Wednesday, June 1, 2016

Chief Little Cash - Big Debt

Everyone knows Apple, Microsoft, and Google has tons of cash somewhere overseas, however there are over 2,000 nonfinancial companies that added a combined figure of $6.6 trillion in debt in 2015, including the above cash rich, tech giants. This debt casts a long shadow over the same total of cash in-hand. The present balance sheet only shows $1.84 trillion for the same companies. According to S&P Global Ratings, this ratio of cash-to-debt is the lowest it has been in 10 years.
Recovery in 2009
has seen company debt grow 50 times that of its cash growth. In numbers, debt grew to $850 billion and cash grew one percent. This equation equates to bad math. Maybe those stats that say the US is falling behind the world in math and science is taking effect?
Looking deeper into the numbers, the stats distort an intrinsic aspect among the companies. The elites like in the first sentence, have the majority of cash and can withstand a difficult period, while the remaining entities(99%) have the majority of debt. They have to budget $6 trillion and their cash reserves will evaporate quickly in any downturn. Just ask the neighboring oil and gas tribe. At present, the cash-to-debt ratio fell to 12 percent among speculative-grade issuers. This aspect puts many banks in a tough situation as they have to set aside more capital to cover Chief Rainy Day who may default.
What do these four have in common?
Aeropostale, Quiksilver, Pacific Sunwear and Sports Authority????
all retailers who filed bankruptcy in 2016. They are not alone as they stand in the court line behind the 67 oil and gas tribe. Last year at this time there were only 39 standing in line. The S&P expects the default rate to continue to rise from the 3.9 percent in 2015 to 5.2 percent this year.
Analysts explain this year's January drop in stock prices to credit conditions tightening at that time. Now, they say credit is available even for Greece. They say the market has passed the danger zone.
I say, "Oh really!"
Those same analysts should have been at the victory pow-woo after Little Big Horn. The victory of bows and arrows(debt) over guns(cash) would be short lived as debt grows with interest while cash is needed in day-to-day transactions. It was a sad victory party because the future had a dark shadow hanging over it just like our economy.