Wednesday, October 24, 2012

An Early Winter for Corporate America

Stocks have started out the month of October in a sluggish fashion, with the S&P 500 off about -2% so far this month.

The market has been weighed down largely by weak corporate earnings reports.  Through the end of last week, 61% of the 127 companies in the S&P have missed revenue expectations, although more than half have beaten earnings estimates.

The gloomy mood of the market has not been helped by the downbeat commentary from corporate chiefs, who have generally reported that the economy has clearly slowed from earlier in the year.

It seems to me that some of the slowdown is not totally unexpected.  If I were head of a major corporation, I would be slow to initiate any new projects without a clearer picture of what government policies will be in 2013, especially with regards to taxes.

Then there is the whole issue of the fiscal cliff.  If Congress does not act before the end of the year, a whole host of draconian federal budget cuts kick in, and our fragile economy could be delivered a major blow.

So most of corporate America is hunkered down, building cash and delaying projects.  General Electric, for example, did a $5 billion bond issue earlier this week for the express purpose of building cash reserves in case Congress does not act before year end.  Corporations are borrowing, but then tucking the proceeds into cash reserves.

The cash build is startling.  Here's what CNBC said this morning:

Corporations are stowing away cash at record rates, reluctant to invest in their businesses or hire new workers as uncertainty clouds the future.

Amid a lackluster earning season that has featured many companies missing sales expectations, cash balances have swelled 14 percent and are on track toward $1.5 trillion for the Standard & Poor's 500, according to JPMorgan. Both levels would be historic highs.

Meanwhile, the public remains skittish about stocks.  Ned Davis Research (NDR) noted this morning that the public pulled $10.6 billion out of domestic equity mutual funds last weeks, the largest outflow since August 2011.

NDR goes on to say that a last week's poll from the American Association of Individual Investors showed just 28.7% bulls, while 44.6% are bearish.

Historically lots of cash on the sidelines, and bearish sentiment building,  would set up the market for a pretty powerful rally.

Will this time be different?