$600 Billion In Trades In Four Years: How Apple Puts Even The Most Aggressive Hedge Funds To Shame

Tyler Durden's picture

Everyone knows that for the better part of the past year Apple, Inc. ("AAPL", or "The Company") was the world's biggest company by market cap, with Exxon finally regaining that title on Friday, following AAPL's latest price drop in the aftermath of its disappointing earnings. Most know that AAPL aggressively uses all legal tax loopholes to pay as little State and Federal tax as possible, despite being one of the world's most profitable companies.

Many also know, courtesy of our exclusive from September, that Apple also is the holding company for Braeburn Capital: a firm which with a few exceptions (Bridgewater; JPM's CIO prop trading desk) also happens to be one of the world's largest hedge funds, whose function is to manage Apple's massive cash hoard, with virtually zero requirements, and whose obligation is to make sure that AAPL's cash gets laundered legally and efficiently in a way that complies with prerogative #1: avoid paying taxes.

What few if any know, is that as part of its cash management obligations, Braeburn, and AAPL by extension, has conducted a mindboggling $600 billion worth of gross notional trades in just the past four years, consisting of buying and selling assorted unknown securities, or some $250 billion in 2012 alone: a grand total which represents some $1 billion per working day on average, and which puts the net turnover of some 99% of all hedge funds to shame!

Finally, what nobody knows, except for the recipients of course, is just how much in trade commissions AAPL has paid over the past four years on these hundreds of billions in trades to the brokering banks, many (or maybe all) of which may have found this commission revenue facilitating AAPL having a "Buy" recommendation: a rating shared by 52, or 83% of the raters, despite the company's wiping out of one year in capital gains in a few short months.

The Perfectly Legal Tax Evasion Scheme

Apple's massive cash hoard is something that gets its 15 minutes of fame each and every quarter, because for now at least, it keeps growing and growing and growing. However, that is not exactly correct. In fact, the company's cash and cash equivalents at December 31, 2012 is just $16.2 billion: barely $9 billion more than it was 4 years ago, on December 31, 2008. Where the bulk of AAPL's profits are kept, however, is not in cash and equivalents, but in various undisclosed short- and long-term securities.

It is these, and particularly the latter, that have soared in a near parabolic fashion in the past 4 years. As the chart below shows, while cash and short-term marketable securities have been virtually flat for the better part of the past 16 quarters, it is the long-term marketable securities that have exploded from just $2.5 billion to a whopping $97.3 billion.

So why does AAPL funnel its profits in a fashion that redirects it to investments instead of domestically hoarded cash? Simple: to take advantage of offshore venues which allow it to avoid paying any tax on the cash that gets redirected for trading purposes. As per the company's filings, of the massive $137.1 billion in cash and investments AAPL has access to, a near record 68.7%, or $94.2 billion, is held offshore.

The chart above means that contrary to popular disinformation, AAPL "only" has ready access to some $43 billion in domestically held cash for corporate purposes such as dividends, stock buybacks and local M&A. The rest of the cash is essentially in offshore lockboxes, which are non-recourse for domestic corporate purposes, absent repatriation. And herein lies the rub. From the latst 10-Q:

As of December 29, 2012 and September 29, 2012, $94.2 billion and $82.6 billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.

Apply a 30% tax to the offshore holdings and suddenly one can see why broad statements that AAPL has some $130/share in cash are largely meaningless: if AAPL wishes to have full access to dispose with this cash as it saw fit, it would first have to pay Uncle Sam some $30/share in cash before it had full recourse.

So why does AAPL chose to have cash stock up offshore instead of being able to dispose of it? Simple, and logical. Taxes, or rather the lack thereof.

The chart below shows that while AAPL has generated some $136 billion in operating profits in the past four years, the amount of cash taxes it has paid, as per the company's cash flow statements, has been a grand total of $18.6 billion: a 13.6% effective tax rate. And this $18.6 billion also includes taxes paid in offshore venues, so realistically the cash taxes paid in the US are likely well under 10% of profits.

The same on a quarter by quarter basis: operating income grows, cash taxes paid stay the same:

But far form us making an ethical claim here: AAPL is merely following the same legal loopholes that are available to all, yet made a mockery of the tax shelters used by recent presidential candidates. Perhaps one should ask Congress why these laws are there in the first place to allow the same companies that spend millions on lobbying members of Congress to retain billions in unpaid taxes via various tax shelters: a rather amazing IRR, if only for the corporations involved.

None of the above is news, and AAPL's aggressive use of tax loopholes has been known for years.

What has not been known is just how the cash from the company's seemingly endless profits gets moved from the Income Statement to the Balance Sheet: profits, which until recently were assumed would grow in perpetuity, until something strange happened: Samsung became cooler and faddier than AAPL, which coupled with accelerated margin erosion at AAPL grappling with an end-consumer who has increasingly less disposable cash flow, has led to a drubbing of the stock to new 52 week lows.

A Hedge Fund On Stroids

The conventional wisdom of Apple, and by implication of Braeburn, is of a boring old shop which invests its money prudently and cautiously in ultra-safe securities.

This is what AAPL itself has to say about its allocation of capital. From the just released 10-Q:

The Company’s marketable securities investment portfolio is invested primarily in highly-rated securities and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade with the objective of minimizing the potential risk of principal loss.

Good but... "primarily" and "generally"? One doesn't have to be an MF Global and JPM London Whale fallout expert to know that Jon Corzine's or Jamie Dimon's (or any other prop trading institution for that matter), was "primarily and "generally" supposed to be invested in highly-rated securities whose objective was avoiding risk and loss. Until it was uncovered they aren't. And as we explained previously, when we dissected AAPL's arm's length asset manager Braeburn, there is little more out there:

Braeburn has no reporting obligations: there is no Investment Advisor Public Disclosure (IAPD) entry on Braeburn for the logical reason that it is not an investment advisor: it merely manages an ungodly amount of cash for AAPL's millions of shareholders. There is also no SEC filing 13-F filing on Braeburn's holdings. As such, not confined by the limitations of being a "long-only", it is in its full right to hold any assets it feels like, up to and including CDS on housing, puts on Samsung, or Constant Maturity Swaps that pay if the 10 Year collapses. It just doesn't have to report any of them.

Nobody knows: and that's the beauty of Braeburn. It is the world's largest hedge fund that is not really a hedge fund, nobody has heard of, and nobody knows just what assets it holds.

Indeed nobody does know just what goes on behind the door of Suite 225 at 730 Sandhill Road in Reno, Nevada where Braeburn in situated. However, one can extrapolate some rather curious things.

Such as that starting December 2008, and through December 2012, according to its own filings, AAPL has bought and sold a grand total of $600 billion in "marketable securities", of which the sales alone amount to a whopping 205 billion!

What is not shown above is that over the same period, maturities on AAPL's ever-growing portfolio amount to some $82 billion. In other words, between maturities and sales, AAPL has generated nearly $300 billion in cash for investment and reinvestment purposes.

Shortening the time frame somewhat, just in 2012 AAPL's gross trading on its securities holdings amounts to a whopping $250 billion, or nearly $1 billion for every working day of the year: an amount that would put the turnover of some 99% of the most active daytrading hedge funds in the US to shame!

What is very curious is that even as AAPL's overall portfolio rose and rose, with purchases "primarily" of supposedly safe investment grade securities, an amount which has peaked at $121 billion as of December 31, 2012, the actual quarterly maturity of AAPL's portfolio, or the natural roll off, has decline to a near record low, or just 2.9% of total. How it is possible that the quarterly maturing notional continues to decline even as the portfolio, of both short- and long-term securities grows, is frankly, beyond our meager comprehension skills.

What is even more curious is that AAPL can't even make the excuse that it is merely churning its short-term marketable securitie. As the chart below shows, beginning in March 2011, the total amount of sales and maturities exceeds the quarterly total holdings of short-term securities, which naturally implies that a substantial portion of the long-term securities is also being sold.

So why would AAPL engage in what increasingly appears to be not only active portfolio management, but extremely aggressive and overzealous portfolio management, one which includes massive trades - buys but more importlanly sales - on a day to day basis?

Said otherwise: why is the world's premier maker of gizmos also one of the biggest under-the-radar day traders of unknown securities nobody has ever heard of?

* * *

We don't know the answer to these questions. We do know however, that if one is indeed engaged in plain vanilla money management, such as investing in ultra safe investments, there would be no need of such aggressive purchases and dispositions of securities.

In fact, adding the simple average of the short- and long-term marketable securities holdings of AAPL over the past 4 years amounts to some $59 billion. Yet, as noted above, the total amount of gross trades -buys and sales - over the same period is $600 billion, or a total portfolio turnover of some ten mindboggling times!

This is hardly what one would call boring investing in safe securities, and certainly something one would call aggressive to quite aggressive money management, one that not even some of the world's most successful hedge fund managers are equipped or willing to do.

Yet Braeburn Capital, a/k/a AAPL, has been doing it for the past 4 years, and does so to the tune of $1 billion per day.

* * *

Finally, there is the minor question of who exactly is it that executes these trades, or, in other words, which are the banks that have pocketed billions in commissions on AAPL's furiously traded portfolio?

We don't know, but we wonder: could it be the same banks that come rain or shine, gave AAPL a Buy rating, one which is still held by some 52 of the 63 banks covering the company, among which naturally are the most prominent brokers of "investment grade" securities:

Perhaps it would be very informative one day, years after the AAPL craze is long gone, to inquire just how much money AAPL paid out to any/all of the banks listed above in the form of trade commissions and other forms of "soft dollar" compensation. After all, any client which has conducted some $600 billion in trades in the past 16 quarters is known by one word at every single bank: "dream."

And parallel to that, one wonders what AAPL's total profits would have been and thus total marketable securities holdings, how much less the total trading churn and commissions to the sell side would have been had the downgrade battery started long ago, and thus broken the hypnotic and very much reflexive relationship between the world's most profitable company and its "coolness" factor, which in a feedback loop made it sell more products, making its market cap bigger, making its securities holdings larger, and making sellside profits greater, and so on ad inf... until one day it all snapped.

* * *
The point of the above analysis is not to take away from the operational side of the business: the fact that AAPL created and dominated the smartphone and tablet sector for years is undisputable. Yet now that many challengers are emerging, both new and old, both premium and commoditized, more and more attention is shifting to AAPL's balance sheet, and the main asset thereon: the company's cash and marketable securities.

The point of the above analysis is to show that when it comes to said cash and marketable securities there is much more than meet the superficial eye, and certainly much, much more than just a summary assessment that "AAPL has nearly $140 billion in cash so it has to hand this cash out to investors."

If there is one thing that the above should have made quite clear, it is that just as the AAPL product ecosystem is supposed to ensnare customers into always and only buying AAPL products, so the AAPL's portfolio management "ecosystem" may have made it impossible for AAPL to break away from what is now 4 years of uber-aggressive asset management in the vein of some of the world's most aggressive investors.

And that any hopes for a quick and easy disposal of cash to the benefit of shareholders may well not be coming any time soon.

* * *

Finally, a tangent: if indeed AAPL is invested in plain vanilla fixed income securities, as it reports, amounting to well over $120 billion which have a DV01 in the tens if not hundreds of millions, and if indeed, the great rotation from bonds into stocks has begun, AAPL, which many have jokingly called Fed-lite will suddenly develop a very, very big headache: how to dump over a hundred billion in debt in a market that suddenly has gone if not bidless, the bidweak.

Because while the Fed can print its own liquidity, AAPL, well, can't...

Source: AAPL public filings

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Aziz's picture

All that cash may not be a cushion. If invested wrongly — as this post strongly suggests — AAPL's cash may turn out to be an incendiary device. A 2008-style derivatives detonation may turn AAPL into the next AIG.

Honest_Money's picture

Take the cash and buy real, physical gold and silver bullion.  Problem solved.

Boris Alatovkrap's picture

When Boris is lots to cash, like indulgence for high tech gadgets. Boris is really really want iPhone. Maybe Apple is to buy iPhones with extra cash!?

Zer0head's picture

good thing Apple isn't evil... sorry that's google..ah but WTF they're both Asspirational companies

Muppet Pimp's picture

It is also at minimum interesting that the Apple logo (Apple with a bite out of it) symbolizes the original sin

and that the colors of the Apple symbol became known as the gay flag (it was just Apple prior to that recognition)

and that Steve Jobs had no problem with using slave labor to produce his products (while wholly unnecessary, certainly confirms Steve's contempt for Americans) even in times of great distress for his own country,

and that other loosely related communist entities such as the NY times sought to declare the founders of our country such as Thomas Jefferson evil (http://www.nytimes.com/2012/12/01/opinion/the-real-thomas-jefferson.html...) while they lived in such times where slavery could more or less be seen as a normal way of life (TJ did not invent it, and tried to end it, but lost out to the NY lobby).

the very same entities (NYT) would celebrate such modern day slavers (while wholly unnecessary, they simply used slaves to make massive profit margins) as shown here:


But don't you worry, the New York times with their crack economist staff will quickly correct any misperceptions regarding what is right an wrong.  What is right is obviously that they shall spend as much as they can fathom and jerk offs like Paul Krugman shall assure them that it is never enough, and how dare you ever question these elites.  They have a bunch of indoctrinated imbeciles at their disposal that will refute any calls for restraint as their shall be no restraint for .gov is our saviour and can in fact do no wrong. 

And this shall be the reason all southern folks shall draw arms and prepare to fight off these evil tyrants for we know better than to believe in their lies.

Stay up north Krugman for yoiur own good.  If we find out you make it down here, we willl teach you what the South is all about you worthless POS.

economics9698's picture

A bit of advice, wait until the fiat dies, a few years at best, then raise arms. The moral of the army declines rapidly when they have no food or money.

Freddie's picture

Drudge has a link to the NYT pimping the stock market for ma and pa investor.  Now is the time to jump in rubes.  It is the most disgusting Operation Mockingbird propaganda.  The responses are even worse.  "The stock market is the best-est-est thing in the whole wide world - ever."  Sick.   

Dr Benway's picture

Vanilla Ice: "If you can buy a house cheaper than you can build it, it's great. Look at the stock market. It's all going up ... No better time to get in than right now."



In Australia the situation is even worse. The largest newspaper, Sydney Morning Herald, now has its property and business sections "sponsored" by major real estate and banking players. It has become, without using exaggeration, the marketing arm of the banksters.


Comay Mierda's picture

exactly.  Braeborn is prob the biggest AAPL option dealer and has the cash to manipulate the stock any way it wants to profit off its options

ss123's picture

I've taken Vanilla's investing advICE, vICE, baby... and made millions!

TWSceptic's picture

I hear the same arguments from braindead christians and commies.

economics9698's picture

Impressive breakdown of the company.  Pretty slick imo.

pemdas's picture

If a hedge fund buying one week or one month T-bills your yearly turn over is going to be huge.  So what's the big deal here?

SafelyGraze's picture

"Maybe Apple is to buy iPhones with extra cash"

is one of mystery for two column of balance sheet regard to principle of accounting whether iphone is asset or is liability of apple company

spoilage: replacing iphone with dollar and apple with federated reserve

Freddie's picture

Maybe Apple is channel stuffing by buying their crap in China and shredding it or dumping it in the Pacific.  The probably day trade and make $50 million a day extra to buy up their iCrap.  I really hate them even more after Tyler's excellent article.  F Apple! 

I felt a little sorry for Jobs until I read this and all the FoxConn misery and other dishonest crap Apple pulls.  They are as slimy as GE, IBM and Halliburton.

IllusionOfChoice's picture

If the turnover on their holding has dropped off, doesn't that imply they could have move into longer term strategies like precious metals?

rotagen's picture

People are really really dumb.  Find out what dumb people are doing and do it when they start doing it.  Stock market success !

francis_sawyer's picture

Has Blythe been informed of this?

unrulian's picture

they're probably shorting silver....how much is in an i-pad/phone/mini/fad/apple?

rguptatx's picture

"The chart above means that contrary to popular disinformation, AAPL "only" has ready access to some $43 billion in domestically held cash for corporate purposes such as dividends, stock buybacks and local M&A. The rest of the cash is essentially in offshore lockboxes, which are non-recourse for domestic corporate purposes, absent repatriation. And herein lies the rub. From the latst 10-Q:"

Are you kiddding me? Show me another company that has access to "only $43B in doestically haeld cash", pluse a lot ore held in overseas (Bermuda / Bahamas / ???) - ftf (fuck-the-fed)

Freddie's picture

Lockboxes?  LOL!  Al Gore, who is on Apples board or was, wanted to "lockbox" Social Security.    Apple is so dirty.  Money offshore, HFT trader, slave labor yet it is loved by lefty hipsters and tards.   Apple are also tax dodgers like Warren Buffet and Bono/U2.

They type out social justice and equality bullshit on their iMacs and iPads. What hypocrites!

pies_lancuchowy's picture

either 'social justice' is the same as 'justice' , or it is not.

If it is the same, then why use the word 'social'? Waste of space. Let's just write 'justice'.

And if it is NOT exactly the same - then , something that is NOT justice, is called INJUSTICE.

fonzannoon's picture

i thought we all moved on to netflix?

knukles's picture

Well we know the SEC is way the fuck past that, now, don't we?

Where ya' goin', Fred?
Men's room.
Ah, tablet, tranny and tissue time, eh?

Freddie's picture

Al Gore's on Apple's board - they are pure as the driven snow.  What a corrupt f***ing company Apple is.  I don't listen to Limbaugh the few times on listen to anything in the car. He pimps Apples crap all the time and the scum in the NFL.  Apple probably HFT it's own stock.

Apple is a real lefty outfit as well. They appear to be frontrunning everyone. 

knukles's picture

Al Gore and snow?

NoDebt's picture

Yeah, does make you wonder how much of their own stock their in-house HFT trading desk traded in (long, or perhaps short, as the case may be recently).  If you ask them the answer would be "none", obviously.

Midas's picture

Is it possible for Braeburn to buy Apple stock on the side?  Or, ahem, short it?

jballz's picture

A proper hedge fund would be short apple out the ass. And yes they can, it is called executive hedging. It is done all the time and legal.

But I doubt they bothered, probably flipping penny stocks for their brothers in laws dog.

Freddie's picture

Apple - the Stevie Cohen of the computer world.

fonzannoon's picture

Schiff: "I don't know why we give Lance Armstrong such a hard time. We have the lance Armstrong economy. We ought to put his image on our money."

jballz's picture

Churn and burn baby.

I bet it is like this. Jobs set the thing up, too busy tinkering with gadgets to care much about the cash hoarded. Managers won the powerball of all time, trade that shit up. Commissions all around, party like its y2k.

I bet their fiduciary oversight is fucking zero. No cloak and dagger here just good old boys and the mother lode of dumb money. Apple shareholders.

Scandal coming... Guaranteed. Ponzi in there somewhere.

knukles's picture

They'd be held to what ever level of conduct management desires.
Probably mere reasonable efforts.  Which in today's world means whatever pleases the boss, period.

fonzannoon's picture

there is an article in the NYTimes about the fed debating whether to slow asset purchases. the comments section is really interesting for a Lib paper. People are really catching on.

fonzannoon's picture

yeah good find. i'm on mobile and can't link for some reason. the afticle is a throwaway. the comments are really interesting. i feel a lot more comfortable ranting on ZH now if people are ranting like that on the NYT. Not a lot of faith in the monetary system on there.

holdbuysell's picture

Agreed. For anyone not in total denial, it really is becoming that obvious.

Seasmoke's picture

Sounds like selling MBS and then going out and shorting against

Tijuana Donkey Show's picture

It's OK, they are short AAPL, so it's all good. 

AldoHux_IV's picture

Foreign long-term securities... like Foxconn bonds or some other slave labor producing company overseas-- nice to see how US companies finance "economies of scales"-- the fraud is becoming that much clearer. Or I could be wrong and they use it for something else... what would I be doing with it if I was AAPL? hmmm....

buckethead's picture

Churn and burn + pump and dump + Squid pro quo... another day at the office.

ss123's picture

Maybe AAPL's been buying themselves the last four years, over and over and over again.

Mr Lennon Hendrix's picture

Liberals love apple and nafta, two things that destroyed America. Way to go blue team.

Freddie's picture

They have this moral righteousness especially when using their beloved Apple technology which makes they morally & technologically superior to the rest.   Amazon is another lefty company that sell counterfit goods.  Conservatives like shitty Wal Mart which is now an O sell out.

Apple is really slimy like GE.  Apple are tax dodgers using slave labor while front running and pumping their stock.  Apple shit is also incredibly overpriced.  i bet a lot of their crap is bought with EBT cards and college loans.

Haysus Christo - this world and America today make Alice in Wonderland look very normal.

Parrotile's picture

It's FASHION, sunbeam!

Combined with a very hefty dose of Product Placement (or have you not noticed that every laptop on every new movie release somehow seems to have the glowing Apple icon??)

"Everyone" builds IBM / IBM PC Laptop clones which work very well, are reasonably priced (for the performance), and inexpensive to repair and / or upgrade "within limits" So there's no cachet owning and using a PC clone is there, even if it is from a very reputable manufacturer (Acer / HP etc.)

With Apple, however, to paraphrase the Jeep ad - "There's only ONE Apple", and there's the rub. The fashionistas MUST have Apple, and like any fad, the Manufacturers can (and do) milk this herd behaviour for every cent.

I see this mentality at work every day. MUST have the latest iPhone.

It's their money - let them waste it. They'll learn the hard way soon enough.

Sellmoney's picture

every broker readig this got a lil wood... 


AldoHux_IV's picture

Accounting/legalize is the language of fraud and shadiness only to be supported by our great laws and lawmakers.