The market is in a slump, as it waits and watches earnings to see where it goes next. What I mean by “slump” is the buyers are watching and waiting. The sellers are out in force, but there are just not enough of them to do any real damage. I suspect there is a whole lot of shorting going on, which means we might be in for short squeeze when the buyers decide to come out and play.
In my daily morning read, I came across an interesting article, one that piqued my interest, not only for the information, but for the potential of what that information might mean.
- According to Thomson Reuters data, companies around the world held almost $7 trillion of cash and equivalents on their balance sheets at the end of 2013 – more than twice the level of 10 years ago.
The above numbers are interesting and they represent a vast amount of money just waiting. As anyone who has followed this cash piling up over the last few years knows, the number at the end of 2013 is way larger than the number from just two years ago. In January of 2011, the Wall Street journal reported the number at $1.93 trillion. So, in just two short years, global corporations have stashed another $ 5 trillion. This holding of cash, rather this excessive holding of cash, raises an interesting question. What exactly are those who hold all this money waiting for?
- But M&A as a share of market capitalization remains lower than it was in 2002, JPMorgan data shows, and share buybacks are also below historical averages.
Okay, so the money is not going into M&A and, most importantly, it is not going back to shareholders, so where will it go? Better yet, where should it go to best serve the corporations and the economy?
- According to this week’s monthly fund manager survey by Bank of America Merrill Lynch, a record number of investors think companies are under-investing and some 58 of respondents want firms to deploy their cash on capital expenditure.
Investing this hoard of money back into the companies themselves is a good idea, especially when one considers the information below.
- Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years.
Clearly, the money is there and, clearly, there does not seem to be any urgency about spending it on buybacks, M&A, or much of anything else right now. One question I have, though, is what will it take to get that money back into the pipeline?
Perhaps 2014 is the year the money will move from low return to long-term return, meaning, CEOs understand the money not giving much back in return, so investing it in infrastructure, equipment, expansion, and even people will probably start to make sense if:
1) Corporate bosses feel the damage done from the economic collapse is finally passed, that political stability is at hand, that global finances are under control, and
2) there is a sustained viewpoint that the global economy is headed for a robust period.
If the next few months show an improving global economy, as the last few months have, then that just might be the catalyst needed to release the dough. That, in turn, will have a synergistic effect on the global economy, and, of course, the global stock market. The same is true for global politics, finances, and the residual fears from the Great Recession. Yup, 2014 just might see the gobs of money flow.
Not only is it important to see the money flow; it is also important to see where it flows. When one is talking about capital expenditures these days, one should not be talking just about physical structure.
- Sears Holdings Corp is closing its downtown Chicago flagship outlet in April, the latest move by the retailer to cut the number of its stores as it relies more on online retailing.
It is a brave new world out there as the transformation to the digital frame continues. Companies, not just retail businesses, but all companies in one manner, shape, or form, will need infrastructure based on the Internet to capitalize on the myriad tentacles reaching deeper into our everyday lives. Which stocks stands to benefit most when the money is unleashed?
Trade in the day; Invest in your life …