Mish's Global Economic Trend Analysis

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• Cash Cow: "Who has the Cash?" Followup
• California Pension Promises Exceed 550% of State Tax Revenue by 2012; A Look at Solutions
• Cash Cow: Who has the Cash, Who has the Debt, by Sector and Company

Cash Cow: "Who has the Cash?" Followup Posted: 22 Oct 2010 12:16 PM PDT In response to Cash Cow: Who has the Cash, Who has the Debt, by Sector and Company I received the following email from Erico who says the cash situation is even worse than I presented it. Erico Writes ... Mish – I believe you overstated the amount of cash in your analysis. A lot of that cash for the banks is collateralized. Plus GS is certainly NOT a cash cow. I would invite you analyzing their cash flow statements over the last 10 years, so you can really see how much of a ponzi finance Wall Street has become. In the latest 10Q available, they "only" generated $2bn from operations. Otherwise, keep up the great work! Best Erico In case you missed that top link, please give it a look. It contains an nice interactive graphic about cash levels, using Tableau software. Corporate "Cash" - Cheering the Asset and Ignoring the Liability Erico is correct but actually I was aware of it. Here is an analysis from Hussman that I meant to include last night but did not. This is one of the things that happen when you finish a post at 5:30AM. Please consider Corporate "Cash" - Cheering the Asset and Ignoring the Liability Four years ago, in There's No Such Thing as Idle Cash on the Sidelines, I observed: "Investors should not believe that the "cash on the balance sheets" of corporations might suddenly be used, in aggregate, for new investments and capital spending. That cash on their balance sheets has already been deployed as loans to the Federal government and to other companies. Now, yes, if the government runs a surplus and retires its debt, in aggregate, or the other companies that borrowed the money generate new earnings and then pay off their debt, in aggregate, then those new savings that retire the T-bills and commercial paper then make it possible for the recipients to finance new investment, in aggregate. So as usual, savings equals investment, and new savings can finance new investment. But what investors often point to and call "cash on the sidelines" is really saving that has already been deployed and used either to offset the dissavings of government or to finance investments made by other companies. Once those savings have been spent, you can't, in aggregate, use the IOUs (in the form of money market securities) to do it again." Now, as then, analysts are pointing to an apparent pile of corporate "cash on the sidelines" as if these holdings of debt securities somehow make new corporate spending more likely. In order to evaluate this argument, it's necessary to understand that what is being called cash is actually a stack of IOUs for money that has generally already been spent by other companies or by the government. Don't get me wrong. At an individual company level, it's obvious that if DuPont has a bunch of marketable securities on its balance sheet, it is free to sell those securities and spend the money on new equipment and so forth. The issue is that somebody else has to buy those securities. At the end of the day, there is no less "cash on the sidelines" after that change of ownership than there was before. Put simply, there is a lot of apparent "cash on the sidelines" because the government and many corporations have issued enormous quantities of new debt, often with short maturities, while other corporations have purchased it. It is an equilibrium. The assets that are held in the right hand represent debt that is owed by the left. You cannot call that pile of short-term marketable securities an asset without calling it a liability. The cash on the sidelines is evidence of debt incurred to fund economic activity that is already in the past. It will remain "on the sidelines" until the debt is retired. The government debt has been issued to finance deficit spending. At the same time, a great deal of corporate debt has been issued over the past year apparently as a pre-emptive measure against the possibility of the capital markets freezing up again. Raising Cash While They Can I have previously address some of these issues myself. For example please consider my August 12, 2010 article Are Corporations Sitting on Piles of Cash? The Wall Street Journal claims U.S. Firms Build Up Record Cash Piles U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery. The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963. "Stockholders don't want them to keep sitting on cash at a zero return," said Paul Kasriel, an economist at Northern Trust. "They're going to use it," either to increase hiring and investment or to make payouts to shareholders in the form of dividends or share buybacks, he said. Sideline Cash = Corporate and Government Debt That corporations are sitting in piles might be dandy if it were true, but unfortunately it is not an accurate representation, at least in an aggregate sense. John Hussman mentioned the corporate cash situation in Cheering the Asset and Ignoring the Liability. .... Corporate Cash Lie The article Hussman referred to is one I have been meaning to link to for several days. Please consider The biggest lie about U.S. companies Or you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were "hoarding cash" but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions? It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock. A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi? According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s. Note that I even referenced that Hussman post way back on August 12. So as you can see, I am very aware of these issues. I concluded the above piece with my own thoughts .... So, in spite of what most are saying, corporations are not really holding tons of cash, ready at any moment to go on an investment or hiring spree. Instead, corporations burnt by inability to raise cash during the 2008 credit bust are simply taking advantage of market conditions to raise cash levels now, at attractive rates, while they can. Corporations raise cash in two instances 1. When they can 2. When they have to After the corporate bond blowup in 2008, companies are wisely focusing on #1, while they still can. How much longer the market is willing to allow debt financing at favorable rates remains to be seen. When it stops, equities are likely to get clobbered. The closer one scrutinizes corporate cash, the less there is of it to see. In short, except for a handful of companies, there is almost no cash that can be used for purposes mainstream media says. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

California Pension Promises Exceed 550% of State Tax Revenue by 2012; A Look at Solutions Posted: 22 Oct 2010 11:20 AM PDT To put a little perspective on the pension crisis, please consider the Bloomberg article California Pension Promises May Top Taxes Fivefold To keep their promises to retirees, the California Public Employees Retirement System, the biggest plan, the California State Teachers Retirement System, the second-largest, and the University of California Retirement System may have combined liabilities of more than 5.5 times the state's annual tax revenue by fiscal 2012, according to the study released today by the Milken Institute. Levies are forecast to reach about $89 billion in the year that began July 1. Debts to government retirees including those in California, the biggest state by population, have grown into a national crisis as pension plans strive to meet obligations to more than 19 million active and retired firefighters, police officers, teachers and other state workers. Fewer than half the plans had assets to cover 80 percent of promised benefits in fiscal 2009, according to data compiled for last month's Cities and Debt Briefing hosted by Bloomberg Link. "California simply lacks the fiscal capacity to guarantee public-pension payments, particularly given the wave of state employees set to retire" in future years, said researchers Perry Wong and I-Ling Shen in the Milken report. "Structural shifts, coupled with the financial design and the accounting practices of state pension funds, all point to the fact that reform is imperative." Addressing California's Pension Shortfalls The study the above article referred to is Addressing California's Pension Shortfalls: The Role of Demographics in Designing Solutions from the Milken Institute. Concurrently raising the retirement age and increasing employee contributions is only the first step in addressing California's looming public pension liabilities, according to a new report, Addressing California's Pension Shortfalls: The Role of Demographics in Designing Solutions from the Milken Institute. The situation will eventually call for even bolder action, such as shifting to hybrid plans with only a partial defined-benefit component. Some of the key findings in the report include: By around 2012 or 2013, the three major state pensions' obligations will be more than five times as large as total state tax revenue. Not only will California's growing senior population depend on Medi-Cal and other state services, but public school enrollment is likely to rise in the coming years. The state can ill afford to fund pensions by cutting back on these services. In 2009, the pension liability came out to $3,000 per working-age adult in the state. By 2014, it will triple to over $10,000 per working-age Californian. Raising employee contributions alone will be less effective over time as the ratio of actively contributing members to benefit recipients continues to decrease. Currently, the average state employee contributes to the system for 25 years, but will receive benefits for 26 years — and the number of benefit-receiving years is increasing as longevity improves. Milken's Proposed Solutions The Milken report recommends raising the retirement age and increasing employee contributions. It also wants as shift from defined benefit plans to a hybrid plan with partial guarantees and a partial 401K type coverage. I agree with the first set of proposals on retirement age and employee contributions. However, I strongly disagree with any guarantees. The private sector has no guarantees. Pray tell why should taxpayers guarantee any benefit levels for public bureaucrats, most of whom are grossly overpaid in the first place. Moreover, we need to get rid of public unions, privatizing every needed service, and killing all of the unneeded ones. The study fails to mention that as part of the solution. Finally, I believe states should explore the legality of taxing all public sector pension benefits above some set amount, say $75K annual, at a very high penalty rate, say 90%. If legal, that would take care of the mess in one easy step. Here is the Milken Slide Show on Addressing California's Pension Shortfalls. It's worth a look to understand the magnitude of the crisis even if the proposed solutions are lacking. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Cash Cow: Who has the Cash, Who has the Debt, by Sector and Company Posted: 22 Oct 2010 03:33 AM PDT There are a lot of claims by mainstream media regarding cash on the sidelines and corporate cash levels. Except for a handful of isolated companies, predominantly technology, claims are far-fetched. This interactive script showing the top 50 companies in the US by market cap is proof. Please give the script time to load. It may take 10 seconds or more. Thanks to Ellie Fields and Ross Perez at Tableau Software for help with the display! As you can see, the total cash (in green) for the top 50 companies is $3.71 trillion, which sure sounds like a hell of a lot of cash, and it would be were it not for the debt (in red) totaling $4.45 trillion. The data for this sheet is from Yahoo!Finance. Scroll over any of the bars (not the company name) to see more details. For example ... Bank of America Goldman Sachs Apple Goldman Sachs (GS), Apple (AAPL), Google (GOOG), Microsoft (MSFT), Intel (INTC) and Qualcom (QCOM) are genuine cash cows, but JPMorgan (JPM), and Bank of America (BAC) are charlatans. As for Citigroup, how much of that cash is needed for losses? Relatively speaking, the tech sector has quite a few cash cows but it also has some real turkeys like AT&T (T), Comcast (CMCSA), Verizon (VZ), and IBM. Google and Apple have the distinction of holding buckets of cash and no debt. An award of sorts goes to General Electric (GE) with a monstrous net cash level of negative $415.9 billion. It's fair to point out that a handful of tech companies could go on a buying spree, but in aggregate, if one factors in debt, a negative $749.6 billion is sitting on the sidelines. That's a far cry from the purported $trillions of sideline cash ready to come pouring into the stock market at a moment's notice. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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