It’s said sharks will die if they stop swimming. The same could be said for the corporations hoarding record amounts of cash on their books right now in a board room paralysis rarely, if ever, seen before.
“Companies are getting closer to the point at which they will either have to accept slower growth or put capital to work,” said Jason Trennert, founder of Strategas Research Partners.
Corporate profits relative to GDP are near 40-year highs, according to Trennert, at more than 10 percent. These fortress balance sheets made sense coming out of the worst financial crisis since the Great Depression, but the economy is supposed to be well into a recovery by now.
The excuses for the extreme cash hoarding range from fears of a double-dip recession to legislative uncertainty in Washington. Regardless of the reasons, gun-shy CEOs will either be lauded by their shareholders for being ready this time for a second economic downturn or ousted for missing one of the best times to invest this century.
“I do believe companies will be under increasing pressure, both internally and externally (i.e. shareholders) to utilize their cash hordes for growth either through acquisitions that are accretive or buybacks and dividends,” said Karen Finerman, who runs hedge fund Metropolitan Capital Advisors and is a ‘Fast Money’ trader.
Companies such as Intel, BHP Billitonand Hewlett Packard have started to put money on the table in the form of acquisitions. For their efforts, they’ve been rewarded with a five-day slide in the stock market that has put the market on the cusp of breaking down to the lows of the year again. Eventually these efforts should be rewarded , said some traders.
“For several reasons, we are embarking on a period of ebullient M&A activity which should serve to stabilize and ultimately lift the US stock market,” said Doug Kass of Seabreeze Partners. “It is unlikely that BHP Billiton and Intel would propose spending $30 billion and $9 billion, respectively, for the acquisition of Potash and McAfee if they felt an economic apocalypse was on the horizon.”
If companies don’t begin merging, hiring employees and returning cash to shareholders, a double-dip recession could become a self-fulfilling prophecy. This is exactly the reason why Federal Reserve Chairman Ben Bernanke has kept rates at zero for so long and even gone to extreme measures like buying Treasuries to smoke out companies from low return investments.
“Paradoxically, zero interest rate policy might actually be encouraging companies to hoard cash,” said Steve Cortes, head of Veracruz Research. “When the Fed constantly reinforces, through words and quantitative easing, that prices (and by extension, the recovery) can't rise, individuals and companies instinctively retrench and credit contracts. The Fed may well be reinforcing the very behavior it seeks to prevent.”
* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.
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Trader disclosure: On Aug 25, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova owns (BM), (GOOG), (MSFT), (QCOM), (TER), (BRCM), (AXP), (C), (MRVL), (BMO), (V), (POT), (GLD), (FCX), (APA), (SU), (XBI); Cortes Owns (FCX), (SFD), (BHP), (TD), (BMO);Cortes Is Short Yen; Cortes Owns Crude Oil; Najarian Owns (HPQ) Calls; Najarian Owns (CELG); Najarian Owns (TCK); Najarian Owns (CNI); Najarian Owns (TEVA); Najarian Owns (V) Calls; Najarian Owns (STX) Calls; Najarian Owns (WDC) Calls; Najarian Owns (MU) Calls
For Joe Terranova
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
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For Brian Kelly
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Moshe Orenbuch
(C), (JPM), (BAC) , (WFC), (PNC), (USB) Is Or In Past 12 Months Was A Client Of Credit Suisse
Credit Suisse Provided Investment Banking Services To (C), (JPM), (BAC), (WFC), (PNC), (USB) In Past 12 Months
Credit Suisse Provided Non-Investment Banking Services To (C), (JPM), (BAC), (WFC), (PNC), (USB) In Past 12 Months
Credit Suisse Has Managed Or Co-Managed Public Offering Of Securities For (C), (JPM), (BAC), (WFC) In Past 12 Months
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(ACOM), (LOGM), (RLOC) have been investment banking clients of Piper Jaffray during the past 12 months.
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Piper Jaffray makes a market AAPL, ACOM, AMZN, BIDU, DRIV, EBAY, FMCN, GOOG, GSIC, IACI, KONG, LOGM, MCHX, MELI, PRTS, RLOC, SINA, SOHU, VCLK, WWWW, YHOO
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