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Whenever
I get the urge for a quick shot of reality (which is, admittedly, quite
often), I like to hear what those on the economic front lines are thinking
and doing. I'm not referring to the clueless wonders on Wall Street or in
Washington. Rather, I mean those who ply their wares on Main Street and who
can't afford to get caught up in "green shoots" fantasies or other
such nonsense.
With
that in mind, I found the following report from the Association of Finance
Professionals (which probably has a few Wall Street types as members, though
luckily they are in the minority), "Companies Stockpiling Cash, Credit Access Still Tight, AFP
Survey Shows," to be a real eye-opener -- or what a
cynic might describe as buzzkill for the bottom-callers.
42%
increase short-term holdings; most move to more conservative vehicles
With
little easing in access to credit, U.S. organizations are continuing to
stockpile cash, according the Association for
Financial Professionals' 2009 Liquidity Survey.
Almost three-quarters (72%) of companies had increased or maintained their
U.S. cash balances during the first part of 2009.
According
to the new AFP survey, 42% of organizations increased their U.S. cash and
short-term investment balances between December 2008 and May 2009, while 30%
saw no significant change in short-term cash balances. More than a quarter
(28%) of organizations saw their U.S. cash and short-term investment balances
deteriorate over the six-month period. Organizations with non-investment
grade ratings were more likely to have seen their cash and short-term
investment balances shrink.
"Despite
unprecedented government action, the lack of any significant thaw in
short-term credit access is extremely troubling and many companies are
reacting by stockpiling cash," said Jim Kaitz, President and CEO of AFP.
"While, many organizations with their strong cash positions will be
well-positioned once the economy begins to improve, overall economic
conditions will not improve until organizations can begin using their cash in
activities that foster growth."
This
is the fourth annual survey performed by AFP focusing on how organizations
manage their short-term investment portfolios. This year's survey also
repeated questions about credit access that AFP asked its members in two
surveys conducted late last year as credit markets deteriorated. The AFP 2009
Liquidity Survey was underwritten by The Bank of New York Mellon.
Despite
recent reports about an easing in the corporate credit markets, over half
(59%) of survey respondents indicate that their organizations' access to
short-term credit has not changed significantly since the beginning of 2009.
A larger percentage of organizations reported that credit was less available
(27%) versus 14% that indicated that credit access had improved.
Two-thirds of organizations expect their access to short-term credit to
remain the same over the next year.
Overall,
financial professionals do not expect their organizations' to decrease
short-term cash and investment balances over the next year. Only one-quarter
(27%) of organizations expect to decrease their U.S. short-term cash and
investments balances.
"The
turbulence of the present period has had no small impact on the liquidity
needs and practices of individuals and corporations worldwide," said
Eric Kamback, BNY Mellon's CEO of Treasury Services. "The survey also
revealed that many believe the tightening of available credit will persist in
2009, so conservative, safety-based investment strategies can be expected to
continue."
Organizations
have moved to a more conservative investment strategy for their short-term
balances and have reduced the number of vehicles they use for short-term
investments. Organizations are allocating 78% of their short-term investment
balances to three safe and liquid vehicles: bank deposits, money market
mutual funds and Treasury securities. The use of commercial paper, separately
managed accounts and auction-rate securities declined significantly over the
past year. While investment policies allow for the use of four or more
investment vehicles, on average, organizations use 1.6 investment vehicles
compared to 2.4 options in 2008.
The
vast majority (93%) of survey respondents indicated that their organizations
have taken at least one action as a direct result of the decline in
short-term credit access in September, 2008. The following are some of the
most widely implemented defensive actions taken:
- Reduced capital spending (70%)
- Reduced or froze hiring (69%)
- Considered/implemented staff
reductions (58%)
- Moved all or
most short-term investments to bank deposits and U.S. Treasury
securities (44%).
Finally,
financial professionals are generally hopeful about an economic turnaround. [My take: aren't we all?]
Almost three quarters (74%) of survey respondents believe that the worst is
over and that credit markets will start easing by the end of this year. [My take: if they truly believed
that, wouldn't they be "unbattening" the hatches -- that is, taking
different actions than the ones described above?]
In May
2009, the Association for Financial Professionals conducted the survey on
strategies associated with the management of short-term investments,
receiving 360 responses from professionals at a broad range of organizations.
Respondents represented organizations in manufacturing, insurance, energy,
financial services, retailing, and other industry sectors.
Michael
J. Panzner
Editor, Financialarmageddon.com
Also
by Michael J. Panzner
Michael J. Panzner is a
25-year veteran of the global stock, bond, and currency markets and the
author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes,
published by Kaplan Publishing.
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