Is Cash Holding the Economy Back?

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Stocks put in another strong showing today, with the Dow Jones Industrial Average (INDEX: ^DJI) and the broader S&P 500 (INDEX: ^GSPC) gaining 0.9% and 1.2%, respectively.

The macro view: Yesterday, Howard Silverblatt, Senior Indices Analyst at S&P Dow Jones Indices shared a tweet that said cash on the balance sheets of S&P 500 industrials has reached record levels, representing nearly 10% of market capitalization, or 131% of estimated 2013 operating earnings.

High cash levels are symptomatic of a problem -- and they create a problem of their own. My Foolish colleague Morgan Housel asked PIMCO CEO Mohamed El-Erian last week if the ambient pessimism is excessive. This was part of the response (you can watch the entire video here):

"Wherever you look, that pessimism is obvious. Look first at companies: No one in their right mind would hold so much cash earning 0% on your balance sheet. There's much better use for cash, unless you're really uncertain about the future, unless you want the optionality value of the cash. ... The behavior of companies -- these are rational, commercial actors -- is telling you that there is a lot of self-insurance going on within the corporate sector. The result of that is less investment in people, in plant and equipment, and the economy is less well off."

There is a "glass-half-full" interpretation to El-Erian's observation: Once the uncertainty that is causing companies to self-insure subsides, that could pave the way for a significant upturn in the corporate investments, and the economy would be better off for it.

The micro view: Enterprise software giant Oracle (NASDAQ: ORCL) reported its fiscal second-quarter results after the close, beating the $0.61 consensus estimate with earnings per share of $0.64. Revenue also came in ahead of expectations, at $9.1 billion versus $9.0 billion.

The numbers show the remarkable gap that is opening up between old and new business models in the software industry: New software licenses and cloud software subscriptions revenues increased 17% to $2.4 billion; meanwhile, hardware revenue -- including servers and storage -- dropped 23% to $734 million. Corporate customers have clearly figured out that when you run software in the cloud, you don't need to buy and maintain your own hardware.

The shift to cloud-based represents a risk -- and an opportunity -- for another software giant. For a comprehensive assessment of Microsoft's prospects, click here to request The Motley Fool's premium report, which includes 12 months of ongoing coverage.

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