Wednesday, March 19, 2014

US CASH PILE........PAYMENT OF DEBT


We all know that an economic development of a country happens when investments in to fixed assets and long term cyclic assets creations are being created. We find that Dow Jones achieving new heights of historic levels and US economy is doing pretty well. The word pretty well defines that they are coming out of the recession, unemployment numbers are coming down and consumer sentiments are again back on the street of consumptions. In my research during 2010 when the Dow Jones was climbing the ladder of 12000 I found that US corporate were having a cash pile of around 1.26 triilion dollars at that point of time. Coming to 2014 I find more aggressive piles of cash which are being kept under the bed of the US corporate and they are quite reluctant to invest as they were in 2010. Some of the Key Findings would elaborate the matter very clearly.


  • According to the Department of Commerce, profit margins at U.S. companies in 2013 were are more than 57 percent higher than average over the past 60 years.
  • From 2006 through mid-2013, total cash reserves at U.S. nonfinancial companies (i.e., everything but banks) nearly doubled, rising from $820 billion to $1.48 trillion, an 81 percent increase.
  • Credit ratings company Moody's (MCO) recently estimated that cash levels at the end of 2013 probably hit $1.5 trillion.
  • If further drilling is being applied we find that the top IT players of US industry holds majority of the cash piles. Apple (AAPL), Microsoft (MSFT), Google (GOOG) and Cisco (CSCO), who together possess $345 billion in cash reserves, or about 23 percent of all cash owned by corporate America.
  • The historical phase of US cash piles is more surprising. During the last 10 years it were different. First, cash holdings increased very fast between 2002 and 2004, growing at an annual rate of 19 percent (from $822 billion to $1.17 trillion), then plateaued until the end of 2008. At that point, they rose significantly fast again, growing at an annual rate of 11 percent until 2011 (from $1.18 trillion to $1.62 trillion).

Now the point of analysis is this that why doesn’t the US corporate doesn’t invest this money since that would create new opportunities for the macro economic factors to grow. Today US corporate (Non Financial Companies) earns 11 trillion dollars and stocks cash of around 1.5 trillion dollars which roughly 13%.Now about 60% of [non-financial corporate] cash piles are offshore and subject to as much as 35% tax if brought back to the U.S. Moreover companies grew their cash reserves by $33 billion over the six months from the end of 2012 to mid-2013. Meanwhile, the past 12 months we have seen a $201 billion increase in corporate debt. This means that over the past year at least, companies have increased their debt by a factor of six relative to cash growth. Today, nonfinancial companies have stacked up a staggering $4.8 trillion worth of debt owed to their lenders and bondholders. So what ever cash piles they are having its only to repay the debate over the next 5 years. Please don’t forget that from 2009 to 2014 we are completing 5 years and another 5 years we will have to pay back what we borrowed for a period of 10 years from 2009. According to Moody's data, some $1.53 trillion in nonfinancial corporate debt matures over the next five years, which is actually a bit more than the $1.48 trillion in cash they've got on hand.

One of the prime reason behind holding such high level of cash piles is that US corporate are more uncertain about the recovery process and another prime reason would be that firms with higher uncertainty in their cash flows had higher cash-to-assets ratios. The prime reason behind this kind of cash pile is that for repatriation taxes. Many countries, including the U.S., have a policy of taxing based on their worldwide global income. Particularly, taxes due to the U.S. government from corporations operating abroad are determined by the difference between the taxes already paid abroad and the taxes that U.S. tax rates would be applicable on them. Importantly, such taxation only takes place when earnings are repatriated. Therefore, firms may have incentives to keep foreign earnings abroad. As a consequence, in times of limited foreign investment opportunities and high profitability, these funds are likely to be held abroad in the form of cash.

Well the economy might be growing and Unemployment might be coming but how much stability it has is a big matter of concern. In my next article I will bring out the facts about the consumer sentiments market backed by Real & REEL employment growth in US.

 Written By Indraneel Kripabindu Sen Gupta

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