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.
Alex Dumortier, CFA, has no positions in the stocks mentioned above; you can follow him on Twitter, @longrunreturns. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.