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Cash Just Kept On Piling Up, But It Looks Like The Spending Has Started


Cash and equivalent, an item that is always near and dear to my heart, for the S&P old Industrials, which is the S&P 500 less Financials, Utilities, and Transportation issues, is running 9.8% ahead of the record setting second quarter value of $773 billion. Information Technology, lead by Oracle which increased $7.9 billion in the quarter, Microsoft which added another $3.6 billion, and Google which has $2.6 billion more, as a sector now has over 13% of it’s market value sitting in cash, which can’t be making much money, and the sector account for 35% of all the cash in the Industrials. Health Care, lead by Merck’s additional $5.2 billion, UnitedHealth’s $2.3 billion gain and Amgen’s $2 billion increase, now has over 17% of it’s market value in cash, and accounts for 28% of the cash. Nine of the ten sectors are up, with Energy being flat, which since Exxon has $3.1 billion less in cash this quarter, but trust me I wouldn’t be passing the plate around for them at this point, means that the rest of the Energy sector was up. Overall, 67% of the issues increased their cash position in the third quarter, mostly due to cost cutting, lower dividends and much lower buybacks, although both dividends and buybacks do appear to have hit the bottom, with dividends actually turning the corner. The cash build up has been occurring over the last year, as companies pulled back after the Lehman credit crunch to insure their own ability to finance their business, and ride their way through the recession.

But it appears that Q3 may be the height of that cash mountain, as companies start to spend some of that money. The expenditures won’t be on CapX, unless we get an accelerated depreciation bill from congress, or jobs, especially since we believe we will be testing the Dec,’82 10.8% unemployment high, nor is it on plant expansion. Shock and dismay, its M&A, and its back and alive in the market place, as well as the pockets of investment bankers. Both Pfizer and Merck have closed fourth quarter deals, with their cash component being over $61 billion. That alone should insure that cash levels decline. Hewlett-Packard announced it will buy 3Com for $3 billion, and United Technology is buying a unit from GE for $1.8 billion. As we progress in the recovery we believe M&A will increase, as companies try to buy market share, bottom fish those companies that remain in poor condition, and recapture a returning consumer, who is now significantly more attuned to the cost factor. Let me put it this way, companies now have more cash then they ever made in any one year period. And if you add that cash to the value of treasury shares, it’s 23% of market value, that’s a lot of assets sitting on the side, especially when the risk-reward trade off now appears to be bending more towards risk. So the question is can Monday Morning Merger Mania be fare behind?


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