Wednesday, March 16, 2011

The Uncertainty Principle in Action

Here is a link to donate to the Red Cross.

From the WSJ:
U.S. companies’ cash hoard keeps getting bigger, a trend both good and troubling.

After hitting new highs in five of the last six quarters, nonfinancial corporations’ cash and other liquid assets reached $1.9 trillion at the end of 2010, according to the Federal Reserve. That’s 7% of all their assets, the highest level since 1963.

From Bloomberg:

Record earnings fueled by the highest profit margins since 1993 are giving executives more leeway than ever to boost dividends as the bull market enters its third year.

Margins will climb to 8.9 percent in 2011, the highest level in at least 18 years, according to data compiled by Bloomberg on non-financial companies in the Standard & Poor’s 500 Index through March 11. Greater profitability combined with dividend cuts during the credit crisis have pushed earnings to 6.53 percent of the gauge’s price, or 3.5 times more than its payout rate, close to the record 3.6 multiple in January.

A total of 95 companies led by Aetna Inc. (AET) and Carnival Corp. have raised dividends as the fastest economic expansion in six years and five straight quarters of earnings growth increased confidence among chief executive officers. Of the 380 that pay dividends, 378 are forecast to maintain or increase them, according to data compiled by Bloomberg using options prices, profits, management statements and peer comparisons.

“The economy seems to be doing well and earnings are on the recovery path, which companies wanted to be sure about before they raised their dividends,” said John Carey, a Boston- based money manager at Pioneer Investments, which oversees about $250 billion. “I feel relatively confident that most of the dividends out there are secure, and we’ll see some fairly broad based increases.”

Companies have more than enough cash to pay for the increased cost of employment and companies are also profitable, meaning the pain from the recession is over. So -- where is the hiring?

There are several answers. First, there is a tremendous amount of slack in the labor force right now. Hours worked are low, meaning employers can simply increase the number of hours worked by current employees in order to increase production. In conjunction with that is the continued increase in productivity; companies are still getting more output from fewer employees, so they don't feel the need to hire.

Second, companies don't know if demand will stay elevated enough to continue to drive the economy. With consumer sentiment still very low (which is caused by high unemployment, the poor shape of the housing market and gas prices spiking), concern about the consumer's overall psychology is understandable.

Third, there is also legislative uncertainty. Let me paint an example. The new health care law is about 2000 pages; this is the same length of the condensed tax code that I use in my law practice that took me over three years to work through (in small pieces) in graduate school. While I am a slow reader (the bane of my legal existence), it still takes time to move through a code that deep and understand what it means. Then there is the movement from reading and understanding a law to implementing it over an extended period of time -- which, with the new law, takes place over a number of years. In short, the new law has fundamentally transformed the largest benefit offered to employees in more ways than we currently understand. This is preventing companies from moving forward. And, no, this is not my way of saying it's a bad law (frankly, I haven't read it nor do I understand health care law in any way). But it is my way of saying the uncertainty concept is not an academic construct; it is very real.