US companies are still worried about an economic shock

By CNN Newsource

Published February 7, 2024 4:42 am

Analysis by Nicole Goodkind, CNN

New York (CNN) — A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

The US economy appears to have swerved away from immediate risk of recession. The labor market is strong, growth has surpassed estimates and inflation is easing. A new CNN poll even shows that the public’s long-held pessimism about the economy is letting up.

But America’s publicly traded companies are flashing a key sign of economic uncertainty — they’ve been hoarding cash.

What’s happening: Americans have spent down their pandemic-era savings and then some. Credit card and auto loan delinquencies have not only surpassed pre-pandemic levels, they’re the highest they’ve been in more than a decade.

US corporations, however, are clinging to their money — they increased their cash on hand through the first half of last year by 13% to $2.35 trillion from $2.08 trillion at the end of 2022.. Firms also cut back on share buybacks, according to the most recent “Cash Pile” report from Moody’s Investors Service.

There’s a high opportunity cost to holding onto cash. Companies can potentially earn higher returns investing in their own business or in securities than they can from the relatively low interest rates on deposits.

And companies with existing and expensive debt in a high-interest rate environment would likely want to use their cash to pay it down. So why hold on to expensive, depreciating cash?

The impetus “is the level of uncertainty that we are facing,” Vijay Govindarajan, a professor at Dartmouth’s Tuck School of Business, told CNN. “From Covid to the wars [in Ukraine and the Middle East], there is a lack of predictability all over the world. About 60 countries have elections this year, and even the concept of democracy is in question.”

That uncertainty, he said, is why companies want to keep their assets liquid – so that they have maximum flexibility in a world that is highly unpredictable.

“This is the time to think about cash as a strategic weapon,” said Govindarajan.

About 3% of publicly traded companies get delisted from exchanges each year for failures caused by supply chain disruptions, labor strikes, changes in demand and technology disruptions, according to a research report by Dartmouth’s Govindarajan, Anup Srivastava at University of Calgary’s Haskayne School of Business and Chandrani Chatterjee at the University of Texas at Arlington.

But a 10% increase in a firm’s cash holdings correlates to a 5% decrease in the likelihood of such a delisting, the report found.

“We interpret this correlation as evidence that cash reserves act like insurance against sudden economic shocks,” wrote the researchers.

A growing concern: Nearly a quarter of shareholders rated access to liquidity as their top concern in 2024, according to an annual poll of institutional traders by JPMorgan. Only market volatility ranked higher.

NTSB report says key bolts missing from door plug in Boeing blowout

Investigators from the National Transportation Safety Board on Tuesday said evidence shows four bolts that hold the door plug in place on the Boeing 737 Max 9 were missing at the time of last month’s blowout on Alaska Airlines flight 1282.

The new finding from federal investigators comes one month and a day after the January 5 incident that triggered a 19-day emergency grounding of all Max 9s and re-ignited scrutiny of Boeing following the fatal Max 8 crashes of 2018 and 2019.

In their 19-page preliminary report released Tuesday, NTSB investigators included observations from a laboratory disassembly of Alaska 1282’s door plug, which fell 16,000 feet into an Oregon backyard. It said the lack of damage to the plug where the bolts were supposed to attach it to the fuselage of the plane pointed to the conclusion that the bolts were missing at the time of the flight.

The missing bolts are apparently not the only problem. Both Alaska Airlines and United Airlines said last month that inspections of their fleets that took place after the January 5 incident revealed loose bolts.

“This is a somewhat complex issue with a lot of parts,” NTSB Chair Jennifer Homendy told CNN in the week leading up to the release of the preliminary report. Even still, Homendy stressed that she “would have no problem getting on a Max 9 tomorrow and flying.”

Shares of Boeing closed nearly 1% higher on Tuesday. Shares of Alaska Airlines, meanwhile, rose by 2%.

Snap shares plunge 30% in the wake of quarterly loss, layoffs

Shares of Snapchat parent Snap plunged on Tuesday after the company reported a loss in the final three months of 2023.

Snap reported a net loss of $248 million for the December quarter, an improvement from the same period in the prior year and a narrower loss than Wall Street analysts had expected. Still, shares fell around 30% in after-hours trading Tuesday.

The company also said revenue from the quarter grew 5% year-over-year to $1.36 billion, its second consecutive quarter of revenue gains after two earlier quarters of declines last year.

CEO Evan Spiegel attempted to strike an optimistic tone in the company’s earnings release, saying, “2023 was a pivotal year for Snap, as we transformed our advertising business and continued to expand our global community, reaching 414 million daily active users.”

But the report comes one day after the company announced it would lay off 10% of its staff, cutting around 500 jobs. The reductions signal that the company is still in cost-cutting mode after the company in 2022 laid off what was then 20% of its workforce, around 1,200 employees, and another 3% of its staff last year.

Tuesday’s report also comes as Snap attempts to revamp its public image and distance itself from social media peers like Meta and TikTok that have faced regulatory scrutiny and safety concerns.