Economic Insights: When Will Corporate Cash Flow? (Ezrati)

Tuesday, April 3rd, 2012

by Milton Ezrati, Lord Abbett

One of the great constants in this otherwise inconstant environment is the strength of corporate finances. Financial excesses and the need to de-leverage concern governments and households, not the corporate sector, which actually came out of the 2008–09 financial crisis and recession with its finances in good order, and has only strengthened them since. The question now is how and when companies will deploy these impressive financial resources—whether on capital spending, hiring, or, especially, on the mergers and acquisitions (M&A) that typically proceed from strong corporate finances.

Huge cash holdings constitute the most impressive aspect of this financial strength. At the close of 2011 (the most recent period for which complete data are available), cash on non-financial corporate balance sheets had risen to more than $1.9 trillion—a jump of almost 60% from the dark days of 2008 and more than 50% from the last cyclical peak in 2007. Cash and cash equivalents have risen, so that today they constitute almost 13% of all corporate financial assets, up from 9.4% in 2008 and 9.1% in the cyclical peak year 2007. They amount to some 14% of all corporate liabilities, up from 9.2% in 2008 and 9.7% in 2007, and almost 12% of corporate net worth, up from 8.9% in 2008 and 8.0% in 2007.

Aside from the powerful cash flows that permitted such accumulations, it is the high and persistent levels of uncertainty that have kept the funds in cash instead of flowing into other corporate uses. Speaking volumes to this motivation is the fact that the bulk of this cash sits neither in time nor savings deposits nor money market shares nor in commercial paper, but rather in checkable deposits. These have grown remarkably—more than 1,500%, in fact—since 2008. The high level of uncertainty behind this behavior is hardly surprising either, on at least four counts.

First and primary as a behavioral motivator is the legacy of the 2008–09 financial crisis. Still fresh in managers’ collective memories, these events have kept companies sensitive to how suddenly economic and financial conditions can change and, consequently, how valuable ready, liquid assets can be. But more, because bank credit standards tightened during the crisis and by and large have remained tight since, companies have lost the conviction that they can borrow should the need arise. It does not help in this regard that many banks during the crisis withheld formerly well-established corporate lines of credit, an act that has left in its wake conviction among corporations that they ought to rely more on self-financing. The sovereign debt problems in Europe, threatening a rerun of 2008–09, have only redoubled this conviction.

Second, Obamacare has contributed, too. Whether a good idea or a bad one, good legislation or not, the huge changes built into this complex law impose tremendous uncertainty on corporate decision making, particularly about hiring. The natural response in the circumstance is to hold back on major corporate decisions and the enlarged cash holdings are an obvious financial reflection of that posture.

Third, the Dodd-Frank financial reform has had its own separate influence. Although this huge piece of legislation covers only financial corporations, it does nonetheless create uncertainty among all companies about future financing, both availability and cost. In this regard, whether Dodd-Frank is good law or bad, it has surely had an effect similar to the liquidity problems of 2008–09, even though it was ostensibly designed to correct them, adding to management convictions that they can no longer rely on credit lines from financial institutions and need, therefore, to do more than previously to cover their short-term cash needs for themselves.

And fourth, if these matters did not weigh heavily enough, corporations must also cope with the uncertainties surrounding the federal budget debate. Without knowing the nature and size of future federal spending or taxes or even the federal government’s prospective borrowing needs, it is difficult for managers to gain any sense of the future and, consequently, how to deploy their resources.

But for all this, there are tentative signs that corporations are beginning to use some small portion of this cash accumulation. Though compared with past cyclical standards hiring has remained subpar (hardly a surprise in such an uncertain environment), it has nevertheless picked up some in recent months. Corporations have also increased capital spending, raising such outlays by almost 8% over the course of 2011—hardly a boom, but certainly faster than sales have risen and a use for some of these surplus funds. At the same time, corporations have shown a modest willingness to extend themselves by accepting a rise in their trade and tax payables. Together, these have risen more than 13% during the past year, faster than sales and even than cash balances.

Still, it will take time before a return of confidence can move matters beyond these recent, tentative expressions. Cash and the lack of confidence it reflects remain high. There is, however, a tremendous potential for dramatic expansion in corporate spending, hiring, and M&A activity from even a modest improvement in confidence. Especially because equity market valuations these days make it cheaper to buy than to build, the M&A potential, with its always immediate market impact, looks particularly powerful.

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy.

The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.

Copyright © Lord Abbett

Tags: Cash And Cash Equivalents, Corporate Balance Sheets, Corporate Finances, Corporate Liabilities, Corporate Sector, Dark Days, Economic Insights, Excesses, Financial Assets, financial strength, Impressive Aspect, Lord Abbett, Market Shares, Mergers And Acquisitions, Milton Ezrati, Money Market, Motivator, Net Worth, Peak Year, Speaking Volumes
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Gold Market Radar (April 2, 2012)

Sunday, April 1st, 2012

Gold Market Radar (April 2, 2012)

For the week, spot gold closed at $1,668.90 up $6.45 per ounce, or 0.4 percent. However, gold stocks, as measured by the NYSE Arca Gold BUGS Index, fell 0.4 percent. The U.S. Trade-Weighted Dollar Index slid 0.5 percent for the week.

Strengths

• Early in the week, comments from Federal Reserve Chairman Ben Bernanke suggested the need for continued accommodative monetary policy. This brought prospects of QE3 back onto the horizon and helped provide a floor to the recent downswing in gold prices.
• Queenston Mining sold their joint venture property to Kirkland Lake Gold for $60 million and a royalty this week. Factoring in this $60 million, the company now has $120 million in cash and cash equivalents on their balance sheet. This will be used to fund exploration and advance the feasibility study of the Beaver Creek project. The market reacted positively to this and the stock outperformed the major gold indexes for the week.
• AuRico Gold sold two small gold mines in Australia to Crocodile Gold this week. This came as no surprise to the market as AuRico had been talking about the sale of their assets before. The total amount of the sale is $105 million (Canadian), or $0.32 per share. In our eyes, AuRico sold their mines for too little, but when you consider the increasing operating costs for the company’s Australian assets, it was the right thing to do strategically.

Weaknesses

• Following 12 days of protests by gold traders across India, the Indian government has said that it will review the tax on ‘unbranded’ gold jewelry. Former finance minster Yashwant Sinha pressed for a rollback of the excise duty on nonbranded jewelry, and called for doing away with the newly required Permanent Account Number (PAN) card to document any gold jewelry purchases worth greater than roughly $4000. The PAN card allows the government to track significant gold purchases and would have to be documented on an individual’s income tax returns.
• Speaking to the Indian parliament, Pranab Mukherjee said, “I know it (gold) is part of our culture … but the import of gold of such magnitude strains balance of payments and affects exchange rate of the rupee through impacting supply-demand balance of foreign exchange.” He went on further to express his concern over the outflow of precious foreign exchange on the import of “dead assets that cause problems in the country.” We think Mukherjee may be confused as to which is asset, gold or the rupee, is the “dead” one.
• Centerra Gold took a hit this week, down 15 percent on Tuesday alone, on news that ice and waste movement has halted production at their Kumtor mine. In response to the disruption, the company revised and reduced its 2012 gold production by 33 percent to 570,000-625,000 ounces. The news proved to be a great buying opportunity as Centerra finished the week only down 1.8 percent.

Opportunities

• Goldman Sachs urged traders to buy gold in a research note this week. The company’s research shows U.S. real interest rates as the primary driver of U.S. dollar-denominated gold prices. Their models suggest the current level of real interest rates would be consistent with the current trading range of gold prices. As they look forward however, their U.S. economists expect subdued growth and further easing by the Federal Reserve in 2012. They forecast this would push the market’s expectations of real interest rates back down near zero and gold prices back to $1,840 an ounce.
• Franco-Nevada Corp CEO David Harquail said that with share prices lagging, miners are wary of turning to equity markets to raise money and are exploring all alternatives such as stream deals or royalties. The latter are at an all-time high, but with most deals happening in the mid-tier market, ones over $500 million will be few and far between. We have a feeling there will be a number of royalty streams locked-in this upcoming year.
• In an interview with the Gold Report, Brent Cook commented on some trends he has noticed gold sector. He emphasized that companies are starting to recognize that quality of a mineral deposit supersedes size. “Grade, or more succinctly margin, is getting more and more important … These junior companies with these large, low-grade, low-margin deposits are then doomed to build.” On a supply-demand basis though, all signs point to gold going up. Brent says that 83 million ounces are being mined annually right now while only 20-30 million ounces are being found per year. This gap between production and discovery is not being filled and can only point to a better gold environment.

Threats

• Still no conclusion or real progression out of Mali, but Randgold Resources CEO Mark Bristow said that the Bamako airport has reopened and the borders are open for all traffic. He maintained that the company’s Loulo complex was replenished with fuel supplies over the weekend and that all three of the Randgold mines in Mali were operating in full.
• RenCap Securities held a special conference call on the situation in Mali. Their consultant expects economic pressure–primarily in the form of sanctions and suspended Western aid–to be the primary outside intervention in Mali. This could hamper import and export activity, though the rebels have promised to transition to new elections.
• However, no timetable exists for the transition and given the rebels’ lack of organization; they may be tempted to stay in power for a period of months in order to found a political party. This could mean that sanctions have the time to truly bite. Any such sanctions, however, would be leaky by virtue of the lack of bureaucratic capability to enforce them among Mali’s neighbors.

Tags: Beaver Creek, Canadian, Canadian Market, Cash And Cash Equivalents, Dollar Index, Feasibility Study, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Gold, Gold Bugs, Gold Jewelry, Gold Market, Gold Mines In Australia, Gold Prices, gold stocks, Gold Traders, Income Tax Returns, India, Jewelry Purchases, Kirkland Lake Gold, Market Radar, Mines In Australia, Mining, Nyse Arca, Spot Gold
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Horizons Launches U.S. Dollar Currency ETF

Sunday, April 10th, 2011

HORIZONS LAUNCHES U.S. DOLLAR CURRENCY ETF

Toronto – April 7, 2011 – BetaPro Management Inc. (“BetaPro“), the manager of the Horizons BetaPro family of Exchange Traded Funds, is pleased to announce the launch of the Horizons U.S. Dollar Currency ETF (the “U.S. Dollar ETF” or “DLR”), an exchange traded fund (“ETF”) which offers investors direct access to foreign currency investing. The U.S. Dollar ETF will begin trading on the Toronto Stock Exchange (“TSX”) on April 7, 2011, under the symbol DLR.

The U.S. Dollar ETF seeks to reflect the price in Canadian dollars of the U.S. dollar, net of expenses, by investing primarily in cash and cash equivalents that are denominated in the U.S. dollar.

DLR is structured as an ETF and therefore has all the characteristics of an ETF, including intraday liquidity, low cost, and transparency. The U.S. Dollar ETF will make monthly distributions of any income earned on the cash and cash equivalents it holds, net of fees and expenses.

“Given our proximity to the United States, Canadian individuals and businesses may want to hold U.S. dollars for a variety of reasons. Canadian financial institutions can charge in excess of 2% to convert our dollar into U.S. dollars,” said Howard Atkinson, President of BetaPro. “Using an ETF is an innovative way for investors to lower the cost of gaining access to the U.S. dollar while increasing their flexibility to buy and sell U.S. dollar exposure throughout the day.”

With an annual management fee of only 0.45%, the U.S. Dollar ETF provides a low cost method for investors to gain access to the U.S. dollar.

Traditionally, investing in a foreign currency could only be facilitated through a financial institution or by trading futures. While many investors may not think of a U.S. dollar bank account as investing, the value of the account in Canadian dollars will fluctuate with changes in exchange rates. Investing in currency futures can potentially involve a high degree of leverage and, for most investors, requires setting up a separate trading account.

“There are other ways to gain access to the U.S. dollar, but we believe the use of an ETF is probably the most cost efficient way for the majority of Canadian investors to buy and sell currency exposure,” said Mr. Atkinson.

Investors in DLR will be able to participate in commission-free transactions through a Pre-Authorized Deposit (“PACC”) and Systematic Withdrawal Plan (“SWP”). DLR can be redeemed for U.S. dollars through your broker in 25,000 unit lot sizes, offering larger investors an additional redemption option.

The U.S. Dollar ETF has closed the offering of its initial units and will begin trading on the TSX when the market opens this morning.

Commissions, management fees and applicable sales taxes all may be associated with an investment in the U.S Dollar ETF. The U.S Dollar ETF is not guaranteed, its value changes frequently, and past performance may not be repeated. Please read the prospectus before investing.

About BetaPro Management Inc. (www.horizonsetfs.com)

BetaPro manages the Horizons BetaPro family of exchange traded funds, a broadly diversified range of investment tools with solutions for investors of all experience levels to meet their investment objectives in a variety of market conditions. The Horizons BetaPro ETFs include several types of structures: single, inverse, leveraged, inverse leveraged and spread ETFs. BetaPro is a subsidiary of Jovian Capital Corporation (TSX:JOV), with assets under management (“AUM”) of approximately $2.3billion as of March 31, 2011, amongst 49 ETFs. Its subsidiary, AlphaPro Management Inc., Canada’s largest provider of actively-managed ETFs, has approximately $609 million of AUM as of March 31, 2011 amongst 17 ETFs and funds. Together under the Horizons ETFs brand, the two companies offer more than 60 ETF solutions with almost $3 billion of AUM as of March 31, 2011.

For more information:

Howard Atkinson, President, BetaPro Management Inc., (416) 777-5167.

Tags: Canadian, Canadian Dollars, Canadian Financial Institutions, Canadian Individuals, Canadian Market, Cash And Cash Equivalents, Currency Futures, Direct Access, Dollar Bank, Dollar Currency, ETF, ETFs, Exchange Traded Fund, Exchange Traded Funds, Financial Institution, Foreign Currency, Horizons, Intraday Liquidity, Investing In Currency, Launch, Management Fee, Management Inc, Toronto Stock Exchange, Trading Futures
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Robert Prechter: Inflation not a problem, deflationary depression in our future”

Saturday, August 15th, 2009

In the last week we’ve covered Robert Prechter, partly because we are fans, and partly because the material is available so that we can share it with you, in case you haven’t seen it yourself. For a long time, and as an advisor, I wistfully dismissed Elliott Wave Theory as technical market charting gobbledygook, as I was zealously taken with Buffett, and buy and hold, Value and Focused investing. High conviction about a way of doing things, especially in the investment business, is a necessity. However, I’ve since softened up because in hindsight, I missed out on a lot of opportunities that being open minded would have made possible. That’s my first point: Keep an open mind. Just because you believe some outcome (like a depression) is not possible (based on your knowledge), does not mean it will not come true.

I have covered Hugh Hendry’s thoughts throughout the course of this year, i.e. his way of seeing things, and his outlook, and I bought into his perspective on the equity and credit markets, and in a word, I got schooled, convinced that a deflation scenario is altogether possible, given the circumstances that the US and thus the world finds itself in at this time. It was made very clear. In hindsight, it made me realize how little I knew about the bond and credit markets. Now I know a lot more, but in reality its really just a little bit more. Hendry’s flagship Eclectica Fund was up 40% at the end of last year. My second point: Always be learning and don’t overestimate your knowledge.

Three years ago, one advisor that I was visiting with when I was a wholesaler for a fund company, showed me the basics of what Prechter was forecasting for long-term bond yields, the deflationary context, and the equity market. Prechter’s ideas represented a 20% directional bet in his book of business, because, “what if he’s right?” This translated into  having an up-to 20% weighting in long dated US treasuries and Canadian government bonds. That bet has paid off for the last 20 years, and the last two, has it not? So has cash and cash equivalents. My third point: Be prepared for what you feel is the least likely outcome.

I told that advisor, “You’re killing me, depressing me with this Elliott Wave Stuff, and I have to see other advisors today,” and the meeting ended. Don’t get me wrong though, the meeting was a good learning opportunity for me, and I haven’t forgotten it since. That advisor was, in my estimation, probably one of a few advisors in Canada who was thinking this way.

In any event, at each step along the way, I have had my eyes opened, and my mind, and my focus as an investor has shifted firmly to the camp that asks themselves, “What can go wrong, how can I lose money, what can go wrong with my thinking?”

Having said that, make sure you see this interview with Robert Prechter on the subject of the real threat of deflationary times. We will also recap the many thoughts of Hugh Hendry again in a future post. You won’t have to wait long, and in case you want to revisit those stories in the meantime, use the search box at the top of the page to search or click here for “Hugh Hendry” or “Deflation,” or “Deleveraging“, ” Bill Gross“. In the meantime, cash and long bonds have become attractive again.

Recently the dollar is said to have bottomed, and that thanks to the risk trade sucking money out of money market treasuries. In the interview, Prechter says that he believes the dollar will rise in value again for the next on to two years,” as the flight-to-safety trade, deleveraging continues, and earnings disappoint. Prechter doesn’t like the opportunities in the municipal or corporate bond market (too much risk for the average investor) and feels that investors should seek the safest, highest quality bets they can, so they can ride this out as safely as possible. He believes the dollar (treasury-bills) would be safe, and anything where the default risk is very, very low (government bonds) would be among the better bets.

Click play to view:

Source: Yahoo! Tech Ticker, August 11, 2009

Tags: Bet Book, Bill Gross, Bond Yields, Buffett, Canadian Bonds, Canadian Government Bonds, Canadian Market, Cash And Cash Equivalents, Circumstances, Conviction, Credit Markets, Deflationary Depression, Eclectica, Elliott Wave Theory, Estimation, Flagship, Gobbledygook, Governmen, Hindsight, Hugh Hendry, inflation, Investment Business, Little Bit, Long Time, Perspective, Robert Prechter, Seeing Things, Term Bond, Treasuries, Wholesaler
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Sideline Money Relative to Market Capitalization at Record Levels

Thursday, March 12th, 2009

The following charts are real eye-openers. By now, its no secret, its been widely reported, that there are some $8-trillion dollars sitting in cash and cash equivalents; record levels. What’s been less discussed is what this cash balance is relative to the total market cap of the S&P500 and Wilshire 5000 indices.

According to chart #2 below, cash relative to the market cap of S&P500 is over 100%, and, chart #3, over 90% relative to the Wilshire 5000. This is remarkable, as these numbers hold the key to a recovery in equity markets.

The question remains though, where will cash be deployed, when the market decides to reinvest? The record proportion of cash and cash balance relative to market capitalization does suggest that we may raise our optimism levels, but it seems clear the equity market will require reassuring signs or catalysts to nudge it back into a long bias, where sell volumes cease to outweigh that of buyers. And equities are not the only choice for investors these days. The longer equity markets take to provide investors reassuring signs the greater the likelihood that investors will opt for a larger share of their savings into the bond market, to move further along in duration for the yield.

You see, Washington must amortize trillions of dollars in short term liabilities, the war, bailouts and stimulus, over the longer term, as well as retire some of the additions to the money supply, thanks to quantitative easing. Over the next year or two, poor conditions in the stock market will, on an increasing basis could help crowd-in a larger share of the market’s cash into the the longer end of the bond market.

Take a look at global bonds or global bond funds. They have been outperforming, as a result of flight to quality, and falling long-term yields, but the aversion to invest in them has been the result of post- quantitative easing fears of hyperinflation. We may however, have much more time than we realize right now before we have to worry about hyper-inflation, while the G6 world continues to deleverage itself from its enormous debt obligations. Remember, deleveraging is not simply a retirement of debt, it entails the liquidation of assets. This is mostly the reason for the ongoing asset deflation that we have been experiencing.

Therefore, the areas of the market that are more likely to do well are those that do not require credit to thrive. Credit-hungry or credit-burdened, cash poor sectors, companies and country bets will continue to be troubled by credit tightness. Cash-rich, under-levered sectors, companies, and country bets will likely be favoured for their clean balance sheets and under-requirement of credit and soundness as part of their business model.  The flow of funds to the latter, the beauty contest winners, could be unbalanced in their favour when the time comes.

Charts: Todd Sullivan, ValuePlays

Source: Thomson Reuters Datastream

Hat tip: MarketFolly.com

Tags: Aversion, Bond Funds, Bond Market, Cash And Cash Equivalents, Cash Balance, Catalysts, ETF, Eye Openers, Global Bond, Global Bonds, Hyperinflation, Market Cap, Market Capitalization, Money Supply, P500, Sideline, Stimulus, Term Liabilities, Term Yields, Trillions, Wilshire 5000
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