Companies, funds hoard cash ahead of debt crisis
Even state governments are preparing in response to the budget drama.
For many of them, this means hoarding cash or getting hold of as much cash as possible -- just when we were finally starting to see companies loosening up with cash in the form of higher dividends or share buybacks.
Now companies are not only holding on to cash, but they're delaying hiring and investments, The Wall Street Journal reports. They're also laying off employees.
General Electric (GE), for example, ended the second quarter with $91 billion in the bank. "Our main protection against something like that not going well, or having a rocky outcome, is to have a lot of liquidity," the company's chief financial officer told the newspaper.
But Jim Cramer says investors need to remember there are two kinds of government defaults. Check out his thinking in the following video.
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The worst-case scenario for many of these companies is that they won't be able to get much access to cash later this year. Borrowing could become extremely difficult. Short-term investments may not provide good returns.
A recent survey of finance executives found that half will take defensive actions, such as hiring freezes or a reduction in capital spending, if Congress can't find a debt-limit fix before Aug. 2, the Journal reported.
We're seeing a similar response from money market funds, the Financial Times reports. Funds with government-only money have increased their cash for meeting redemptions within one week to 68% of assets. That's up from 48% at the end of March.
These funds are staying away from one-month Treasury notes that mature on Aug. 4 and Aug. 11. They're also cutting the time they are willing to lend, the FT notes.
And what about those entities without much cash? They're trying to borrow it now. Just look at California, which is about as broke as it gets.
The state has lined up $5.4 billion in loans from a number of banks as an emergency lifeline if the credit markets dive, The New York Times reports. Yes, someone out there is actually willing to lend California money.
The bridge loan would come from Goldman Sachs (GS) and seven other banks. "California had to obtain this interim financing to protect the state from the immediate, drastic consequences of a failure by Washington to resolve the debt ceiling impasse" by Aug. 2, the state treasurer said.
So what's an investor to do in these turbulent times? Some analysts say the best course is to focus on "ultra-safe equities," the Financial Times reports. Those include companies with credit-default spreads below that of G7 sovereign levels but with dividend yields above government bond yields, analysts from Credit Suisse say.
That rare group of stocks includes Centrica (CPYYY), Sanofi (SNY), Novartis (NVS), Compass (CMPGF), Pfizer (PFE), Philip Morris (PM) and Merck (MRK).
These businesses have not just started "Hoarding" cash. Most of these people as were the rest of the country were affected by the Housing bubbles effect. Artificially produced by the loose credit standards set by the Government. The ripple effect led to foreclosures, losses in value, loss of jobs, and etc.. Companies trimmed their operations and slowed their growth to be more efficient producing a higher rate of return for their stockholders. They have increased their retained earnings to record highs. They do not want to be caught unprepared for whatever may come. But to think the sole reason these businesses are hoarding cash is the looming debt crisis is quite naive.
I read a lot of posts and rarely leave a comment so just take this for what its worth. I am a small business owner(manufacturer) . When I read that companies are hoarding money
I find it laughable and sad. Laughable because I have been running on a line of credit loan
for 2 years to keep my bills paid and my workers employed. Sad,because a lot of people buy into this Bulls&#*t reported as truth by MSN and other outlets. The truth is every business and company I deal with are in the same boat I am. Happy to break even and overjoyed when we make a few bucks.
The truth is very few in Washington really care about mainstreet. Democrats buy Votes thru entitlements and welfare. Republicans buy votes thru large corporations. I was a democrat
and changed to republican because they were to liberal. Now I can't vote republican because
they have no interest in what Middle class (if there is one) needs. Both sides delay these votes
and comprimises so they can use scare tactics to pass what they want. Sadly the media groups jump right in and help. This should have been resolved long before now,Think about what I am saying, Forget your self imposed label of Democrat,Republican,Tea party or whatever. We are falling for this crap time and time again. Every time they (either party)
wants to shove something down our throat they use the Gloom,Doom and terror tactic.
George Bush " if we don't act this thing is going down" (financial bailouts)
Obama " If we don't pass this stimulus this things going down" Now its if we don't pass this thing its going down ( both parties and media). Well if you cared about America you would have put on your big girl panties and wirked this thing out like adults. My sugesstion is Vote out all of these self serving,good for nothing but trouble idiots and lets try agin. Just my opinion.
They hoard it because they do not know several key things:
What are their taxes going to be?
What is healthcare "reform" going to cost them?
The recession is far from over, so when can they recoup their "investment"?
Banks will not loan money, so they have to keep cash so they can invest when the time is right.
If you do not understand these things, then you are ignorant of what owning a business is like, and should not criticize that which you do not understand. Go cash your paycheck and be thankful you have a job.
The money system doesn't work unless money is circulated throughout the system. No one owns money; it is a public good. Corporations hoarding money just make things worse, but unfortunately this is an immutable fact of corporate capitalism, and a market failure. The only solution is to re-develop our lost local economies so our communities have at least some level of self-sufficiency.
Isn't it obvious by now that corporations will use accounting tricks to hide their cash flow and psychological tricks to sell their products.
Tman95 - But just to be sure I'm on the right blog, are we blaming Bush, Obama, or both?
It is both of their faults. Neither of them did anything to Reinstate the US Laws eliminated by Both Parties that made Illegal the Causes of the 1907 Depression, 1929-1939 Great Depression, and the current 60-100 Trillion USD "Global Economic Crisis" consisting of the "Mortgage Crisis", "Wall Street Crisis", "Financial Crisis", "Credit Crisis", "Banking Crisis", etc.. Same Causes = Same Results, as to why the US and most ot the World is actually in a Depression, NOT a Recession.
The Chinese retained their version of the US Laws as to why they are not affected and also immune to Financial Weapons of Mass Destruction that can destroy entire Nation's Governments and Economies.
Repeating the same mistakes and expecting different results does not help either:
1. Known by President FDR, that his New Deal to the American People failed to get the US out of the Great Depression (people literally starving to death). His Nationalization of all US Industry and Businesses, Suspension of US Labor Union Activities, and Sale of War Materials (Made at the US Nationalized Industry) to England, 1939-1941 (before US entered War) got the US out of the Great Depression (as to why the official date the US got out of the Great Depression was 1939 and not 1941. The US Entry into World War II was the final thing that pushed the US out of the Great Depression.
Contrary to this is President Obama's Reduction In Force (RIF) of the US Military by 27,000 US Military Personnel, and the Unemployment of the xxx,xxx US Civilians (Jobs) that provide direct and indirect support to the 27,000 US Military Personnel. Before anyone says use US Military on the US Borders, no that is Illegal, Against US Laws to use Federal Active US Military and the States cannot afford to absorb the 27,000 so they will be Unemployed along with the xxx, xxx US Civilians (all sectors including Raw Material Processing, Manufacturing, Transportation, Construction, Textiles, Food Processing, Farming, etc.). Since they have no money anymore except for necessities further layoffs (Unemployment) in these areas: Retail, Restaurants, Car Dealerships, Theaters, Fast Food, Lawyers; less Taxes equals more layoffs for Teachers, Police, Firefighters, school closures, less work (construction) on roads and public buildings, etc..
2. Health Care Reform, as pay back to the Insurance Corporations, Medical Device Industry, Pharmascheutical Industry for the almost 1 Billion USDs to President Obama of "Unlimited Corporate Campaign Contributions". Instead of Eliminating the Insurance Corporations from the Medical Profession, and the implementation of President FDR's Universal Health Care For All US Citizens that would cost each US Citizen $42 for Unlimited Medical Treatments as what Senator Kennedy (RIP) wanted for all US Citizens. The Health Care Reform costs US Taxpayers (the Budget) $1.7 Trillion USDs (adjusted for Inflation, $2.1 Trillion USDs).
Regardless of which Professional Politician you elect, they were already bought and paid for by the US Corporations. The Professional Politicians are already indebt to those that paid for their Campaigns and that darn sure was not you giving them Hundreds of Millions USDs (your $1 Campaign Contributions do not mean squat).
Lot of people commenting here are blaming either party and/or Bush or Obama for the economic/fiscal mess the country is in. To take this position is to be myopic. The mess the country is in was caused by policy. Lowering standards of credit to allow everyone to qualify for a house was really dumb, since at some point, these collateralized loans will become worthless, which they did. Once that happened, to paraphrase Bush I, we were in "deep doo-doo." And, this Debt-Ceiling issue has nothing to do with the current mess. The parties will come to some agreement right before the dead-line, so has to make it appear that they have accomplished something worthwhile. However, the effects of the unintelligent housing policy will be felt for decades. (Last I checked there was $628 Trillion in Credit Default Swaps pending. The economy (GNP) of the entire world is $75 Trillion)
vintage1937 - What about all those companies who received bailouts?
Facts not your uninformed emotive non factual opinions (thumbs down).
1. US Congress NOT the President (Bush) Appropriates the money, as part of the "Checks and Balances". In the Case of Trouble Asset Relief Program (TARP), it was the Demoncraptic Party Controlled US Congress that passed the November December 2008 TARP as "Time Sensitive" (no Public Scrutiny) to buy the January 2009 Electoral College Votes, as your "Popular" Vote does NOT determine the President and Vice President of the US. Reference Businessweek Article as to the Physical Locations of TARP Recipients corelated to the Electoral College Votes.
2. Research who "Mr. Corporate America" is, his major campaign contributors and major constituents are (I warned all of you about "Mr. Corporate America", he is a Demoncrap):
(My List from 2005) Delaware: Freddie Mac, Fanny Mae, Bank of America, Wilmington Trust, First USA / Bank One / JPMorgan Chase, AIG, Citigroup, Deutsche Bank, Barclays plc, GM, Chrysler, Wachovia, ExxonMobil, Chevron, ISDA, and those States with Corporations Incorporated at Delaware.
Over 50% of US publicly-traded corporations and 60% of the Fortune 500 companies are incorporated in Delaware; the state's attractiveness as a corporate haven is largely due to its business-friendly corporation law. Franchise taxes on Delaware corporations supply about one-fifth of its state revenue.
1. Delaware Division of Corporations
2. Delaware Fiscal Notebook - State General Fund Revenues by Category
Companies hoarding money? What money? They are flat broke. Companies had closed up.
laying people off. Banks are letting people go to. And when they do that ITS BAD!! People who have lost their jobs after 20 years, I lost mine after 11. WE have NO JOBS in the USA, none in my town, nor many others Homes being foreclosed on, The unemployment rate is sky high.
the only ones hoarding money is the Government. Obama and his buddies. WE need to give all of them the boot out, from the President, To the senate, Congress, and get people in our Government who give a dam about the American people.
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