. Now business are being a lot more careful about matching their supply to the demand, and most of the false demand (speculation) isn’t out there to cloud their radar screens.
A lot of the announced buybacks don’t seem to fully materialize. I trust dividend increase announcements a lot more than buyback announcements.