As geopolitical turmoil roiled the stock market last week, it was easy to forget something so crucial to remember as earnings seasons heats up: Corporate America hasn't looked so financially secure since the 1960s.Credit markets, ratings actions and cash balance sheets tell us that companies are unlikely to close their wallets, hinting at the potential for a recovery by the beleaguered stock market. Stability in the credit markets last week stood in stark contrast to the (near) panic in the stock market, which sent the Nasdaq Composite down 4.4% for the week to its lowest level since October. The Dow fell 3.2% last week, while the S&P 500 shed 2.3%. Conversely, spreads on high-yield bonds averaged 333 basis points over comparable Treasuries Friday, tighter (or better) by 18 basis points from the start of the year, and still not far off their historic tight levels of 270 reached in 1997. Junk bonds are a virtual Zen Buddhist monastery compared with the recent bleeding in the stock market. "The high-yield market never went along for that ride
When corporate giants like Citigroup ( C), Pfizer ( PFE) and Microsoft ( MSFT) report earnings this week, remember that companies have just scratched the surface when it comes to capital expenditures. And when Caterpillar ( CAT), Schlumberger ( SLB), and Halliburton ( HAL) report, remember that high oil prices may take their toll on profits, but American companies have a historically massive cash cushion to absorb the high costs of materials. Non-financial corporations had $1.324 trillion of cash on their balance sheets as of the end of the first quarter, according to Moody's. Corporate America's ratio of cash to total debt outstanding stood at 24.3%, which is off slightly from a peak at 25.2% in the fourth quarter of 2005, but still one of the highest measures since 1967. In the best years of the last economic cycle, debt weighed much heavier on company balance sheets. The ratio of cash to total corporate debt was only 18% in the first quarter of 1996, according to Moody's. All that cash means companies have a lot of spending power and more than enough in their pockets to justify doling out some shareholder dividends or buying back stock. Non-financial companies spent $983.97 billion in the first quarter of 2006, according to the Commerce Department. Cash on hand is running at 135% of spending, down from 143% in the fourth quarter of 2006, but at the strongest levels since the early 1960s. In the first quarter of 1996, that ratio was only 90%. "They aren't going to just put that cash in a checking account while their stocks go down," observes RealMoney.com contributor James Altucher, who expects more M&A activity, more stock buybacks, higher dividends and investment in R&D and infrastructure. "All of those items boost stock prices and boost the economy," writes Altucher, a managing partner at Formula Capital, an alternative-asset management firm. "We haven't even really seen the effects yet of the massive cash that's sitting on the sidelines right now in corporate America. "
Indeed, with massive cash on their balance sheets, fears of shrinking GDP should be tempered by some faith that corporations can take up the slack if consumers fall off the map.