Companies have record amounts of cash to spend: $1.9 trillion.With corporate profits and cash levels at record highs, you'd think financial markets would be booming. And they are. Under the current administration, stocks are doing better than they have under any president in the last 65 years. (President Obama's predecessor, former President Bush, presided over the worst stock market within that period.)

But in order to keep the stock market growing, more cash is going to have to move off the sidelines. Investors are going to have to shift cash away from bonds and commodities and into stocks. And companies are going to have to invest that cash in profitable growth opportunities. But how are they going to find those? The short answer is to seek projects that will gain them market share in rapidly growing countries.

Cash Levels Rising

Companies boosted their cash balances by $600 billion in the third quarter, bringing their total cash to a 51-year high of $1.9 trillion, according to the Federal Reserve. According to my analysis of data from S&P's Howard Silverblatt, corporate cash has averaged 6.8% of the market value between 1980 and 2010. In the third quarter, it towered over that average at 9.9%, which actually represented a drop from a record 11.6% in the second quarter. The high balances are great news for corporations and come on top of record 2010 estimated profits of $1.66 trillion.

The stock market is behaving as if it had anticipated all this good corporate news. From Jan. 21, 2009 through early last month, the S&P 500 had been climbing at an average annual rate of 26.9%. This performance is in welcome contrast to the stock market under the 43rd president, when index declined at an average of 4.5% per year during his eight years in office.

You would not know this from listening to some media commentators, such as Fox News's Glen Beck, whose diatribes against debt -- and in favor of gold -- may have directed buyers to the products of an advertiser, Goldline -- a company that's now being investigated by California authorities.

That may be part of why money has been flowing everywhere but stocks, in spite of the strong market. In the first nine months of this year, investors pulled $58 billion from U.S. stock mutual funds while directing $221 billion into bond mutual funds and more than $7 billion into commodity funds, according to the Morningstar Direct Funds Flow Report in October.

And with the price-to-earnings ratio of 14.75 on the S&P 500, it looks like the stocks -- whose earnings are expected to grow 13% next year, according to S&P's Silverblatt -- may be fairly valued now unless they can boost growth above that forecast.

How might companies do that? This is where that $1.9 trillion in corporate cash comes in to the equation. Sure, company CEOs are paid to beat quarterly earnings targets and boost their growth forecasts. But they can't achieve that for several quarters in a row unless they find profitable growth opportunities in which to invest.

How Should Companies Spend Their Cash?

And for now, companies seem to be short on ideas about where to invest it. Here's a hint: Look for countries with economies that are growing rapidly. According to the International Monetary Fund, the six fastest growing economies -- based on 2011 GDP forecasts -- are China (9.6%), India (8.4%), Vietnam (6.8%), Indonesia (6.2%), Chile (6.0%) and Peru (6.0%).

But just because those countries are growing fast, that does not mean that all companies will be able to find profitable growth opportunities there. A quick way to jumpstart their presence is to find attractive acquisition candidates in those fast-growing countries.

The most cash-rich industries right now are information technology and health care, with $347 billion and $193 billion in cash and short-term securities, respectively, as of the third quarter, according to Silverblatt. Of the S&P 500's total $902 billion in cash, IT accounts for 39% and health care makes up 21%.

Pfizer (PFE), for example, has $23.2 billion in cash. If it wanted to take a piece of the health-care market in fast-growing countries, it could consider investing in Teva Pharmaceuticals (TEVA), which sells generic drugs in 60 countries, including many emerging markets. Teva has $15.5 billion in sales, which have grown at a five-year-average rate of 24%, and $2.9 billion in profit, which has grown at an annual average of 43%.

Capturing some of that growth would likely come at a high price for Pfizer, given Teva's $49.3 billion market capitalization, so this particular deal may never happen. But one thing's for sure -- unless companies find profitable ways to spend their cash, they won't be able to sustain the profit growth that's been propelling stocks for last several years. And that would be a big disappointment to all that investor cash coming off the sidelines.


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Sonny

They better hang on to that cash to weather the storm that is surely coming. Why should they do anything with their money considering the uncertainty of our economic situation. All this talk of improvement is smoke and mirrors to fool all of us sheeple into putting money into the stock market. That is the main job of the banks, the wallstreeters, and yes, even our own govt.............to trick us yet once again. I say..........screw them!

December 21 2010 at 5:21 PM Report abuse rate up rate down Reply
marhee9

They talked about this at donsmithshow.com today. That is the best conservative site on the internet.

December 12 2010 at 8:12 PM Report abuse +2 rate up rate down Reply
dwuzze

Might as well just give it to the mega-rich with no fanfare ... thats where it will end up to rot anyway

December 12 2010 at 6:02 PM Report abuse rate up rate down Reply
Thermopol

I do not know why this is so complicated. Most of this pile of retained earnings is held by a handful of companies. Most of those companies do not have plans for the money that will give them a decent return on investment. So,they should pay some big dividends to their shareholders. That is who they are earning it for isn't it?

December 12 2010 at 2:24 PM Report abuse rate up rate down Reply
avalosdebra

did you read that? the short answer is to seek projects that will gain more profit in other rapid growing countries not the u.s.a how funny is that NOT we need jobs here and right in front of our faces the say jobs or thier markets . in other countries not here . what about our markets? or am i reading right please correct me if im wrong but i dont think so

December 12 2010 at 12:03 PM Report abuse +3 rate up rate down Reply
avalosdebra

like yeah right they are going to spen it on nothing that concerns us ..i dont no how people would sit here and tell people they dont pay taxes . what we never buy anything or what ? everthing you do is taxed so much you cant even go out and have fun everthing you buy is taxed or it allready included it the price of what your buying. so how can you sit there and say 50 % dont pay taxes . if you have a job you file every year when it time to collect or pay cause some got a better deal you want to point fingers then want the same thing if not more then a lot of these bizzes will go out of biss maybe thats what needs to happen and what does gold have to do with anything , if you cant afford health care what makes you think people can buy gold what an idiot people like you and you medical staff should quit you only think about youselfs anyway so we the people dont need drs like you thats one of the reasons this health care bill passed because of people like you and now that pres made it law you and people like you want it gone so you can cater to the rich well when they are gone who are you going to get money from , so as far i can seee you and people like you are going to cut your own throats and there is not going to be anybody who cares when that happens. cause you brought it on your greedy selfs thats going to be funny and the working lower class and poor are going to have the last laughthere they go again tell people who and who can get health coverage ,and not going to afford coverage cause no one wants to cover you so then u pass the poor house just to take some kind of care till you die or put the rest of thier family's in duebt cause a insurance plan wont cover you for pre-exiting problems , not only that have you seen what these health insurance charge a single adult is any where from 20 to 60 dollars a month thats with no pre exiting conditions and if you do have pre condit they charge even more or wont cover you at all so it goes to show you who the health care is really for the well to do and rich. as for the working class and the poor we dont count to them but yet our votes count when they want something, and whats really sad it the one who can get health care is if you have money so once again its get medical coverage that you may or may not use or pay rent and put food on the table or starve so you can have health insurance, and then try adding your whole imediate family then the price goes out the window and now you have to choose who gets covered and who dont thats messed up. so because i have hardly ,no money coming in the rest of you's on the repub and tea parties say i dont deserve health care that it would be better if people like me would die off then who's going to do all your dirty work for you cause the next well to do or the next door rich person not going to lift a finger for anyone but themselfs. thats the main problem with this government they care when we vote them in then its forget about you im here now its what i want that i care about and not the people who put you there, or the select few who have the money well this country better get ready for another revoloution , that another reason why they are passing so many gun laws ( people without guns are easier to controll ) just look at what they are doing .like the song goes stop children look around everybody look whats going down ,theres a man with a gun over there telling me ive got to beware so its like stop children whats that sound everybody better look whats going down .and that the truth on that one . sorry for the long post ,watch when this government fails the people the people are going to fail them and turn the table real soon mark my words. when a revolotion starts happening then what are they going to do ? when they show us the people from other countries have more rights the the everday american citizen that all for now cause you can keep going and going but it just dont get you nowhere

December 12 2010 at 11:48 AM Report abuse rate up rate down Reply
arjohny

always amazing to me how the marxists and the donkey party dolts actually believe the business of business is to provide everything possible to them without their having to do anything for it . . . such colossal ignorance is very sad.

December 12 2010 at 11:25 AM Report abuse +1 rate up rate down Reply
Jen

L, take your Prozac and chill. Some of your facts are taint bit partisan and a little loose on the facts. Nafta has helped jobs move over seas, passed by who? Social Security is tapping our budget because it was moved to from a trust fund to general fund and spent against like a Ponze scheme, guess who? Barney Franks and the Dems had nothing to do with Fannae and Freddie? Obama did not vote yes for Tarp?

December 12 2010 at 10:09 AM Report abuse rate up rate down Reply
dquandle

The should give it back to all the Americans they stole it from....with interest.

December 12 2010 at 4:04 AM Report abuse -3 rate up rate down Reply
Sam Das

Cash is king. Companies have cash because they are prudent. Moving out of cash is a risky business and should be done only when there are no doubts. Incremental passage back to investments are better than abrupt. Caution is warranted.

December 11 2010 at 11:03 PM Report abuse +2 rate up rate down Reply