Cash Hoards are Shrinking at S&P 500 for the First Time since '09 as Obama Continues to Woo CEOs

According to Bloomberg Corporate America is putting its cash hoard back to work.
In the first decline since mid-2009, Standard & Poor’s 500 companies reduced cash and short-term investments to $2.4 trillion from a record $2.46 trillion, according to data Bloomberg compiled from their most recent quarterly reports. Capital spending increased $22.3 billion, the biggest quarter- to-quarter jump since the end of 2004, to $142.8 billion, the highest level in two years.
Budgets are rising for new plants, distribution centers and stores from S&P bellwethers Cisco Systems Inc., General Electric Co. and Coca-Cola Co. While some of the money is being spent abroad, company officials say they are opening the purse strings at home now too. A rebound in economic demand, President Barack Obama’s efforts this year to court business leaders, and Republican gains in Congress have helped build confidence to invest and start adding jobs, executives and investors said.
U.S. companies’ accumulated record cash last year after they slashed spending shut factories and fired workers in 2008 and 2009 to cope with the worst recession since the 1930s.
The dearth of investment took a toll on jobs, with the unemployment rate averaging 9.6 percent in 2010. An increase in spending this year may help lower the rate to 9.2 percent, the average estimate of 87 economists in a Bloomberg poll.

Political Climate

Companies held their cash partly on concern that health- care mandates and increased financial regulation would add costs to their bottom line.  Business confidence has improved and is contributing to some increased risk appetite. The economy last year grew 2.9 percent after shrinking 2.6 percent in 2009.

Profit, Not Presidents

Obama backed a compromise to extend tax breaks that were set to expire in December and a measure to accelerate equipment depreciation. He has countered executives’ criticism with a call to lower corporate taxes, freeze federal spending and review “outdated and unnecessary” regulations. In return, at a Feb. 7 speech to the U.S. Chamber of Commerce, he asked companies to invest and create more jobs at home.

 ‘Good for the Economy’

The Bloomberg data examined the most recent quarterly figures reported by S&P 500 companies, regardless of the specific calendar period. About 75 percent have reported so far in the current cycle, and final totals may change. The S&P 500 increased 12.8 percent in 2010, compared with 11 percent for the Dow Jones Industrial Average.

http://www.bloomberg.com/news/print/2011-02-16/cash-hoards-shrink-at-s-p-500-for-first-time-since-09-as-obama-woos-ceos.html

Economy: Factory Production Increases, Housing Stagnates

Production at U.S. factories climbed in January for a fifth consecutive month, while builders began work on fewer single-family houses, showing the expansion remains driven by manufacturing as housing stagnates.

The Fed’s report also showed total production was unexpectedly restrained by a decline in utilities as milder temperatures curbed demand for heating. Output fell 0.1 percent after a 1.2 percent increase in December.

Mining production, which includes oil drilling, decreased 0.7 percent last month. Utility output fell 1.6 percent after a 4.1 percent increase the prior month.

Automakers are benefiting from rising sales. Output of motor vehicles and parts jumped 3.2 percent in January after rising 0.2 percent a month earlier.

Business Equipment

Production of business equipment rose 0.9 percent after a 1 percent gain. Output of computers and semiconductors rose 0.9 percent after increasing 1.5 percent.

Read entire article at bloomberg.com

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Lenders Ease Up on Restricted Payments

Companies are increasingly able to renegotiate restricted payment covenants, enabling them to pay dividends and institute buybacks.

In another sign of looser creditor protections and greater flexibility for borrowers, a growing number of companies are getting lenders to relax the restricted payment covenants on their debt. In numerous public filings during the past three months, companies have detailed changes to credit agreements that will give them more freedom to return some of the cash on their balance sheets to shareholders and private-equity sponsors. That's a marked change from two years ago, when many lenders tightened the screws on restricted payments in order to keep borrowers from reducing their cash cushions.

Restricted payment covenants prevent a company from paying dividends, buying back stock, prepaying subordinated debt, or paying management fees to a private-equity sponsor. "They are set up to limit what the company can do with cash or assets it has generated from operations, the idea being that creditors want to preserve the value at the borrower and not see it flow out to third parties in a way that wouldn't benefit the creditors," says Vanessa Spiro, a partner in banking and finance at law firm Jones Day.

Read entire article at CFO.com

A Bonus for Companies Using Bonus Depreciation

The new Job Creation Act signed last year gives companies a bigger depreciation benefit, and more time to use it.

Businesses got more breathing room to capture a bonus depreciation deduction when President Obama signed the new tax and jobs bill into law last year. In general, the revamped and substantially liberalized provisions contained in The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extend the Bush tax cuts for an additional two years, in most cases.

Further, the law extends and expands the additional first-year depreciation to equal 100% — rather than 50% — of the cost of qualified property placed in service after September 8, 2010, and before January 1, 2012. (September 8 is the date on which President Obama first broached the subject of "full expensing" of the cost of qualified property.) It also extends some similar tax benefits as far out as 2014.

The thinking behind the extension was to continue to spur capital spending by U.S. companies. For the past several years, the tax code has allowed for enhanced depreciation deductions with respect to tangible and intangible property, as long as the items met certain requirements. One of the more popular deductions related to this kind of qualified property was the "first-year depreciation" deduction. Under the older rules, an additional first-year depreciation deduction was allowed in an amount equal to 50% of the adjusted basis of qualified property that was placed in service during a specified period. That deduction has been raised to 100% under the new rules, and the time line has been expanded.

While some critical dates have changed under the new law, the mechanics of the deduction remain the same. For instance, the rules apply for both regular tax and alternative minimum tax purposes, but not for purposes of computing earnings and profits (see Section 168(k) of the Internal Revenue Code). In addition, the property must fall into one of the following four categories: (1) property to which the MACRS depreciation system applies (most tangible personal property) with an "applicable recovery period" of 20 years or less; (2) water utility property; (3) computer software (if either "off-the-shelf" or not acquired in a transaction involving the acquisition of assets constituting a business or a substantial portion thereof); or (4) qualified leasehold property that meets three criteria:
• the original use of the property must commence with the taxpayer after December 31, 2007; and
• the taxpayer must purchase the property within the "applicable time period" (after 2007 and before 2011 under the old law; but before 2013 under the new law); and;
• the property must be placed in service after 2007 and before 2011 under the old law, but before 2013 under the new law (or before 2014 in the case of certain long-lived property and transportation property).

Read entire article at CFO.com

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Consumer and Business Spending to Spur Expanding U.S. Economy

A newly resilient economy is poised to expand this year at its fastest pace since 2003, thanks in part to brisk spending by consumers and businesses.

In a new Wall Street Journal survey, many economists ratcheted up their growth forecasts because of recent reports suggesting a greater willingness to spend.

The 51 economists polled—not all of whom answer every question in the survey—expect gross domestic product will be 3.5% higher in the fourth quarter of 2011 than a year earlier, up from the 3.3% increase they projected in last month's survey. That would be the largest increase since 2003. They look for GDP to expand at a 3.6% annual rate in the current quarter, accelerating from the 3.2% rate recorded in the final months of 2010.

To be sure, the economy faces substantial challenges, including high foreclosure rates, rising commodity prices, strained state and local governments as well as the risk that financial tremors in Europe and geopolitical ones in Egypt could cut into growth. And despite the optimistic GDP forecasts, economists expect the unemployment rate will end the year at 8.6%—below January's 9%, but still high by historical standards.

Since late last summer, the economy appears to have strengthened considerably. The economists put the risk of a return to recession at 12%, down from 22% in September.

The headwinds to expansion appear to be subsiding. A majority of economists—32 of 46 who answered the question—say that rising commodity prices are due to supply-and-demand issues stemming from world-wide growth, not bubbles blown by monetary or fiscal policy. On average, they say oil prices would need to jump to $127 a barrel—well above current levels—to bring down growth. Meanwhile, nine of 10 say the turmoil in Egypt hasn't substantially altered their outlook.

While cuts by state and local governments are likely to subtract from growth in 2011, the economists don't expect the drag to be strong enough to derail the recovery. On average, they expect the sector to trim just 0.3 percentage point from economic growth over the year.

Having seen the global economy so far weather Europe's financial crisis, companies are no longer as worried about the risk it poses. They are also far less worried about tax and regulatory issues, as the White House has signaled a more conciliatory tone toward business.

"Every step in the last three months from the Obama administration looks like they're courting the corporate sector," said Bank of America Merrill Lynch economist Ethan Harris.

Read entire article at WSJ.com

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Accounting Standards Boards of Japan, U.S. Consider Global Convergence

Representatives of the Accounting Standards Board of Japan (ASBJ) and the Financial Accounting Standards Board (FASB) met Feb. 7 and Feb. 8 in Norwalk, Conn. This meeting was the 10th in a series of discussions between the ASBJ and the FASB designed to enhance dialogue between the two boards in their shared pursuit of global convergence of accounting standards.

In November 2010, the FASB and the International Accounting Standards Board (IASB) issued a joint statement, Progress Report on Commitment to Convergence of Accounting Standards and a Single Set of High Quality Global Accounting Standards, which affirmed their priority projects. The decisions connected with the use of IFRSs are expected to be made during 2011 for the United States and in or around 2012 for Japan. With those decisions in sight, both the ASBJ and the FASB are vigorously conducting their respective convergence programs with the IASB.

“As the decisions connected with the use of IFRSs in both countries approach, it is extremely meaningful to exchange views with the FASB regarding financial instruments, revenue recognition, leases, and the measurement of liabilities, most of which are high priority MOU projects between the FASB and the IASB,” said Ikuo Nishikawa, chairman of the ASBJ. “I am pleased that we were able to affirm our continuing relationship between the ASBJ and the FASB under the leadership of newly appointed Chairman, Ms. Leslie Seidman. The ASBJ will continue to contribute to the development of high-quality, global accounting standards.”

At this meeting, the ASBJ and the FASB updated each other with the recent developments in their respective convergence projects with the IASB. They exchanged views on the following projects:

• Financial instruments (based on the credit impairment model for financial assets recently deliberated by the FASB and the IASB and the Exposure Draft on Hedge Accounting issued by the IASB in December 2010)
• Revenue recognition (based on the FASB and the IASB’s recent redeliberations with respect to the Exposure Draft on Revenue Recognition)
• Leases (based on the FASB and the IASB’s recent redeliberations with respect to the Exposure Draft on Leases)

The ASBJ and the FASB also exchanged views on issues related to reflecting the current interest rate in the measurement of liabilities, as a cross-cutting issue.

“The FASB iscommitted to working cooperatively with the ASBJ on important issues related to the international convergence of accounting standards,” said Chairman of the FASB Leslie Seidman. “Our dialogue on major joint projects with the IASB, and our shared interest in international convergence, are important to ensuring the future of high-quality financial reporting in both Japan and the United States.”

The next joint meeting is planned in the summer of 2011 in Tokyo, Japan.

The Accounting Standards Board of Japan (ASBJ) was established in July 2001 as a private-sector organization. Accounting standards developed by the ASBJ are to be authorized by the Financial Services Agency as part of generally accepted accounting principles. The ASBJ develops accounting standards and implementation guidance that appropriately reflect the environment in which business enterprises operate. The ASBJ also communicates with corresponding organizations abroad and contributes to the development of global accounting standards. For more information about the ASBJ, visit its website at https://www.asb.or.jp/asb/top_e.do.

Since 1973, the U.S. Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting and reporting in the United States. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information. For more information about the FASB, visit its website at http://www.fasb.org/.

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