The possibility of a debt-limit disaster is finally settling in, and state governments and big corporations are getting ready.For many of them, this means hoarding cash or getting hold of as much cash as possible -- just when we were finally starting to see companies loosening up with cash in the form of higher dividends or share buybacks.
Now companies are not only holding on to cash, but they're delaying hiring and investments, The Wall Street Journal reports. They're also laying off employees.
General Electric (GE), for example, ended the second quarter with $91 billion in the bank. "Our main protection against something like that not going well, or having a rocky outcome, is to have a lot of liquidity," the company's chief financial officer told the newspaper.
The worst-case scenario for many of these companies is that they won't be able to get much access to cash later this year. Borrowing could become extremely difficult. Short-term investments may not provide good returns.
A recent survey of finance executives found that half will take defensive actions, such as hiring freezes or a reduction in capital spending, if Congress can't find a debt-limit fix before Aug. 2, the Journal reported.
We're seeing a similar response from money market funds, the Financial Times reports. Funds with government-only money have increased their cash for meeting redemptions within one week to 68% of assets. That's up from 48% at the end of March.
These funds are staying away from one-month Treasury notes that mature on Aug. 4 and Aug. 11. They're also cutting the time they are willing to lend, the FT notes.
And what about those entities without much cash? They're trying to borrow it now. Just look at California, which is about as broke as it gets.
The state has lined up $5.4 billion in loans from a number of banks as an emergency lifeline if the credit markets dive, The New York Times reports. Yes, someone out there is actually willing to lend California money.
The bridge loan would come from Goldman Sachs (GS) and seven other banks. "California had to obtain this interim financing to protect the state from the immediate, drastic consequences of a failure by Washington to resolve the debt ceiling impasse" by Aug. 2, the state treasurer said.
So what's an investor to do in these turbulent times? Some analysts say the best course is to focus on "ultra-safe equities," the Financial Times reports. Those include companies with credit-default spreads below that of G7 sovereign levels but with dividend yields above government bond yields, analysts from Credit Suisse say.
That rare group of stocks includes Centrica (CPYYY), Sanofi (SNY), Novartis (NVS), Compass (CMPGF), Pfizer (PFE), Philip Morris (PM) and Merck (MRK).
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