Corporate Cash on the Balance Sheet and the Pathetic Media

What I find interesting is that the financial pornography like CNBC, FoxBusiness, Financial Times, WSJ, and all the other mainstream folks still mention every know and then that corporate cash on balance sheets at their all-time highs since World War II. 

I, too, have been plagued by this comment thinking, "Hey, perhaps all the money that's been pumping into the system from the Federal Reserve is going to paying down debt and increasing liquidity in non-financial firms.".....WRONG!

While the cash on balance sheets has been increasing (on an absolute standpoint), however, relatively speaking, the other liability side of the balance sheet has been dramatically increasing.  Since interest rates have been at all-time lows, CFO's tend to believe it makes sense to lend out on all ends of the yield curve assuming rates can only go up from here.  This idea makes sense only if the cash is being used to invest in projects that create positive NPV (Net Present Value).  Given all the uncertainties in the market and inflation, one would have to apply a larger discount rate to their projects making it more difficult for executives to want to invest in their company.  This is a very simple content, yet very applicable to the times we are dealing in today.

With that being said, I believe that shareholders are currently commending management with much higher stock prices in the last two years, however, C-level executives will need to start to put that cash to work.  And when that happens, the risk factor will increase even more since the debt levels have been on the rise.  If the Federal Reserve starts to increase rates and we have a shock in the yield curve, expect stock prices to drop dramatically to those firms that are once again overleveraged. 

Enjoy the article below that was printed nearly one year ago, however, I don't believe this information is stressed enough to the general public investor. 

http://www.businessinsider.com/about-those-supposedly-strong-corporate-balance-sheets-2010-8

Take care & Avenge!

Bonds should have little to no place in your portfolios

What I find very interesting is that over the past year, Energy, Materials, & Telecom Stocks (up 33%, 23%, and 25%, respectively) over the last 12 months, however, IT Stocks are up only 12%.  It appears that most of the excess capital poured into the market (QE2 and extremely low overnight rights) has gone towards stocks in the commodity linked sector such as Energy & Materials.

Much to my surprise, since corporations are still near all-time highs on Cash on their balance sheets ,that an increase in M&A, especially with IT like-kind acquisitions, and firms outsourcing, that equity prices have not been jumping in that sector.

From a Bond standpoint, I wouldn’t touch anything out there right now because spreads are way too tight due to the amount of liquidity in the market right now.  There’s WAY too much risk versus reward in many different scenarios.         

1)  Economy recovers & Unemployment decreases:  Fed tightens, demand shock upward, and yields rise.  Given all the mass inflows over the past 3 years (mutual funds, institutions, endowments) in fixed income, a way of sell offs will begin.  I’m not thinking defaults will be the case however demand will cause a drop in value

2) Economy continues to decline:  Unemployment worsens:  Fed will instill QE3 and rush to Treasuries will widen spreads even more.  The current 50-75 bps spread to take for corporates don’t make any sense.  If you want fixed income & bearish on the economy, Treasuries are the way to go.  Volatility will increase and correlation will go to 1.00.

3) Economy stays sluggish and we see stagflation:  Given the upside down yields (dividends higher than bond yields), investors forecasting a sluggish market for years to come will seek for high-quality cash flow intensive (& dividend paying) securities to invest in going forward.

Current P/E Ratios (trailing 12 months) in the S&P 500 are still well-below 20 which tends to be an indicator for increased equity prices, given historical prices in similar interest rate environments.  The yield curve is still steeply sloping and that trend doesn't look to be changing fast enough.  Lastly, cash on corporate balance sheets (non-financial corporations) are still near all-time highs which states demand is still pent up as corporations will eventually start to either a) payout to shareholders to spend b) increase in M&A or c) increase Cap Ex which may lead to job growth.

All in all, my thesis states that equities ( I like IT stocks the most) will be much more favorable for the next 12-18 months.

take care and avenge!

My first investment idea blog...Silver volatility is here to stay...

I have been investing & studying the markets for nearly 10 years and this blogging thing is all new to me so forgive me if my writing is not so structured & concrete.

This is my first ever blog and hope to continue to do this assuming people out there really care about my opinions.

I've been trading Silver (using the ETF: SLV) for over a year now and feel that I made a good directional call, however, the way to make money on these commodities is through a volatility play.  It's difficult to play 3+ months contracts out using a Straddle (long put & call at the money) because the breakeven (not assuming time value & implied vol) is at least 20%+. 

The key to this trade is when the cost hits around 15% to put on the trade.

Given the many, many uncertainties in the market (especially with inflation, Fed policy, global demand for commodities, european debt issues).

Well, I'm going to figure out additional ways to add more value with underline companies.

All in all, my general investment thesis, for all picks, results from my perception that the market doesn't know what it's looking at or there's an obstacle that is constraining the company whether from management, secular trends, access to capital, and ownership.

take care,
Avenge