George Gershwin did have a way with words. Where have the simpler times gone?
There was a time when we did not worry about the market, there was no CNN and the internet had not been invented. That is not the time we now live in no matter how hard I try. In the past few months most of the trading we have done was to hedge, write calls against, existing positions. The market has continued its gravity defying climb ever higher.
As we have previously written, we have no comfort in chasing the market. Our goal is to add income not principle value. The past 6 months have been challenging as we do not want to get whipped-sawed (buying high just to participate then selling low because we get stopped out at a loss).
Corporate cash continues to accumulate.
Source: Compustat
Source: Compustat
The Ratio chart seems to be most indicative although both charts demonstrate that cash holdings are high for the past decade. This is important information and a clear reason for the strength of the market. The article authors determine that, "There are two main reasons why firms find it beneficial to hold cash: precautionary motive and repatriation taxes." Precautionary motive...... fear of the future. The business and political environment globally is unstable at best. Corporations are risk taking and adventurous organizations. They profit from taking risks. When they curtail their activities the economy suffers. If cash is truly the grease that lubricated the rails of the economy, then hording cash is a sign of coming problems, as if there are not enough problems now. The tax issue is a constant. The primary goals of any corporation is to make money and avoid paying taxes on the profits. When both are done legally investors cheer, when done illegally government investigators and prosecutors cheer (job security).
Why have stock prices risen with corporate cash holdings? Investors buy stocks for appreciation, income and ownership. There are any number of theories as to how stock prices are arrived at and what constitutes the value of a stock at any given moment. Present value of future earnings, discount dividend, and my personal favorite the equilibrium between buyers and sellers. Cash can easily be disgorged by managers in the form of investment, wages, bonuses and dividends. Investment can be in the form of buying property plant and equipment or another firm. The 1980's saw diversification as a means of growth. This had mixed results. Integration can be good as ling as it is within the confines of the existing business. There is one aviation company that owns a guitar maker, but that is the exception. Tyco did a good job of adding annuity based service companies while RJR didn't do such a good job adding businesses to its portfolio. GE remains to be seen, our group is split on that one. However, with stock prices so high, it is logical to assume valuations are too high as well. If so buying a company may be too expensive. Paying higher wages and bonuses will be frowned upon, however, providing better benefits or funding pension obligations will be more acceptable. Paying of dividends, special dividends especially, is a time honored tradition that income investors really, really like. Although we are not betting on a tsunami of special dividends, we have seen some and would welcome more. If the choice were greater taxation of corporate cash or rewarding shareholders, we would like the latter. Note that there is a tax payment necessary for every dividend at the corporate level (remember the triple taxation arugement on dividends?). Certainly, acquiring businesses' is a good idea, valuations and an uncertain economy may leave managers little choice but to provide special dividends.
There was a time when we did not worry about the market, there was no CNN and the internet had not been invented. That is not the time we now live in no matter how hard I try. In the past few months most of the trading we have done was to hedge, write calls against, existing positions. The market has continued its gravity defying climb ever higher.
As we have previously written, we have no comfort in chasing the market. Our goal is to add income not principle value. The past 6 months have been challenging as we do not want to get whipped-sawed (buying high just to participate then selling low because we get stopped out at a loss).
Corporate cash continues to accumulate.
Source: Compustat Ratio of Cash to Net Assets
Source: CompustatThe Ratio chart seems to be most indicative although both charts demonstrate that cash holdings are high for the past decade. This is important information and a clear reason for the strength of the market. The article authors determine that, "There are two main reasons why firms find it beneficial to hold cash: precautionary motive and repatriation taxes." Precautionary motive...... fear of the future. The business and political environment globally is unstable at best. Corporations are risk taking and adventurous organizations. They profit from taking risks. When they curtail their activities the economy suffers. If cash is truly the grease that lubricated the rails of the economy, then hording cash is a sign of coming problems, as if there are not enough problems now. The tax issue is a constant. The primary goals of any corporation is to make money and avoid paying taxes on the profits. When both are done legally investors cheer, when done illegally government investigators and prosecutors cheer (job security).
Why have stock prices risen with corporate cash holdings? Investors buy stocks for appreciation, income and ownership. There are any number of theories as to how stock prices are arrived at and what constitutes the value of a stock at any given moment. Present value of future earnings, discount dividend, and my personal favorite the equilibrium between buyers and sellers. Cash can easily be disgorged by managers in the form of investment, wages, bonuses and dividends. Investment can be in the form of buying property plant and equipment or another firm. The 1980's saw diversification as a means of growth. This had mixed results. Integration can be good as ling as it is within the confines of the existing business. There is one aviation company that owns a guitar maker, but that is the exception. Tyco did a good job of adding annuity based service companies while RJR didn't do such a good job adding businesses to its portfolio. GE remains to be seen, our group is split on that one. However, with stock prices so high, it is logical to assume valuations are too high as well. If so buying a company may be too expensive. Paying higher wages and bonuses will be frowned upon, however, providing better benefits or funding pension obligations will be more acceptable. Paying of dividends, special dividends especially, is a time honored tradition that income investors really, really like. Although we are not betting on a tsunami of special dividends, we have seen some and would welcome more. If the choice were greater taxation of corporate cash or rewarding shareholders, we would like the latter. Note that there is a tax payment necessary for every dividend at the corporate level (remember the triple taxation arugement on dividends?). Certainly, acquiring businesses' is a good idea, valuations and an uncertain economy may leave managers little choice but to provide special dividends.
