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Wednesday, September 21, 2011

Cash is "The King"

What is the difference between the great recession started in 2007-2008 and the global crisis we are currently facing? It is a 4 letter simple word. CASH- no matter what currency it is.

If I focus on the US, the biggest economy in the world, all big banks and corporations are sitting on the huge piles of cash. This was not the case 4 years ago. Most of them were cash stricken. After Apple Inc, the most valued company on this planet, released its 2011 Q2 results, it showed over $70 billions of cash & cash equivalents which is more than the GDP of many countries. Lessons learned perfectly- that's what we can say! Now the question is if these mammoth companies have enormous amount of cash, then why are we on the verge of another worldwide crisis? It is because everyone is too skeptical about economy, political unrest and discomfort in European economies. No one wants to spend their cash based on weak outlooks. If there is no cash circulating in the markets, then how can one make money and drive economy along?

In the course of company's life cycle, if management thinks there is no more growth ahead, then they distribute  excess cash as dividends to reward investors or buy back their own shares. Recently, share buy back has been a spree which is a good sign since companies buy back their "cheap" shares in anticipation of increase in share value. But many companies are issuing cheaper bonds to raise cash and use that cash to buy back their shares. Isn't it unusual? Why would they not use abundant cash they have and end up paying interest payments to bond holders? We have connected the dots here. No one wants to use "cash" they have. Everyone has figured out that cash is the only way to get their company out of the potential financial mess. And once again, it has been proved that cash is the only king you want to save till the end.

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