Friday, July 09, 2010

Awash in Cash

The 2010 AFP Liquidity Survey found that a full 43% of U.S. corporations had larger domestic cash and short-term investment holdings this May than they did six months earlier. Only 24% of respondents reported that their short-term holdings had shrunk during the past six months. We expect the upcoming round of June quarter reports to support the survey results. Cash balances bode well for strategic flexibility and perhaps reduced leverage, but reveal starkly cautious sentiment in board rooms across the country. In our view, the building piles of cash do not offer as much hope for future growth. With not investment we expect most operations to coast, maintaining existing market share and customer relationships, but making little if any progress in building product lines or penetrating new markets.

We expect corporate cash to become a target for government policy makers in the coming election season. After footing the bill for bailing out the ailing banking and auto industries and extending benefits to the unemployed, the U.S. government may be tapped out. Jobs growth may be dependent upon corporate leadership to loosen up the purse strings. Just how far the Obama Administration and Congress will have to go to increase private investment is not yet certain. June quarter results and the attendant conference calls will be instructive in terms of what if any increase in capital spending might come to pass in the second half of 2010 and early 2011. In our view, new capital spending plans bode well for new demand generation for each of the companies in our coverage universe.

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