Lots Of Cash
LOTS OF CASH....The New York Times reports that American corporations are flush with cash:
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....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.Cash has tripled over the past ten years? Wow. What does it all mean?
Some analysts [] speculate that these cash-rich companies may start sharing their wealth with investors through special dividends, providing welcome stimulus for the economy.But there's another downside to this, and I'm surprised the Times doesn't mention it: huge cash holdings suggest that corporations don't have a lot of good investment opportunities. They're not spending money to expand operations as aggressively as they could afford to; they aren't seeing a lot of attractive acquisition targets; they aren't expanding into new business areas; and they've got the money to spend on productivity-enhancing capital equipment but apparently aren't finding that a very appealing prospect.....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.
Lots of cash is usually a bad sign. It's why Wall Street has historically been lukewarm about stock buybacks: if you can't think of anything better to do with your money than buy back your own stock, what does that say about your future growth potential? Ditto for the business community as a whole. If they can't think of anything great to spend their money on, what does that say about the future growth potential of the entire country?