You know about the endless speculation - the $100 billion question - "What will Apple do with all that cash?" Will they pay an ongoing dividend? Will they pay a special dividend? Will they buy a major company? Will they buy Rhode Island?"
It isn't just Apple (AAPL) that's stuck with all that cash. There is more money on the sidelines parked in cash, in both private and public companies combined, than at any other time in the past half-century. It's north of $2 trillion. Here's a few big non-financial cash hoarders as of the most recent quarter:
- Apple (AAPL): $97 billion
- Microsoft (MSFT): $51.7 billion
- Google (GOOG): $45 billion
- Amazon (AMZN): $9.5 billion
- Berkshire Hathaway (BRK): $37.5 billion
- Dell Computer (DELL): $13.8 billion
- EMC (EMC): $6.3 billion
- eBay (EBAY): $5.93 billion
- General Electric (GE): $137 billion
- Verizon (VZ): $10.8 billion
- Cisco (CSCO): $44.3 billion
- IBM (IBM): $11.3 billion
- 3M (MMM): $4.9 billion
The list goes on and on. Now, pharmaceutical and tech companies will constantly be dumping cash beyond any free cash flow into R&D. That includes 3M, which has a sizable medical and tech presence. Cisco and IBM and Dell and EMC are all operating in very competitive environments. Berkshire always keeps billions on hand in the event of an insurance catastrophe.
But even if you subtract all the cash needed for these items, it still leaves a ton of it left over. So what gets done with it? I'll give you two hints first, and see if you can guess.
First hint: the General Motors (GM) and Chrysler bailouts raped bondholders. In Chrysler's case, secured creditors got destroyed and even publicly vilified by President Obama. Hedge funds with a claim on assets were browbeaten into submission. Not surprisingly, given the President's loyalties, the UAW ended up with a better deal than even secured bondholders. So much more went on behind the scenes than was ever reported, most it highly irregular or even unprecedented, and some of it arguably illegal.
Second hint: there have been enormously complex regulations slapped into place on many different industries. I have seen it first-hand. As a broker of private investment deals - which include everything from private equity investments targeting 20% returns or more to investors with as little as $25,000 all the way up to multi-billion dollar opportunities - I have witnessed a capital strike.
So, can you guess what these companies will do with all that cash? Here's the answer:
They are going to sit on it. Nobody wants to invest in a business that could, without warning, suddenly be hit with regulations that effectively kill it, as has happened with the cement industry, among many others. Nobody wants to hire workers to build products that may become regulated out of business. Furthermore, nobody wants to invest in a business where the government could suddenly swoop in and wipe out secured creditors, force out the CEO, give a sweetheart deal to the unions, and completely restructure the business.
So how is this actionable?
First, see who wins the election in November.
If the GOP takes over the White House and Congress, and you start to see true dismantling of regulatory overreach, bet on America. Buy all the companies with the biggest cash hoards, such as the ones above, because they will start hiring people again. That means more consumers will have more cash to spend, and we will see an actual recovery, not the faux one presently touted in the media. Buy manufacturing companies like Deere & Co. (DE) and Caterpillar (CAT). Shift from consumer staples to consumer discretionary, like Liberty Interactive (LINTA) and Ashford Hospitality Trust (AHT) and retailers like Target (TGT). I'd buy the entire market in the form of the Wilshire 5000 Total Market ETF (WFVK). Since people will be spending more, I'd go with the credit cards like Visa (V) and Mastercard (MA).
If President Obama gets re-elected, expect the capital strike to continue. I'd take a more market neutral position, sticking to selective stock picking. I'd grab the big cash hoarding companies that also pay dividends, such as 3M. I'd focus on buying quality companies and selling covered calls against them.
Of course, the most actionable thing you can do is to vote next November, and you can probably guess which way I think you should go….if you want the economy to improve.
Disclosure: I am long AHT.