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First In Line at the Printing Presses
By Paul Lamont
August 1, 2011
Only a few years ago, we forecast a panic because the banks were out of cash. Now the government, who backstopped the financial system, believes it is out of cash. No one has any cash yet some expect hyperinflation!
With the President secretly telling banks that there will be no default and the Treasury department’s contingency plan to pay debt holders first, Treasury Bills are still the form of money investors should hold - even if the debt limit is not raised. If payments are somehow delayed for August bill holders, other investments will do worse during the ensuing Panic.
While most would expect gold to soar if payments on August Bills were not immediate, we would not be surprised by a significant sell-off regardless. Just like in 2008, investors would be forced to sell gold to meet margin calls. Increased bond market volatility is already causing exchanges to hike margin requirements.
Corporate Cash Piles
Stock market observers have noted over $1Trillion in cash on corporate balance sheets. While this is an astonishing amount, it is small compared to the $7.2T in total corporate debt. Regardless, some individual companies are indeed flush with cash. Apple holds $76B in cash with no debt. As Clyde Montevirgen, “a Standard & Poor’s analyst states, Apple likes ‘to have a substantial amount of cash just in case there is an Armageddon D-Day type of scenario.’”
Cisco Systems is another tech company holding a substantial cash horde ($43B w/ $16B in debt). That amount is half the company’s market cap. Ralph Nader recently wrote a letter to Cisco Systems demanding a larger dividend for himself and other shareholders. The Wall Street Journal reports: “Nader’s Cisco holdings, once worth $1M in 2000, are now valued at $278,460.” As a reminder, in the year 2000 Cisco was the world’s most valued company because investors paid a premium of over 100 years worth of earnings (P/E=109).
What is today’s investor to make of all this corporate cash? And will companies distribute their cash in the form of dividends as Nader is requesting?
Of course, we have a historical precedent.
In July 1932, Benjamin Graham (Warren Buffett’s mentor) wrote Should Rich Corporations Return Stockholders’ Cash? for Fortune magazine. In the article he describes the environment at the stock market bottom of the Great Depression (equities down >80%).
“The typical shareholder is weighed down by financial problems while his corporation wallows in cash. Treasurers are sleeping soundly these days, while their stockholders walk the floor in worried desperation.”
Graham notes the “undue generosity by stockholders towards their corporations“ during the late 1920s which injected cash on the corporate balance sheet. Investors overpaid for securities but not as great as they did for Cisco in 2000.
The market was bottoming when Graham’s article was written. Does that mean that Nader’s letter marks a similar turn, especially with Cisco down to two times its cash level? Not necessarily. Graham mentions: “More than one-third of all industrial stocks are selling in the open market for less than the companies’ net quick assets (Ed Note: cash).”
That is an amazing resolution to an overvalued situation. You could buy scores of companies for less than what cash it held in the bank. Should we expect a greater undervaluation in the future since companies in 2000 were more overvalued than in 1929? That would require Cisco to fall at least another 50% from present levels. At that point after being down 86%, I assume Mr. Nader would give up his shareholder revolt and sell his shares to us.
Full Disclosure: Paul J. Lamont holds U.S. Treasury Bills and a bearish S&P500 option position.
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