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Here Is Why Companies Are Hoarding Cash And Why They Will Not Let It Go Any Time Soon
Much ink has been spilled over the topic of surging corporate cash holdings. In fact today, DB's Chief Strategist Binky Chadha wrote an extended report called "Buying Firms Who Will Raise Payouts" discussing why investors should run, not walk, and buy all the companies that he has mentioned in his report, which is basically a CapIQ screen of all names that have seen their cash holdings spike over the past 2 years. The report has some pretty charts, the main one demonstrating that the cash and short term investments in the S&P 500 ex fins has increased by 30%. Binky's argument: these are the companies which will spend all this "excess" cash on such sundry as dividends, stock buybacks, CapEx, M&A, etc., all wonderful things which in a normal environment will certainly grow revenues and EPS. Binky would be completely correct if it weren't for one simple thing. Taxes. With apologies for bursting Mr. Chadha's bubble, there is not one mention of the word "tax" nor the fact that as companies have been pumping up their cash balances, their corporate tax outflows have plummeted. Well guess what: net corporate tax withholdings by the US government have declined by exactly the amount that cash has grown by. It is extremely naive to assume that in an environment in which Obama is preparing to hike not only individual taxes but corporate taxes as well, that the current LTM net tax withholdings (which incidentally are at all time TTM lows of $90 billion), will not go back up to their historical average of $400 billion. Glaring Binky report oversight #2: the amount by which corporate tax has declined ($300 billion) is precisely the amount by which cash and ST investment has risen ($300 billion). Companies are not going to use the cash for all much-fabled stock price boosting activities noted in the Chadha report. Instead, they are merely preparing for the massive tax hikes which will soon hit them all, as the administration realizes that it must tax the crap out of the S&P companies that have reaped the benefits of the 80% S&P rally. Sorry Binky: pretty charts though.
See chart below which demonstrates plunging corporate tax withholdings (net of refunds), sourced from the Financial Management Service, with surging S&P 500 ex fins corporate cash and ST investments (source CapitalIQ).
Here is a link to Binky's report, which we now anticipate will need a substantial rewrite. And no, "we believe corporate taxes will remain at 0% in perpetuity" is not a sufficient (or necessary) excuse.
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Go get 'em!
Get ready....Obamanomics is about to be unleashed in it's greatest flourish.
BINKY!!!!!!!!!!
Wait, I'm confused. Should I be happy that the companies will be forced to pay taxes like everyone else? Or should I be happy that the companies are flush with cash?
Hello...McFly.....companies do not pay taxes. Corporate taxes are just another expense of producing goods and services that are passed along as higher costs to the consumer.
Companies do not pay taxes, only people do.
+1 (I was typing the exact same thing when your comment posted.)
Money extracted by the government from companies is the exact same thing as the company paying more for electricity, more for raw materials, or more for any other expense.
Companies never pay taxes -- those are merely additional costs to the consumer.
The difference is that not all of us have to buy every product. Let these douchebags buy their iPhones and iPads while Apple finally pays a marginal tax rate approaching what a 40000 dollar a year clerk endures
Companies are people too, just ask the federal bench.
Tee hee! I'd cry if it wasn't so sad. *rolls eyes*
You are confused, or at least misguided to think that corporations "pay" ANY costs whatsover. At least those who make even one penny of profit.
A stint in an accounting firm or a brief reflection on your economics education would have informed your post.
Think, man, think.
Ah, take the cash, and let the credit go,
Nor heed the rumble of the distant drum.
Seems like a simple change in tax law could get them to spend it pretty quick...
Squeezing working capital to drive OCF is hardly a picture of wealth - I guess said author is not projecting any material inventory build in anticipation of the skyrocketing consumer demand on the back of ever more transfer payments
I will tell you exactly why companies are hoarding cash... because they are scared to death of the Obama administration, government in general and this giant ponzi scheme called a currency. If you know that taxes have only one direction to go (UP), you might as well take the hit on profits this year because this may be it.
My company is back to profitability but we are maximizing the equipment and employees we have and the last thing we are going to do is invest in a capital project that would have a 5 to 10 year payback.
There is a tremendous amount of uncertainty in the entire fiscal/govt. realm and most business owners are just milking their companies for all they're worth and making plans for the escape to that farm somewhere when it all blows up.
It's tempting to blame this on TheBamster's admenstruation, but the fact is he is lightweight, his experience amounting to one term in government. He literally kows nothing but some fascist anti-constitutional form of government that Executive orders grant him. The disastrous results of which shouldn't be clearly seen until after his re-election after those who put him in office, the democrat elite, have made a ton of money. Just like the republicans did.
Look to the old lady, Nancy Pelosi, and her men and women behind the curtain for what everyone without an oar on the kayak in the water of Nancy's pond fear.
It's the senate finance committee that gives pause to most savvy corporates.
That was a good one. Especially "admenstruation". Props!
Props!
<sarcasm on>
Your company must be the exception to the rule because everything I read and everything I see on the TV tells me good times are back and things are getting better. There is nothing to fear but fear itself. Better start hiring or all the good ones will be gone by this time next year. And you better spend that stash as well because the cash registers are ringing like crazy and you don't want too much money sitting around being unproductive. That will get you fired.
<sarcasm off>
I can tell you I an certainly thankful for Zero Hedge and all the intelligent commentators to bring some sanity to this magic bus ride.
Our 15 year old manufacturing company saw an almost instant 40% drop in sales in Nov. 2008. We were on a pretty good financial footing and so we figured we would ride it out because it had to be some sort of an anomoly. The last thing we wanted to do was to lay off good, experienced employees but we had to for the first time in Aug. 2009 when it became apparent that this economy was structurally broken.
I started searching the internet for some real answers but everything I read said that "all was good". The only problem is that every person I talked to in the real world was singing a different tune.
This would have been really hard to go through without the ZH community. I think I would have gone nuts if I had read one more article about green shoots.
Glad to hear you found a home on ZH. So many people express fear (or at least a very deep concern) that a lot of so called professional people are singing one tune when they're seeing obvious problems where ever they cast their eyes. It almost makes them feel like they're crazy.
Let me assure you that if that is the case with you, what you're feeling is actually a sign of intelligent life. Proof of life in fact. Trying to find sanity in an insane world doesn't exactly inspire confidence in one's own sanity. In fact, I would argue that it's impossible to find pure sanity in an insane world that thinks it's sane.
The best you can hope for is less insane. It's all relative. Just remember, when you begin to question your own sanity, it's a good sign. When you think everything is fine, that's a bad sign.
<Sarcasm on>
Expressing fear? You must have some sort of cognitive disorder! While the rest of the world is out buying Gucci handbags and 3x leveraged bull funds you are tucked away in your closet of fear, missing out on the start of a new era!! And you call that intelligent life? Haven't you heard?? The recession is OVER and the great moderation is back on, never to go away again! Never a better time to buy, the coast is all clear now!
<Sarcasm off>
Inspired encapsulation of the sales message.
lol @ 3x bull funds.
Direxion should make a new 3xETF (ticker: BULL) which is basically a basket of all their 3xbull etfs, so essentially youd be fully long invested (dont even know the leverage, itd be 3^3?) in this wonderful up market on all sides:)
You're not kidding CD! Keep up the words of wisdom.
Great post!
However, I think the term "insane" is a misnomer.
I feel most people are OUTSANE, as in, outside of sanity.......
I once heard the term "unsane" used instead of "insane" because he said it fit better. I like the fact that "sane" or "sanity" is a derivative of "sanitation" as in clean or dirt/germ free.
+ 10654789
Concur with what you said. The one underlying thing that i saw in people in the past 2 years is fear. Everyone is terribly afraid of something; most of them are afraid that their standard of living will fall/fall further, that they will not be able to own, buy and sell things, they are afraid that they will become unable to consume, they are afraid that they will need to put a leash on their greed and for the first time in their life actually control their irrational needs and desires. Most feel like someone cut of their balls and made them slaves simply because they can't have as much as they did before. Also there is some feeling of shame in them; and they can not cope with the new-found sentiment of humility. But i don't want turn this into a rant longer then necessary. You know what i mean.
I do CB. When you've been conditioned to be a consumer most of your adult life, like Pavlov's dog that salivates when the bell is rung, all the "consumers" are fearful they won't be able to follow their conditioning.
http://en.wikipedia.org/wiki/Classical_conditioning
http://en.wikipedia.org/wiki/Consumerism
I'm not being disrespectful but neither should I ignore the obvious. Rarely are TV or radio commercials informing you of something you need. They are creating an artificial need within you. What happens when your ability to pay for these objects, and thus your ability to consume, is capped but the commercials drone on?
In the case of the dog, it gets very upset when the food doesn't arrive when the bell rings.
Or, in the case of the consumer, it resumes it's wreckless spending ways on the first sign of "less bad". Like you said, you're dealing with at least a full generation of this mentality. We aren't going to break that habit in 15 months.
F'n Green Chutes! Oh, and do not go near Timmy Geiththththner today. He is 'bout it 'bout it!
yep, that was the same time my 9 year old consulting business dried up, not to return, on life support (savings) and a few crumbs (work).
I took an informal poll of some friends of mine. Turns out that 10 out of 10 people (in their late 20s and early 30s) were all 'consultants'; technology, finance, marketing, management, legal, etc. 100%!
Two questions:
1.) If everyone is consulting to each other on their own area of expertise, then who in the heck is doing the production? Consulting is advice, it's not production per se.
2.) Which 'consulting' industry is the most likely to succeed in the next 10 years? Which industries to stay away from and which to migrate your career toward?
biz I work for took the same approach, didn't lay off unnecessarily in '08 but had a huge pile of cash to try and weather the storm, V shaped recovery you know.
but now with no recovery and too many employees i think they'll close my division since we've been in the red for going on two years now...too much overhead.
i have believed that many firms went the same route, held on to most employees they could based on the V, which never arrived, and now they have to acknowledge that there's no recovery and let people go or close divisions / operations. it's sad but whatcha gonna do?
why i expect unemployment to start heading higher in 2H this year.
Doing anything to change the rate of depreciation given, uh your maximization policy? Not diggin just curious.
DD,
Believe it or not, we have a million dollar plus manufacturing company with no debt. We have utilized the Section 179 tax break over the last several years to purchase equipment with cash and write it off that same year so we don't have any depreciation we can take. We're in an inexpensive leased building so that is all expensed out also.
We're thinking we need to wait a couple more years until the CRE market bottoms and then buy an industrial building with cash.
I've been wondering if there is any way you could build/buy a building with cash and write off the entire thing the same year but my accountant is not very creative. Any suggestions from the ZH community???
You have that right, HS. I am being offered a machine tool that is stupid cheap. I am not about to do it unless I have such a giveaway prospect that it can pay off in two years or less. If I could expense it immediately I would go ahead even without having any forward view of what the kleptocrats are going to levy on the last producers.
Tapeworm,
You might want to check into Section 179. You can expense out up to $250K in equipment this year. Bush started this several years ago and we have built our entire company up debt free utilizing it.
Looking farther through your replies I see that we are quite similar. My problem is that the machine tools that we run are mostly over 35,000 pounds and are a rather expensive proposition to move and install.
I need some visibility to bother with continuation of this shop. All that I see is galloping fascism and a strong hatred for small business.
I'd rather be somewhere else.
I feel your pain! How can you effectively make the decisions needed to efficiently run a company when our president is a sophisticated community organizer that has surrounded himself with communists/fascists and has the hammer down on the money printing machine?
All facets of the economy seem like they are running on hopium and some tapped out credit cards. We have traditionally bought some of our raw materials by the trailer load to get the best price but I'm almost afraid to continue to do that because I don't know when the phone is going to stop ringing again. I'd like to order smaller quantities but then costs are out of line since we rolled prices back to 2006 levels last year.
Then you can add a 6% price increase on most plastic based products in the last month and the squeeze on me is getting intense.
They're scared as hell of Oreobama?!
Let him smite me like he has them, may I be bailed out beyond my wildest dreams.
Really, I could use an enemy as dedicated as Barry.
All future profits will be paid out in tax deferred annuities for executives. No taxable income, problem solved.
Keep this list, because these may be some companies that will weather the storm, and anything that pumps oil out of the ground or digs up gold. I love reading J.P. Getty.
HOG, CAT, and First Solar are the only ones I like, but you know, whatever.
as a stock picker you have to ask yourself, do I take the rational side of the analysis, (Tyler) or do I follow the momentum, keep my stops tight, and hang on. would you rather be right, or would you rather be on the roller coaster from hell? that's always a hard choice.
but if Tyler is right, the real question is, should we go short these names? Discover Financial? hmmm
The problem with tight stops is overnight gaps. In fact, I'm very worried about a massive gap down and then a trip to hell over the next 7 trading hours of the 20% kind. Anyone who thinks that just can't happen with the Fed on the ball isn't clearly seeing that the Fed and the other masters of the universe know they aren't fixing the problem. So a massive drop like that could actually help them push massive social change "because they had no choice in the matter".
And from this, convergence on point if not in circumstance.
Nice!!
I think you nailed the next step CD. It's hell when their hands are tied and they have no choice but to take control. You know it keeps Rahm up all night worrying about it.
if you're thinking gap down you should be short? as for the social problem, let me say this. when the financial wizards fucked things up badly in the 30's, society fell apart. the outcome was war, and if you imagine WW2 was about good guys and bad guys, god help you. it was mass insanity. it was only later that the spinmeisters saved the day for the hollywood masses and the propaganda machine.
since ww2 society has been gradually rebuilding, but the financial wizards are at it again, and the naysayers who believe society will implode (maybe this time they are wrong - listen) the society of the 30's used to gather around a radio and listen to the bastards tell them lies. today we have way too many options to fall for that line of crap. this time we know the financial wizards are trying to fuck us and our little dog too, and we are coming for THEM, so the Goldman execs had to buy guns, too bad.
society is just a lot stronger than it used to be. they can't push massive social change, it already happened. they dream of it, but we already did it, just like in Iceland when the people of Iceland told the financial wizards in the UK to go pound salt!! they weren't going to pay those stupid debts.
don't worry keep the faith, when you see some of the financial wizards hanging upside down in the plaza like a Mussalami, then you know a new age has dawned. speaking of gap downs.
I am biased short but not totally short. And I have no illusions about what's going on. Click my ID name and scroll through my posts and articles to see my views. And I think people ARE just as susceptible to propaganda as they were in the 30's. You don't have to believe propagandafor it to be effective. It just has to freeze you in your tracks like a flash-lighted deer. Thanks for the feedback.
That is why I add options now to my final cost of trade. It saves me a lot of headaches (well, most of the time) dealing with the day-to-day volatility and very apparent market manipulation.
I don't worry for me. I can and do protect myself. I worry about the millions who believe their financial advisers and politicians because they're too frightened to do otherwise and remain fully invested in equities.
Binky is good looking. But I don't find him all that bright.
To those who express gratitude to ZH: this one of the few places where sanity prevails.
Companies hoarding cash: why? easy one! The money is a form of bailout recapitalization derived directly and indirectly from taxpayers. As such it's regarded as a one-time gift, not a recurring one and one to be held on to preciously in what many perceive as a low growth environment with many potential dangers.
Here's how it happened: how did so many corps in different sectors reap so much cash in so short and so crappy a period of time? I started hearing about the "piles of cash" in Q3 2009 when business was still horrible and earnings had only been positive for a single quarter (!) with ongoing cost cutting necessary for profitability. So how did they pull these rabbits out of a hat?
Hiding in plain sight are 2 huge sources (and the only 2 that are working): secondary equity offerings and junk bond issuance aka the Red Bull of investment banking. And the media is replete with eye popping reports:
"This week week may have been a record for any recent period on how many secondary offerings came to market combined with how many specific filings were made to raise funds for public companies. Secondary offerings were up 81 percent for the year to date, compared with the period a year earlier when the equity capital markets were basically locked down. Companies have raised $48.7 billion so far this year, with offerings in the United States and Japan accounting for nearly 47 percent of the total, according to data from Thomson Reuters."
Junk bond issuance reached a record this month. Companies worldwide issued $38.3 billion of junk bonds in March, passing the previous high of $36 billion in November 2006, according to data compiled by Bloomberg http://www.bloomberg.com/apps/news?sid=a2I7FjZ881NQ&pid=20601087
And those are only the most recent reports. There were lines out the door in 2009 for secondary issuance.
Under normal market physics, an oversupply of issuance into a an overextended market spells disaster. But not in the Stay Puffed Market! The only reason that markets can defy the laws of physics is when they're not free. The mega government debt zero risk carry trade and liquidity programs and policy directives have made this magic possible. But corporations that had near death experiences or serious issues with rolling debt in 2008-9 won't part with the cash easily at all. They hope to be survivors of the next leg down.
Excellent analysis. This is why this isn't a capitalist system any longer. Failures don't fail, but rather - they get to "refresh" and refill their coffers and continue their scams another day......
Hoarding cash makes sense for the corporate sector as it does for the individual. This is an era of geopolitical and fiscal uncertainty. The financials must definetely hoard cash. They sit on a Mount Whitney of bad paper. The non-financials must absolutely hoard cash in anticipation of what will happen with the financials. Consumers with a remaining whit of common sense must hoard and deleverage as quickly as possible, too.
Who knows what the capital lending markets will look like next year ?? None of us. But the non fi smart money is hoarding because they believe a lending squeezedown and high rates are baked into the cake as QE ( purportedly ) dissipates and one or more of the obvious global debt threats become reality.
I love TD as always, but I think taxes are way in the back of corporate cash hoarding instincts ...at least for now.
Obama wants jobs, but companies have no place to put new employees even if they hired them out of compassion or political point making. It's a Greenspan-style conundrum. The backwash from years of multiple fuckups and confidence games. Smart(er) money knows the worst is yet to come.
Uncertainty is the name of that tune.
Well said. I would only add that many corps are also hoping that hoarded cash will be a lifeboat in the next downturn. They learned. Without government facilitating secondaries and junk bonds many would have folded, unable to roll debt.
The Austrian school saw this coming: there is no escaping the bust after a credit-fueled boom. The bust can be put off, but it cannot be avoided.
true, it cannot be avoided, but it can as we see be postponed. unfortunately by postponing the inevitable, the pain will be that much worse.
Those pesky little correlations keep showing up
I don't understand. In a climate where just about everyone is anticipating INFLATION, why would the smartest amongst us hoard the stinking pile? Maybe that's why they're so smart.
Deflation is really knocking it out of the park.
This doesn't surprise me. Stock market rally or no stock market rally, they understand nothing has really changed. Companies know that they should prepare for a deflationary depression. Why spend your cash now when it will just get more valuable while everything else gets cheaper?
What has been really different during this economic dumper is how well corporate America has controlled cash usage. Slash workers, cut cap-ex below maintenance levels, manage cash taxes etc. Quite a growth story for an economy with high unemployment and weak consumer demand. Get ready for that promised economic recovery everybody! I read about it on Bloomberg! Woo-Hoo!
While i haven't read Binky's (?) article and nor have the time to do so, from what i understand in Tyler's post the author forgot to mention taxes as a major problems for these firms hoarding excess cash...
Well sir, there is a big difference between an effective tax rate and the statutory one that firms are, IN THEORY, supposed to be paying the man.
So there is your answer, which probably doesnt justify binky's article, but definitely sheds some light on how companies view taxes as very trivial due to all the credits they receive. And don't forget the Future Tax Assets account on the B/S... yes, taxes are also an asset, especially after having a year or 2 of tough economic times!
Sometimes while fighting a strong current (with light wind) in a sailboat race you can actually pull ahead by anchoring for a while.
In past times of similar uncertainty (to put it mildly) - late 70's/early 80's perhaps - did companies with large cash positions ever elect to strategically move a substantial portion of that cash into a foreign currency, gold or some other non-traditional M1 type asset?
You can't do much about the taxes, even a REIT type structure won't help if taxes on divs go up too but given the other macro problems is there an optimal strategy here for a (entirely domestic lets say) public company - ex "green" or other policy incentives?
Maybe the best strategy for some is to just sit on the cash in hopes that the next big market wipe-out will allow for a shopping spree and future growth will thus come from such acquisitions.
Just askin'
Three (honest) ways to get rich:
Worthless people blame their karma. ~Burmese Proverb
A man without a head can run Burma...
I must have missed the econ 101 class where buisness doesn't pass taxes and fees on to the end...the customer.
Of course I didn't attend Hahhhvahhhd ;-)
I think the ironic observation is that the goverment will consume our dollars one way or the other. What that observation ignores is that taxes on companies with a high return on capital is like a wet blanket on economic growth. Less jobs, less demand, less cap-ex, missed growth, and down, down, down we go... Even worse than taxing citizen victim's income...
Uh... problem being that most business owners are going to lose everything trying to weather the storm, so that farm is more likely going to start looking like their family vehicles when push comes to shove. The ultrarich, however, can look forward to being the original and less sodium versions of soylent spam.
There are the usual comments on how business always passes on taxation costs to the customer. It doesn't work that way.
What really happens is that the manufacturer eats a large proportion of the costs, thus reducing profits that are needed for further investment in competitive tools.
I see the auction notices for the companies that just can't absorb such costs. It isn't as though the owners and operators of these shops are incompetent boobs. All of them are at the mercy of the inherently unstable financial "system". The best engineers and the finest equipment are useless when floater fiat currencies make them uncompetitive. You should see the waves of ruined Canadian machine shops that show up on an auction notice.
Were they stupid uncompetitive dolts? I doubt it. When the currencies change international values by five or ten percent in a year or less that wipes out the margins in quick time.
Nearly all of you are traders that can close a position with a click. The dumb bastards that populate what is left of North American manufacturing have a far longer time line that is now always a journey into the whipsaws of the maggots that have a timeline of milliseconds all the way up to a week.
The big finance fecks have the timeline comparable to the life cycle of botflies. They are pupating and eating the flesh of the real economy. Soon they will fly away.
Agreed -- in a normal market, every company is a "price taker". The costs *are* passed on to the consumer, but if the business can't pass that cost on (because no consumer wants the product/service at that increased price) then the company dies.
Taxes kill. That's their job -- to distort, extort, and kill.
When Rome fell, the average pesant's nutritional diet got... Better. (according to archiological digs)
Once you no longer need to support Empire and throw it off your back, its much easier to walk. Infact you'll be quite strong from carring it so long.
I think the author ignores the fact that much of this cash may be offshore, and thus untouchable by the US tax man. My opinion is that large corporations are moving resources where money is treated best, and that is NOT the US.
"My opinion is that large corporations are moving resources where money is treated best, and that is not the U.S."
Why should anyone be surprised?
Does ANY transnational CEO have any confidence in Obumbler and his merry men?
The US economy will not recover until Capital is made to feel welcome here again, with predictable rules, predictable tax burden, and a stable social environment.
Wake up folks - it's not just the jobs that are fleeing offshore, but the capital as well.
KrvKpt. laughing swordfish
shoreside awaiting further assignment
What about that anachonistic remnant that actually gives a damn for the employee that is stuck in the same morass of K Street theft?
Very few of you get it on how it works in a sub 15 person employment manufacturing business. If the goomint busts us there will be a very large industrial company that will take a huge hit. Our crummy shop produces quality that they cannot get in the hemisphere.
I have capital on the floor that should be enough to retire upon. The return that I get now is less than a goomint drone Fire asst Chief gets at retirement at age 52, or 50.
A kid that I went to scool with retired at age 55 with the pension based upon his last year. He was lucky to get an honorary asst principal job along with his wife, which was doubley fortunate.
The guy is an OK teacher, but he is not worth the draw on an hypothecated 2,000,000.00 if interest return was 3%
Be good enough to avoid firing and you will get a pension that is higher and more stable than some SOB that worked and saved to gather (USD 80,000/0.015 if lucky)
Get 1.5% on savings?
We mundanes are on our own. We mundanes never had a word to squack to say to the filthy gombit pension managers.
I called state representatives and the holy Senators. They dismissed my calls as as worthy as a sandgrain in the shoe.
I did raise a stink on local radio stations and newspapers. The local paper insisted on championing the cause of the worthless and uneducable.
We have an election coming up to do a choose of two or three out of four.
Meanwhile, NYC Catholic schools have 1/50 of the suction thieving maggots in the administration.
In small business, those holding back from firing must be looking at the increasing costs and asking themselves- Can I work harder and get rid of one or two more??
charlie evans, chitown fed, says UE remains 9+% this year..gotta keep rates low, low, low..
never a word about the Gov borrowing..I cannot see how they let rates move up and make that Nut..
hope Ivy League has produced Supermen able to solve that Gordian Knot.
dup
Looks like barro - ricardian equivalence at work here.
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