Friday, April 6, 2012

Corporate Cash Is Near Record High Levels--Is That a Good Thing?

We've heard for months about how much cash has been accumulating on corporate balance sheets (though much of this is overseas and is off limits without a tax waiver).  Strong, liquid balance sheets would seem to be undeniably a good thing for the companies--and for investors.  Substantial, excess cash on the balance sheet give companies attractive options such as making acquisitions, increasing dividends, or buying their own stock back.

Yet the evidence for investors contradicts this assumption.  Both corporate share repurchases and mergers and acquisitions have tended to occur near market tops.  And though cash as a percent of total corporate assets is now the highest since 1964, remember where 1964 was in U.S. stock market history.  It began an 18-year period in which the Dow Jones Industrial Average made no net gain (excluding dividends).

I reiterate my advise to be cautious toward stocks at current levels and raise some cash.

Steve Lehman

S & P 500:  1398

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