Apple is gaming Fed policy to counteract its stagnating stock price

11 years ago

“Since the ominous 666 S&P 500 March 2009 stock market bottom, the financial world has operated with unprecedented Federal Reserve accommodation,” Justin Pulitzer writes for Real Money.

“In response to the Great Recession and a nuclear winter in global credit, the Fed took on a herculean effort to restore order to chaos and save the economy. Fed Chairman Ben Bernanke embarked on a zero interest rate policy (ZIRP) by vastly expanding the Fed’s open market operations, branded quantitative easing (QE). This means the Fed purchases government or other securities directly in the open market to increase money supply with the end goal of lowering interest rates,” Pulitzer writes. “That, in effect, floods financial institutions with capital/liquidity to encourage them to take advantage of their ability to borrow short-term money at lower interest rates and lend it out at higher interest rates, thawing the sudden and steep credit contraction.”

As expected, QE had many effects, but not necessarily the intended one of healing the economy. It forced savers and the risk averse to transfer money from sub-inflation-pace-yielding safe havens like money markets and CDs into the stock market for a shot at positive returns. It’s also facilitated large corporations like Apple to change capital structures with borrowing costs below that of the government,” Pulitzer writes. “The Fed’s hope has been for companies like Apple to use their cheap money policy to lower the hurdle rate on growth projects to invest in property, plants, equipment and labor. While this has happened with billion-dollar investments in Nevada for iCloud Server Farms and a new UFO-shaped campus in Cupertino, Calif., the larger part of those funds has gone to combat the effects of slowing global growth on Apple’s share price. This has been accomplished by paying dividends and through huge share buybacks.”

Read more in the full article here.

MacDailyNews Take: The other reason is that it’s currently much cheaper to issue debt than to repatriate hundreds of billions of dollars subject to the current confiscatory U.S. corporate tax rate.

Under the current U.S. corporate tax system, it would be very expensive to repatriate that cash. Unfortunately, the tax code has not kept up with the digital age. The tax system handicaps American corporations in relation to our foreign competitors who don’t have such constraints on the free flow of capital… Apple has always believed in the simple, not the complex. You can see it in our products and the way we conduct ourselves. It is in this spirit that we recommend a dramatic simplification of the corporate tax code. This reform should be revenue neutral, eliminate all corporate tax expenditures, lower corporate income tax rates and implement a reasonable tax on foreign earnings that allows the free flow of capital back to the U.S. We make this recommendation with our eyes wide open, realizing this would likely increase Apple’s U.S. taxes. But we strongly believe such comprehensive reform would be fair to all taxpayers, would keep America globally competitive and would promote U.S. economic growth. – Apple CEO Tim Cook, May 21, 2013