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Analysis

US corporate liquidity

by Gabriel Stein

Tue 10 Jun 2014

US corporate liquidity Enlarge Chart loading Image

What the chart shows: The chart shows the liquidity – defined as cash and bank deposits relative to bank debt – of US non-financial companies

Why the chart is important: Companies as a rule do not like to hold excessive liquidity. This is partly because the return on cash is usually low and means investment returns foregone – although in today’s climate this so-called opportunity cost of holding cash has also come down – and partly because holding large amounts of cash opens them to pressure form shareholders and activists who want them to deploy their funds better. Since this will either mean share buybacks, corporate investment or M&A activity that will tend to be good for share prices. High and rising corporate liquidity has therefore historically been correlated with rising share prices. US corporate liquidity remained high in Q1 this year (data published 5th June); but it is no longer rising. This implies that US equities are no longer receiving the same support from corporate liquidity as previously, increasing the risk of a correction. However, since US equities are still probably the most attractive investment in an unattractive world, that correction is likely to be limited.

Chart and comments provided by Oxford Economics www.oxfordeconomics.com