Research Articles

Tea Leaves: Corporate Cash Trends

The following is an abstract. Here is a link to the full article: Tea Leaves.

According to Investor’s Intelligence, bullish sentiment among investment advisors recently hit a 30-year high. Moreover, consumer confidence is now its highest level in 16 years. How did markets perform back then around 1987 and 2001-2002? Hint: Not well!

Bullish sentiment often translates into easy money. In turn, this can enable elevated market valuations as well as the survival and growth of many enterprises that would otherwise fail or stagnate. However, once the easy money dries up, corporations are left to fend for themselves and some will collapse. Share prices tend to follow.

This article looks at US corporate cash flow trends. I observe both the money flowing into companies as well as how they are allocating it. My research indicates easy money is drying up and companies are increasingly getting squeezed for cash. Given the backdrop of investor optimism and elevated valuations, I believe we have the right the ingredients for a significant market correction.