$7 Trillion Corporate Cash Pile – Can it Set Stock Market on Fire?

Based on recent Thomson Reuters data, corporations around the globe hold a record $7 trillion worth of cash on their balance sheets. This has to be bullish for stocks, right? Not necessarily. Here’s everything you’ll ever need to know about the effect of corporate cash piles on stocks.

Reuters just reported that companies around the world hold almost $7 trillion of cash and cash equivalents on their balance sheets.

The Federal Reserve pumped about $3 trillion into the U.S. economy. This has propelled the S&P 500 ETF (NYSEArca: SPY) by over 175%. Should we imagine what $7 trillion could do?

Let’s take a look at some basic numbers and concepts before we start drooling over the potential stock market profits.

Corporate Cash 101

It is somewhat difficult to find coherent corporate cash figures that allow consistent charting and tracking. Most estimates exclude financial corporations (NYSEArca: XLF), other don’t. Some estimates are limited to domestic cash piles, other are global.

The analysis provided here is based on data from the Federal Reserve for non-farm and non-financial companies.

Based on the latest available data, non-financial U.S. corporations had caches worth $1.76 trillion. As figure 1 illustrates, this is the highest corporate cash pile in history.

Two Sides of the Balance Sheet

However, there are two sides to the balance sheet: Assets and liabilities. Wherever there are assets, there are also liabilities.

Figure 2 shows that corporate liabilities have grown along with the assets. The data suggests that a fair portion of the corporate cash pile is mortgages by liabilities.

Figure 3 pegs the difference between U.S. non-financial corporate assets and liabilities – U.S. corporate net worth – at $1.1 trillion.

The ‘Corporate 1%’

According to the Financial Times (which analyzed the S&P Global 1200 Index), 32% of corporations hold 82% of the aggregate global cash hoard.

Figure 4 shows the top 5 cash richest corporations of 2013. Apple, Microsoft, Google, Verizon, Samsung.

Effect of Corporate Cash on Stocks

Basic logic suggests that corporate cash – if invested – is bullish for the economy and, by extension, major stock indexes like the S&P 500 and Dow Jones (NYSEArca: DIA).

Figure 5 plots the S&P 500 (SNP: ^GSPC) against U.S. corporate ‘net worth.’

The correlation between corporate ‘net worth’ and S&P 500 peaks contradict the assumption that corporate wealth is good for stocks.

The red lines show that major S&P 500 peaks coincided with prior, albeit smaller, corporate cash stockpiles.

Corporations have more money because they are paying less taxes despite record profits.

‘Legal’ tax evasion has become one of the biggest contributors to the growing cash pile.

Here’s how companies do it and how many billions they save (or cost Uncle Sam):

Corporate Profits – Born in the US, Taxed Elsewhere or Nowhere

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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Wall Street Analysts’ Forecasts Surprisingly Accurate – Next Target: S&P 1,575

Here’s a surprise: Wall Street forecasts haven’t been optimistic enough to keep up with stock prices. That’s right, the S&P would actually have to drop about 5% to “catch up” with analysts’ target prices.  This sounds bullish, but it’s not.

If you’ve read my articles before you know that I like to poke fun at Wall Street analysts and use them as a contrarian indicator for stock market analysis. Most of the time that’s pretty easy, because they are wrong more often than right.

Wall Street is always way to optimistic, but something changed a couple of years ago (we all know what changed, more about that later). Surprisingly the one-trick pony rosy forecasts have been pretty spot on. Despite three serious correction since 2009, stocks eventually recovered to reach and surpass analyst estimates.

According to Bloomberg data, the average year-end price target for the S&P 500 is currently around 1,400, about 2% below current prices (a few days ago it was 5% below). Stocks will actually have to drop to get in line with analysts forecasts, that’s rare.

One would think that’s bullish from a contrarian point of view, but it isn’t.

Forecast Mean Reversion Ahead?

Lets look at prior examples when analyst forecasts weren’t bullish enough to keep up with the stock market. Analysts’ forecasts also trailed stocks before the 2000 and 2007 market top, in late 2009, late 2010 and early 2012.

Each prior instance occurred before a sizeable top. The S&P 500 didn’t decline immediately, but several months later any gains were given back every single time it happened (going back 13 years).

Goldman Sachs’ chief US equity strategist, David Kostin, sees the S&P 500 at 1,575 by next year. Oppenheimer’s John Stoltzfus sees 1,585, Bank of America’s Savita Subramanian sees 1,600 and Citigroup’s Tobias Levkovich expects 1,615.

The numbers seem somewhat arbitrary to me, but the common denominator of 15 predictions tracked by Bloomberg is the expectatian of new all-time highs. Is that too much groupthink?

It just might be. In February 2009, a similar cohort of analysts rapidly ratcheted down their end of year price targets and earnings expectations. Stocks bottomed in March and haven’t looked back since.

From blunder to crystal ball, what change made one-trick pony Wall Street analysts look like geniuses?

The non-scientific but accurate reason is QE and other liquidity shenanigans facilitated by the Federal Reserve and ECB. Forecasting a Fed supported market has proven to be like forecasting weather in a green house. Always warm, always dry, and mostly sunny.

Ironically history suggests that periods of accurate or too low analyst predictions tend to lead to some sort of top. Poor analysts, they just can’t earn credibility. Fortunately for them Wall Street bonuses are the highest they’ve been in years.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.