Today starts earnings season with Alcoa being the first to report after the close of the market. Though Analysts have been revising their estimates downward for the past month, they are expected to report a profit for the year. They are also one of the many companies that have been hoarding cash. In fact, Charles McLane, their CFO, has said, “they'd have to beat me over my head to get it out of my hands,"
It’s pretty widely known that companies are stashing cash to the tune of about $1.8 trillion. What doesn’t seem to be so widely known, or at least not widely agreed to, is the reason why. Some of the reasons that I have heard are that they are holding back to thwart the economic recovery hoping that Obama will be seen as "failing" in the eyes of the electorate or that egomaniac CEOs want the cash for new jets and mistresses or, the more cogitative reason, “they’re greedy.”
With all due deference to these sagacious perspectives, I believe the build up in cash supplies are simply a reaction to the financial crisis where companies couldn't raise cash or had to pay much higher rates for it. They have an uncertainty about the tax and regulatory environment and it’s effect on business going forward.
The three major concerns of business are:
1) Increased regulation & Fees
2) Increased taxes
3) Unavailability and increased cost of credit
Contrary to what some pundits have said, the proposed financial regulations do not only affect financial institutions, they impact everyone that relies on borrowing to satisfy their capital requirements. We have all heard politicians criticizing banks for not providing credit only to see those same politicians propose regulations and fees which basically tell the banks not to lend and consequently sends the message to businesses not to spend or hire but rather, hoard cash. Moreover, the proposed regulations are not limited to financial institutions. Looming Environmental and Healthcare regulations and fees also threaten profits and scare the begeezes out of corporate America
With the Bush tax cuts set to expire and no reprieve expected, after-tax income will necessarily erode. Less disposable income will likely stifle already weak sales, delayed spending will provide a better tax benefit later and higher tax on dividends and capital gains will likely reduce shareholder investment and make it more difficult for companies to raise money in the bond markets or even issue short-term debt.
Debt service is one of the largest expenses of corporate America. Especially small businesses which frequently use personal credit to finance business needs.The corporate cash stash looks less impressive when compared to its debt. This High debt makes companies nervous about depleting cash or spending more of their profits. As Treasurers look at impending inflation and the accompanying interest hikes as well as uncertainty that banks will be there should they run short of cash, they will continue to hold onto their funds.
Increased cash saving is normal in an early recovery period when profits are rebounding but is not translating into investment in the economy. At this point, despite the rhetoric, businesses are going to sit on the sidelines until they are confident that the rules of the game are not fixed against them. With companies spending and investing less, economic growth is slowed. However, as the economy improves, these cash reserves give them Treasurers more freedom and comfort to start hiring and spending
It’s pretty widely known that companies are stashing cash to the tune of about $1.8 trillion. What doesn’t seem to be so widely known, or at least not widely agreed to, is the reason why. Some of the reasons that I have heard are that they are holding back to thwart the economic recovery hoping that Obama will be seen as "failing" in the eyes of the electorate or that egomaniac CEOs want the cash for new jets and mistresses or, the more cogitative reason, “they’re greedy.”
With all due deference to these sagacious perspectives, I believe the build up in cash supplies are simply a reaction to the financial crisis where companies couldn't raise cash or had to pay much higher rates for it. They have an uncertainty about the tax and regulatory environment and it’s effect on business going forward.
The three major concerns of business are:
1) Increased regulation & Fees
2) Increased taxes
3) Unavailability and increased cost of credit
Contrary to what some pundits have said, the proposed financial regulations do not only affect financial institutions, they impact everyone that relies on borrowing to satisfy their capital requirements. We have all heard politicians criticizing banks for not providing credit only to see those same politicians propose regulations and fees which basically tell the banks not to lend and consequently sends the message to businesses not to spend or hire but rather, hoard cash. Moreover, the proposed regulations are not limited to financial institutions. Looming Environmental and Healthcare regulations and fees also threaten profits and scare the begeezes out of corporate America
With the Bush tax cuts set to expire and no reprieve expected, after-tax income will necessarily erode. Less disposable income will likely stifle already weak sales, delayed spending will provide a better tax benefit later and higher tax on dividends and capital gains will likely reduce shareholder investment and make it more difficult for companies to raise money in the bond markets or even issue short-term debt.
Debt service is one of the largest expenses of corporate America. Especially small businesses which frequently use personal credit to finance business needs.The corporate cash stash looks less impressive when compared to its debt. This High debt makes companies nervous about depleting cash or spending more of their profits. As Treasurers look at impending inflation and the accompanying interest hikes as well as uncertainty that banks will be there should they run short of cash, they will continue to hold onto their funds.
Increased cash saving is normal in an early recovery period when profits are rebounding but is not translating into investment in the economy. At this point, despite the rhetoric, businesses are going to sit on the sidelines until they are confident that the rules of the game are not fixed against them. With companies spending and investing less, economic growth is slowed. However, as the economy improves, these cash reserves give them Treasurers more freedom and comfort to start hiring and spending
