- The earnings announcement of the century…
- Apple’s cash plans: What we know, and what will shock everyone
- Bonds sell off, but for stocks, “more money means more momentum”
- Americans’ incredible shrinking savings accounts
- Alaska’s recession (and Medicaid squeeze)… a portent of things to come?
- Would you like a casket with your pizza?… a reader’s cease and desist order… the Knack, Weird Al, Avenged Sevenfold and Jethro Tull… and more!
We’re now a little more than 72 hours away from what might be the most anticipated earnings announcement so far this century. From today’s Financial Times…
But why? More broadly speaking, why is AAPL only $130 billion away from becoming the first company with a $1 trillion market cap?
It’s not because the iPhone X is a breakthrough product that people think they have to have. Nor do Apple products still have an edge over their competitors because of a single-minded focus on Steve Jobs’ old mantra, “It just works.” (Last week, I bricked my less-than-two-year-old iPad Air 2 while installing the latest version of iOS.)
Apple’s earnings announcement — due after the closing bell on Thursday — is noteworthy only because of something that happened five weeks ago.
The president finally signed corporate tax reform into law. It was months later than most of Wall Street had counted on, although for the record we had strong doubts it would ever be enacted at all.
But now it’s law, and Apple can bring home its ginormous overseas cash stash.
“At last count, Apple held more than $252 billion stranded overseas” says our Zach Scheidt. “The company couldn’t bring the cash back into the United States without paying an exorbitant 35% tax on the profits (even though the gains weren’t generated on U.S. soil).
“But thanks to the new tax law, Apple can now bring that cash back to the United States, paying a minimal 15.5% tax rate on the profits and freeing up the cash to use productively.”
Well, after forking over a $38 billion tax bill, that is.
Here’s what we know so far about how Apple plans to put that cash pile to work.
For starters, the company promises to sink $30 billion into capital expenditures — including a new tech-support campus, data centers in seven states and solar/wind power installations to supply all those buildings with electricity. Estimated number of new hires: 20,000.
Apple is also giving every full- and part-time employee — 120,000 of them — a bonus of $2,500 in restricted stock units. The firm also promises to contribute twice the amount of each employee’s charitable donations through year-end, up to $10,000.
“That’s real cash that will be paid to real Americans,” Zach says, “and also real donations that will have an amazing impact on many causes that are near and dear to our hearts here in the U.S.”
And for shareholders? What’s in it for them?
Zach’s been keen on Apple for more than two years — we even spotlighted AAPL in a “Three Free Stock Picks” episode of The 5 at year-end 2015. If you’d acted on that guidance then, you’d be sitting on a 60% capital gain in a little over two years.
One of the things Zach liked then was Apple buying back its shares. Two years ago, AAPL had roughly 5.6 billion shares outstanding. Now it’s 5.2 billion. With billions in corporate cash coming back home, expect that to continue or even accelerate. “When Apple buys these shares,” Zach reminds us, “it makes the remaining shares more valuable to us as investors because we now own a bigger portion of the total number of shares in float.”
Will Apple announce further buybacks on Thursday? Will it boost the dividend? What else will it do with that stupendous pile of cash?
Zach anticipates something completely out of left field. We hinted at it in an email we sent you this morning. It’s so significant that when Zach saw the news about Apple’s plans to repatriate its overseas cash, he decided it was “go” time for a side project he’s had in the works the last seven years.
He’d had his doubts about this project all along… but when Apple made its announcement 12 days ago, those doubts were erased.
We won’t say much more about this project right now… except to say it’s has unearthed profit potential of up to 1,177%… often in as little as a day.
Zach will reveal details of this project Wednesday at 1:00 p.m. EST — in plenty of time before Apple’s conference call. No need to sign up in advance; we’ll remind you again tomorrow and send you an access link on Wednesday.
To the markets, where the big story is rising interest rates.
The yield on a 10-year Treasury note is up to 2.71% this morning, another level last seen nearly four years ago.
It’s still way too early to say the 36-year trend of falling interest rates is over — as we said earlier this month, there’ve been plenty of fake-outs in recent years — but something’s afoot at least for the moment.
The major U.S. stock indexes are in retreat, but not dramatically; the Dow has pulled back to 26,509. After a 200-point run-up Friday, a 100-point pullback is no big deal.
We’re heading into the heart of earnings season, with everyone from McDonald’s to Exxon Mobil to the aforementioned Apple reporting this week.
So far earnings season has been terrific, Alan Knuckman reports from the Chicago options pits: “Not only are more than 70% of S&P stocks beating earnings, but the big surprise is that 80% of companies are besting revenue projections. Better still is that the earnings estimates for the quarter have been revised upward to 13% (from 10%) according to those in the know.”
Stock market impact? “More money means more momentum!”
Elsewhere, gold has pulled back to $1,343 as the dollar index has bounced up to 89.3. Bitcoin sits at $11,288.
Party like it’s 2005? Americans’ personal saving rate is now a paltry 2.4% — the lowest in 13 years — according to Commerce Department figures out this morning.
Meanwhile, personal incomes grew 0.4% in December… and consumer spending grew at the same pace. Put it all together and it’s evident Americans are dipping into whatever savings they have to maintain their standard of living — just as they were as the housing bubble was approaching its zenith.
Imagine how much worse that’ll get if inflation starts taking off in a meaningful way.
Which brings us to the last figure from this Commerce Department report — the “core PCE” measure of inflation. At 1.5%, it’s been climbing slowly for four months now.
Reminder: Core PCE is the Fed’s preferred measure of inflation, and the yardstick it uses when talking about its 2% inflation target. As long as the number keeps moving up, there’s nothing to stop the Fed from raising the benchmark fed funds rate again at its meeting in mid-March. (There’s a Fed meeting this week too, but nothing happens during the meetings that take place at the end or beginning of the month.)
From Alaska, a preview of coming attractions: Medicaid and food stamp use are up big.
In much of the nation, we’re experiencing the boom before the bust. But in Alaska, the next bust is already here: The decline in oil prices starting in mid-2014 drove the Last Frontier State into a recession that some economists figure began two years ago.
Result: Food stamp enrollment as of last September was up 40% year over year. And Medicaid enrollments are likely to rise this year to levels 47% above those of 2015. One-third of the state is now covered by Medicaid, says the Anchorage Daily News. “Total spending on Medicaid in Alaska, including federal cash, has grown to $2.2 billion this year from $1.6 billion three years ago.”
Uncle Sam picks up most of the cost of food stamps… but the Medicaid burden is shared between the feds and the states. For years, Medicaid has been the biggest line-item in most state budgets. The Alaska legislature is now arguing over what to do about a $100 million Medicaid cost overrun — out of a $700 million Medicaid budget.
What happens when the next bust rolls around and the whole country is in Alaska’s fix?
No, we’re not saying the next bust is imminent. But it is inevitable… and we’re already thinking about the impact on your portfolio, just as Agora Financial was warning readers about a housing bust back in 2005, when those savings rates were so pathetic…
“Krause Funeral Home is offering a unique approach to get you to think about death: free pizza.”
According to a story at Milwaukee’s Fox station, the funeral home mailed postcards with an invitation to a seminar about funeral pre-planning. To sweeten the deal, the funeral home’s throwing in a free pizza lunch.
Gimmicky? Sure…but it piqued the interest of Janice and Dale Cassle, who’ve been married for 40 years.
“It’s a creative way of doing it,” Mr. Cassle says.
The couple attended the last pre-planning and pizza event in February where they planned — and paid for — their own funerals, including choosing music, writing obituaries and arranging small receptions.
“We’ll have a little food on the side and I’ll be cremated afterward,” says Mr. Cassle.
Gulp… Wonder if pizza’s on the menu?
Mark Krause, owner of Krause Funeral Home says: “I would venture to say 35% or 40% or maybe even 50% of our families plan ahead of time… You buy your funeral today and we guarantee you will get your service and merchandise without any added expenses in the future.”
He says the funeral home got some traffic for the last pizza party: Over one hundred people attended. It worked for the Cassles, who say “the pizza party concept helped them feel more comfortable talking about death, and hopefully, also sliced their funeral bills.”
“I never liked death,” says Mrs. Cassle. “I was always afraid of it.”
Huh. Maybe a cheesy, carb-loaded pie takes the edge off…
“Excuse my ignorance, but how does investment by foreign companies in U.S. add to the trade deficit?” a reader inquires after some remarks by the president gave us cognitive dissonance on Friday.
“Do foreign subsidiaries building cars here with American labor not contribute to GDP or do they count as imports? That would be ominous, as these companies are also paying taxes here, are they not?”
The 5: Strange but true. As Tim Worstall wrote last year at Forbes, “We all think it’s just a great idea when foreigners send their hard-earned capital to be invested in the United States. This increases the capital stock in America. Things get built, factories opened, Americans get employed making and doing things. It makes the country richer and we all like that.
“Sadly, because the balance of payments does balance, always and everywhere, foreigners sending their capital in must also, and does, mean America runs a trade deficit.”
“Dear Dave, your 5 Min. Forecast would be decidedly improved by discontinuing your gratuitous snide comments on everything Trump and his administration,” writes a reader — offended that we experienced cognitive dissonance at the president’s remarks Friday.
“By the reckoning of everyone but the most ardent leftist, our current president has done a pretty good job on every aspect of governance of this country, and particularly a good sight better than the immediately preceding occupant of the White House.”
The 5: God forbid that in the course of surveying the markets and the economy we occasionally subject Trump to the same scrutiny and scorn that we do other politicians.
For the record, however, we’ve mentioned for several months how small-business owners are welcoming a slowdown in the pace of new regulations compared with Obamatime. And the tax deal almost surely will give the post-2008 “recovery,” such as it is, another year or two of juice than would be the case otherwise. It will not, however, generate enough growth and thus tax revenue to shrink the deficit.
Trump had a golden opportunity to clean house at the Federal Reserve with the authority to appoint five out of seven governors. Instead, we’re getting more of the same.
On the subject of a musical jape we made last week, a reader writes…
“Before this controversy fades out of view, I feel it is my duty to point out that had there never been a ‘My Sharona’ there would never have been a ‘My Bologna,’ the song that propelled ‘Weird Al’ Yankovic to fame and fortune. And personally, I would not want to live in a world that didn’t have a ‘Weird Al’ Yankovic.
“Love you guys as always.”
“Thanks for the Tull reference, Dave!” writes our final correspondent. “Have tickets already for the June concert out here in Southern California.
“Love The 5!”
The 5: We saw a headline this morning about how Avenged Sevenfold bagged out on the Grammy ceremony last night because the “Best Rock Song” category, for which the band was nominated, was excluded from the televised festivities. “How marginalized has rock become when ‘Rock Song’ of the year can’t get two minutes?” said frontman M. Shadows.
But really, the Grammy people never have gotten rock figured out. Remember the time nearly 30 years ago that the first Grammy ever awarded for “Hard Rock/Metal Performance Vocal or Instrumental” went to… Jethro Tull? Over Metallica?
Tull’s record label placed the following ad in Billboard…
The 5 Min. Forecast
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