Friday, June 14, 2013

Companies With High Cash Balances/Improved Equity Performance

Bloomberg presented a video the other day providing some details into how companies are using or are not using their cash flow.
That got me thinking about that companies must use their balance sheet cash on the thesis that it is earning next to nothing, we have to return to shareholders, it is prudent financial management, etc. What does the final arbiter, the market, say about this assertion? Well, it appears the thesis does not hold much water as it pertains to equity performance. The following chart shows the average performance of companies in the S&P 500 with cash balances per share greater than 25% of the price per share versus the performance of the S&P 500, all excluding financials.

Since 2004, companies with large cash balances look to have largely outperformed the overall group in nearly all quarters. 

Massive Sun Prominence

The Solar Dynamics Observatory view of a massive sun eruption on June 13th, 2013

More Evidence of a Trend Change In Risk

For awhile now, changes in the value of the dollar relative to other currencies has been a pseudo tell of the risk-on/risk-off mentality of investors. For years, the dollar has moved inversely to the value of the equity market and yields on treasuries. Now however, that trend may be changing. Just look at the following two charts showing the rolling 6-month correlation between the dollar and both the S&P 500 and the yield on the 10-year treasuries.

6-month rolling correlation- dollar and the S&P 500

6-month rolling correlation- dollar and the yield on 10-year treasuries

Notice how the correlations have remained largely negative since 2008 for the dollar/S&P 500 cross and 2011 for the dollar/10-year treasury yield cross. That is up until recently. This is just more evidence, in my mind, that the trend in risk is changing.