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Pay attention to corporate cash

Falling corporate cash levels show the credit crunch is starting to bite.

During the first quarter of this year, Chicago-based consultancy Treasury Strategies questioned 135 large US corporations about their cash and near-cash holdings. It has been an article of faith that most of these investment-grade corporations remain cash-rich – having retained a large portion of their healthy earnings for the past five years, reduced large-scale capital expenditure since the dotcom bust, seen off shareholder demands to return cash and avoided the clutches of avaricious private-equity acquirers.

That cash gives them a substantial buffer against the gathering credit crunch as banks cut new lending in response to asset write-downs, increased funding costs, regulatory pressure to de-lever and the accumulation of unwanted assets returning from the broken vehicular finance system.

Treasury Strategies conveys a warning signal. In the second half of 2007, fully $250 billion of corporate cash... disappeared. It’s not entirely clear what has happened to it.

This is not necessarily a disaster in the making. Huge though that sum is, corporates have a lot of cash. Corporations that had been sitting on $5.5 trillion at the end of June 2007 held $5.25 trillion at the end of December 2007. How those cash levels evolve over the coming months and years will become a key indicator of corporate health.

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