WASHINGTON -- A credit crunch is causing malaise in financial markets, but America's biggest companies are the picture of financial health and that could be a key factor in what comes next for investors and the economy.
Balance sheets are bulging with cash, which may help temper the effect of the credit woes if Corporate America doesn't need to tap increasingly costly credit markets.
Some Wall Street advisers say following the money trail could give investors clues on what to do with their own cash.
The largest U.S. companies are sitting on three times as much cash as they had during the 1998 credit crisis, when the collapse of Long-Term Capital Management hard on the heels of a Russian financial crisis prompted the Federal Reserve to step in and cut interest rates.
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"Higher credit costs are not a threat at this juncture to the health of the broader market, though some individual companies could be at greater risk," Tobias Levkovich, Citigroup Inc.'s chief U.S. equity strategist, wrote in a recent note to clients. "The bigger-cap names are sitting on more cash than others. Consequently, any liquidity fears support our large-cap bias."
While some on Wall Street say the current credit tightening mirrors 1998, and look to the Federal Reserve to cut interest rates as it did then, cash-rich Corporate America may not have as much need for financial markets to build new factories, buy back stock, or just fund day-to-day business.
"They have more cash than they know what to do with," said Howard Silverblatt, senior equity analyst at Standard & Poor's in New York. "You've got some turbulence here but they've definitely got enough (cash) to ride out a storm."
$623 BILLION IN CASH
Global stock markets have sold off heavily in the past week as worries mount that what began as a U.S. subprime mortgage meltdown was spreading to other forms of credit, such as corporate debt. If companies can't borrow to fund growth, that can lead to job losses and spell trouble for the U.S. economy.
A handful of companies with exposure to the mortgage market have had trouble getting financing recently, and home loan terms have tightened, even for those with good credit.
But data from S&P shows big companies are sitting pretty.
The S&P industrials, an index of big companies that excludes financial and utility stocks, had $623 billion in cash and cash equivalents at the second quarter of 2007, Silverblatt said, representing 6.5 percent of their stock market value.
In 1998, when the Fed stepped in with three rapid-fire rate cuts in the wake of the Russian financial crisis and the collapse of Long-Term Capital Management, those companies had just $203 billion in cash, or 2.6 percent of market value, according to S&P data.
The amount of cash those companies now have on the books adds up to some 62 weeks worth of earnings, based on generally accepted accounting principles. As Silverblatt put it, "They've got well over a year of cash sitting in the bank."
A recent survey from the Association for Financial Professionals found that companies were increasingly stockpiling cash. The survey, released last week, found that 36 percent of companies were building their cash positions.
Whether the hoarding mentality reflects a growing concern about the direction of the U.S. economy is unclear. Companies have taken knocks for being too tight-fisted as they held off on new investment and cut costs in recent years. But in hindsight the strategy looks wise as global markets plunge and credit grows more expensive.
STEADY FED
From the Fed's perspective, financial market pain does not always mean the underlying U.S. economy is at risk. Indeed, St. Louis Federal Reserve Bank President William Poole rattled markets with comments Wednesday saying that the turmoil had not undermined the U.S. economy, and there was no need for the central bank to ride to the rescue with an emergency rate cut.
The S&P 500 was down 1.9 percent in Thursday afternoon trading.
In 1998, when the Fed's medicine included a rare inter-meeting rate cut, the collapse of LTCM came against a backdrop of weak economic conditions in places such as Russia and Asia. This time around, global growth is stronger, a point Bush administration officials have tried to drive home in recent public comments.
Goldman Sachs economist Ed McKelvey said there were "obvious parallels" between the 1998 situation and now, including the sudden re-pricing of risk and potential breakdown in the flow of credit, but that may not sway the Fed.
"It's Fed officials' views about the economic impact that matter, not those swirling about in the markets," McKelvey said. "Although severe distress in financial markets can clearly precipitate an emergency easing, the risk to the economy has always been a central focus."
Recent economic data suggest the economy keeps chugging along, albeit at a tepid pace. Inflation has been modest, consumer spending hasn't completely dried up, and the manufacturing sector is showing signs of recovery.
With markets volatile, Citigroup's Levkovich said it was smart to follow the cash, and that path leads to large-cap stocks such as IBM , Intel, Oracle and Merrill Lynch .
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