Wednesday, May 2, 2012

The Illusion of the Corporate Cash Hoard

January 30, 2012
Analysis: Corporate cash hoard screams "buy" for investors

"In the coming decade, rather than U.S. companies being absorbers of capital we expect them to be sources of capital," said Richard Vigilante, director of selected research at hedge fund Whitebox Advisors in Minneapolis.

That's if they use the cash wisely.

Click to enlarge.

What are corporations going to do with that hoard of cash? Just look at it grow!

Click to enlarge.

Here's a crazy idea. They could use their hoard of cash to pay off their hoard of corporate bonds. Well, sort of. As seen in the chart below, they'd come up more than a bit short.

Click to enlarge.

I guess there's a reason there are so few AAA rated companies left in the S&P 500, cash hoards notwithstanding.

You want really scary though? What if the companies with the most debt are the ones with the least cash? Didn't we already do this once? It was called a subprime housing bubble. Everything seemed fine on average. Unfortunately, the averages hid a nasty surprise.

Fortunately, I've been assured by the powers that be that nasty surprises are a thing of the past [decade].

Illusion is the first of all pleasures. - Oscar Wilde

Note: The financial data comes from "B.102 Balance Sheet of Nonfinancial Corporate Business" as seen in the Federal Reserve Board's Flow of Funds reports.

Source Data:
FRB: Flow of Funds
St. Louis Fed: Population
St. Louis Fed: CPI

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