Apple Invests $250 Billion In America

Extreme Bullishness

Stocks hit a record high on Wednesday as the S&P 500 was up 0.94% and the VIX recoiled from its gains on Tuesday falling to 11.54. There hasn’t been much of an effect from the crash in cryptocurrencies as I expected. If stocks continue on this unprecedented streak, I could see the Fed doing a shock rate hike to prick the bubble before it gets too large. This type of policy action won’t happen in the next two months because we’re in a transition period between Yellen and Powell. He needs to be confirmed by the Senate before anything like that happens. The charts below show the euphoria in the market. As you can see, the 4 week moving average in the two most prominent investor surveys shows that investors were only more bullish in 2003 and that this is the 3rd lowest percentage of bears. Stock speculators laughing at those losing money in cryptos should worry about how the frothiness in stocks will end.

AAPL To Invest Its Cash Hoard In America

Because Apple already borrows against its overseas cash position at low interest rates, some investors thought it would keep the capital overseas. However, Apple announced on Wednesday that it would repatriate almost all its $250 billion cash hoard. It will pay $38 billion in taxes because of this repatriation. The company said this would be a $350 billion contribution to the economy. The company plans to hire 20,000 more workers and open a new campus. It will spend over $30 billion capex over the next year. $10 billion of that capex will be investments in U.S. data centers. The firm also increased the size of its innovation fund to $5 billion from $1 billion. Finally, the company will keep up the $55 billion in 2018 super cycle spending with domestic suppliers and manufacturers. This announcement helped lift Apple stock up 1.65% to a record high. This news boosted sentiment in the overall market as if it needed anything else to be optimistic about.

Goldman Sachs And Bank Of America Report Earnings

The two big earnings reports on Wednesday were from Goldman Sachs and Bank of America as the financials are usually the first to report earnings. Goldman took a lost of $5.51 in EPS because of the $4.4 billion tax hit which was a one time charge. Ignoring that charge, the adjusted earnings were $5.68 per share which beat estimates for $4.91. Revenues were $7.83 billion which beat estimates for $7.61 billion. Even with beats on the bottom line and the top line, the stock fell 1.86% on Wednesday because of hair. Hair is a Wall Street term for problems within the report. The fixed income, commodities, and currencies trading business fell 50% from last year. This caused overall trading revenue to fall 34%. Equities revenues fell 14%. Investors are worried the company lost market share because these results were worse than its competitors. That being said, the lack of volatility in Q4 hurt trading revenues.

Just like most of the other financials, Bank of America took a $2.9 billion cash charge in Q4 because of the new tax law. Its adjusted earnings were 47 cents which beat estimates by 3 cents. Revenues were $21.4 billion which missed estimates for $21.531 billion. The company said it took market share across its businesses which probably included share gains at the expense of Goldman. Net interest income increased 11% to $11.5 billion. This improvement was catalyzed by loan growth, deposit growth, and higher interest rates.

You would think higher interest rates would make people save more money, but there’s actually evidence that low interest rates encouraged people to save more money to make up for the loss in income. Either way Bank of America will be helped by the Fed raising rates 75 basis points this year as the difference between lending rates and deposit rates grows. Despite this good quarter, the stock fell 0.19%. This decline is a trend I’ve been noticing after reports. It’s not surprising to see some pull backs because the overall financial sector is extremely overheated. The XLF financials ETF is up 12.1% since November 27th. It’s up 5.23% year to date which is a slight out-performance over the S&P 500.

Party Now, Pay Later

It’s clear stocks will have a great 2018 because of the tax cut and the fact that monetary policy is still accommodative. However, the long term future looks gruesome. Firstly, the Fed will be very hawkish in 2 years if it continues with this balance sheet unwind. The shadow rate will be over 4% by 2020 which is 2% more than the goal for inflation. Usually around that point the economy starts to weaken. I see the financial conditions index showing stress in 2019 because of this change.

I often discuss how these tax cuts might not be permanent because the Democrats can win an election and change the law. Besides changes in the political climate, the budget math doesn’t support continued low tax rates for corporations combined with high government spending. You can have one, but not both. As you can see from the chart below, the fiscal deficits adjusted for tax reforms cause the deficit as a percent of GDP to increase to the levels seen at the depths of the financial crisis even without a recession. The next recession will blow a hole in the debt making a potential fiscal stimulus less practical.

Conclusion

We’re at an extreme bullish phase of what should be near the end of this bull market. The tax cuts, stimulative monetary policy, and global growth story are leading stocks higher. This story will change in the next 2 years, but for now, the only way to go is up. The financials have started the earnings season off with a bang. The big tech names report earnings in two weeks. Netflix will be the first of the FAANG names to report earnings as its results come out on Monday.

Spread the love

Comments are closed.