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Cash + Excess Capacity = Optimism

Posted on May 31st, 2011 by John Reeder

I have a theory that a lot of the bad news that makes its way into the newspaper is creating fertile ground for economic growth.  Let’s think for a minute about what kinds of things you would want available to you if you were going to grow your business.  You’d want access to a cheap labor force (check).  You’d want access to cheap space/real estate for your business to expand (check).  And you’d want to have the cash on hand to expand, so you wouldn’t have to fund your expansion with debt that could become a real liability in any contraction (check).

Companies right now are generating a lot of cash that they could be using to expand their businesses if not for two problems.  First, they’re scared to death to spend their cash as their most recent memory is of the world almost ending in late 2008.  Second, they don’t have faith that their expansion would be met with increased demand for their products and services (because the economy and job market are both weak).

But I think you can foresee a scenario where we work ourselves out of this mess.  Our company hired a new mapping/GIS guy recently and I was blown away by the resumes that we got and how eager all of the applicants were to work.  We ended up getting a really smart guy who does great work, and was available to us at a reasonable salary.  After we hired him I was so happy with how it went that I immediately began thinking about ways that we could hire another support person. 

Our recent hire is a positive ROI for us, and because of the job market there are going to be a lot of people out there who are good at what they do and can be acquired for reasonable prices.  I think that companies across the country are going to slowly realize this fact and will add employees due to the value that is out there right now.  Hiring will improve, which will improve demand for goods/services, which will improve companies’ appetite for growth.  It will be the opposite of the vicious cycle that got us to where we are today.

An article from the WSJ was the inspiration for this post.

There is a cash crisis in corporate America—although it comes not from a shortage of the stuff, but from a surplus.

In the first quarter, the five companies with the greatest cash hoards—Microsoft, Cisco Systems, Google, Apple and Johnson & Johnson—added $15 billion in cash and marketable securities to their balance sheets. Microsoft alone packed away roughly $9 billion, or $100 million a day. All told, the companies in the Standard & Poor’s 500-stock index are sitting on more than $960 billion in cash, a record.

To be sure, at many companies the cash piling up is at global operations that generate "undistributed foreign earnings" that can’t be brought home, under U.S. law, without incurring taxes of up to 35%. But hundreds of billions in cash remain available—and idle.

via The Intelligent Investor: Why Won’t Companies Unlock Their Cash Hoards? – WSJ.com.

May 31st, 2011 | Category: Uncategorized

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