Warning: Corporate Debt-to-Cash Reaches Record High

corporate profitsThere has been a lot of talk about all the cash U.S. corporations have accumulated since the credit crisis hit in 2008—about $2.0 trillion stashed in corporate America’s bank accounts.

From the White House to the average American, encouraging businesses to spend the cash they have accumulated due to strong corporate profits would translate into jobs being created, which would obviously help turn this economy around.

However, corporations have been hesitant to spend their corporate profits because of visibility: they simply don’t see where the demand for their product/service is going to come from in the future.

 Corporations, just like consumers, remain cautious and have opted to spend their corporate profits on share buybacks and dividends instead.


 Non-financial corporations—companies outside the financial industry—are sitting on $2.0 to $3.0 trillion in cash according to various reports. JPMorgan has compiled corporate profit numbers for non-financial corporations in the S&P 500, noting that, as of the end of 2011, these companies are sitting on just under $2.0 trillion in cash.

These are staggering numbers, and it is no wonder everyone is attempting to find a way to get these corporate profits into the economy, so that this economic turnaround can really get moving.

But what people are not looking at is how much corporate debt is sitting on the balance sheet of these same corporations. According to the Federal Reserve, non-financial corporations are, as of the third quarter of 2011, carrying corporate debt to the tune of just over $7.6 trillion (see chart).

As you can see from the chart, corporate debt has been in a steady climb since 1978 and, even after the financial crisis, the total number continues to rise. Needless to say, the over $7.6 trillion in present corporate debt is a record.

My point…even if we could get this economy growing again, how much can corporations really spend when they are—just like the average consumer—tied down with too much debt?

This number is much worse when one considers the anomaly that is Apple Inc. (NASDAQ/AAPL). What an amazing story Apple has turned out to be for its shareholders. As of the end of 2011, the company is sitting on an incredible $97.6 billion in cash, from corporate profits, with no corporate debt.

If we remove Apple’s cash from non-financial corporations’ cash-on-hand, we get $1.9 trillion, and since Apple has no corporate debt, the debt figure remains at $7.6 trillion. This means that corporations are sitting on four times more debt than cash-on-hand: $4.00 of corporate debt for every $1.00 of cash earned from corporate profits.

So, when I take a step back and look at the average American consumer, dear reader, who is saddled with debt and no real income growth; increased spending is going to be a challenge to say the least. When I look at the average corporation, with high corporate debt levels compared to cash-on-hand from corporate profits; investment is going to be a challenge, especially with corporate profits declining, as I’ve been reporting on recently. (See: Earnings Outlook for Blue-chip Stocks Could Mark End of Bear Market Rally.)

And when I look at the government, with its trillion-dollar deficit, I can say that spending is going to be limited. I ask myself: where is the economic growth going to come from?

As they say in times of crisis, “Houston, we have a problem.”

Michael’s Personal Notes:

Everyone wants to know where the bottom is for the U.S. real estate market. And I’ve argued that the U.S. economy cannot get out of its hole or grow until the U.S. real estate market heals and home prices start rising.

Inside the U.S. real estate market, however, there is the office market and retail space segment. They really reflect the health of the American business.

The Fitch Rating Agency has created an index that tracks delinquencies in mortgage-backed securities of the office and retail U.S. real estate markets. For January of 2012, delinquencies have hit a fresh high in both these areas of commercial mortgage-backed securities.

Worse, in office and retail spaces/complexes worth at least $100 million, there were four delinquencies in December 2008, but that number jumped to 25 in January of 2012! The number of large properties falling behind on their payments is steadily rising, presenting a very disturbing trend for commercial mortgage-backed securities.

For an office or retail property to be considered delinquent (behind on its payments), payments had to not have been made for at least 60 days. For the office U.S. real estate market, the December 2011 Fitch Delinquency Index came in at 6.84%, but January’s number stands at a record 7.30%. Concerning the retail U.S. real estate market segment, the delinquency index was at 6.89% in December 2011, but it jumped in January to 7.21%.

Typically, many office and retail office leases and loans are done on five-year contracts.  Therefore, the contracts initiated in 2007, right before the crisis hit, are going to come due now in 2012 for the U.S. real estate market.

For this reason, Fitch forecasts their delinquency index probably hitting a high of 12% in 2012, as retailers close and office spaces become empty or are significantly downgraded.

Moody’s has its own delinquency tracker, and it confirms Fitch’s findings. Moody’s notes that its delinquency ratio for the office U.S. real estate market has remained stubbornly high: over the nine-percent level for the last 12 months.

Moody’s also highlighted that, within the office U.S. real estate market, the industrial sector recorded its largest increase in delinquencies in years. Remember, dear reader, the industrial sector is part of the plan to increase manufacturing jobs in the U.S. Now, one month does not a trend make, but it is worth keeping an eye on this segment of the U.S. real estate market.

Other surveys are saying that the commercial U.S. real estate market is on the mend and will begin recovering in 2012 (heard that one before). However, the numbers above are pointing to trouble ahead. Especially as the five-year leases and loans come due.

It seems, dear reader, that not only are home prices in the U.S. real estate market looking for a bottom, but so are the office and retail segments of the U.S. real estate market. If rising inflation tempers long-term interest rates, both the residential and commercial real estate markets will deteriorate further. (Also see: Our Annual Forecast: How Much Home Prices Will Fall This Year.)

 Where the Market Stands; Where it’s Headed:

It’s extremely interesting to note this morning that the number of bullish stock advisors is now near a 10-month high. Meanwhile, the number of bearish stock advisors is near a six-month low.

Why is this important? The stock market usually does the opposite of what is expected of it. I put major credence into consensus of stock advisors, because, as a group, they are usually wrong. We are getting close to a top for the market, but were not quite there yet.

 What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.