Apple Just Turned A Net Seller Of Securities: Here Are The Profound Implications

Last week, we showed what may soon be perceived as the most dramatic consequence of the Trump tax reform on the bond (and stock) market: corporate bond issuance for cash-rich companies, those that until recently held hundreds of billions in cash in offshore accounts, had frozen with not a single bond issued so far in 2018.

The reason was simple: whereas previously cash-rich companies which held most of their "cash and marketable securities" offshore (technically this definition was meaningless, as said securities were mostly in the form of bonds), and inaccessible due to the high repatriation tax, they were forced to issue domestic bonds to fund buybacks, dividends SG&A and/or domestic capex, following passage of Trump tax reform, they would be allowed to repatriate this offshore cash domestically (paying a modest one-time charge), and no longer be reliant on the bond market.

In other words, these cash-rich companies would finally start spending their "cash" (mostly on buybacks, less on CapEx) which really wasn't "cash" at all, but cash equivalents such as Treasurys, corporate bonds and in some cases equities: effectively launching a form of Quantitative Tightening.

Here Goldman provided some context: of the companies with large overseas cash holdings, the top eight held $750 billion by year-end 2017. "Exhibit 2 details the size and breakdown (by major investment type) of these companies’ investment portfolios. With a total of $328 billion invested in short-dated IG corporate bonds, cash-rich companies own roughly 13% of the total $2.6 trillion universe of index-eligible investment grade bonds with maturities shorter than 5 years. "

The implication of this historic reversal in bond market dynamic were dramatic, because while the Fed may be withdrawing only modest amounts of liquidity from the capital market so far, Trump's tax reform has had a far more pronounced impact on overall market liquidity, by way of the private sector, where net debt destruction - is now the order of the day, as companies no longer issue debt to fund buybacks, but instead sell existing debt securities to fund operations and/or shareholder friendly activities.

Incidentally, this reversal also has a profound impact on funding markets, and also explains why the Libor-OIS spread has so far failed to tighten nearly 1 month after the end of the massive T-Bill supply onslaught which so many said was the catalyst for the blowout in L-OIS, and suggests that unless something materially changes in terms of corporate liquidity preferences, financial conditions will remain especially tight.

* * *

We bring up the above because yesterday we got the most vivid example of this theory taking place in the real world, courtesy of Apple, which as we noted previously just reported the first drop in its record cash holdings in three years:

Only, of course, it wasn't "cash", but rather cash equivalents, i.e., corporate bonds and other marketable securities.

And, as Bank of America points out this morning, for the first time in years, Apple has turned into a net seller. Here is the take of BofA's Hans Mikkelsen:

Apple’s earnings release today and investor call after the close highlighted that anything is possible regarding capital plans. They did announce a new $100bn buyback program (in addition to $10bn remaining under the old one), which was more than the $75bn our equity analysts expected. While the company plans to execute the program efficiently and at a fast pace no time frame was given. We note that Apple reported having repurchased $23.5bn in shares in the March quarter.

Between debt maturities, tax payments to Ireland, buybacks, a 16% increase in dividends, possible M&A, etc. is difficult to estimate how long it will take Apple to consume its net cash position.

And the punchline:

In terms of impact on the short maturity fixed income market we note that Apple in the March quarter turned net sellers (purchases-sales- maturities) of marketable securities for the first time in at least three years (for as long as we could quickly find data) to the tune of $22bn. 

What does this mean? Well, as BofA explains, in previous quarters, the company was a net buyer of $32bn/quarter on average.

Hence, Apple’s impact on the fixed  income market already is a decline in support of $52bn/quarter, which is money that needs to be found elsewhere. Gilead added to the number of companies with meaningful declines in cash despite no guidance.

And, as the following table shows, expect a tide of "cash-heavy" companies to deep freeze their bond sales for years, certainly until such time as their cash levels - used largely to fund stock buybacks - drop low enough and need to be replenished.

Until then, however, what will happen is effectively the equivalent of Quantitative Tightening, if for the private sector, where net debt creation will hit a brick wall, and even go into reverse once already issued debt matures, in the process soaking up trillions in hundreds of billions from the overall market. For those still curious why stocks are unable to rise despite the best earnings quarter in 7 years, the very real tightening in the bond market that has resulted as a result of Trump's tax reform, may be the explanation.

Comments

vofreason Cosmicserpent Wed, 05/02/2018 - 13:27 Permalink

Yes!  This was the stuff I came here for originally,....not the nazi, prepper speak it has unbelievably turned into.  

 

This is great reporting though, I think it will be just this kind of unintended consequences that cause a disruption in the system that no one will see coming.  It's the kind of thing where we all see the headline "companies bring back overseas cash" and think it's a great bull sign but then the effect is the exact opposite because of some reason like this that shoots rates up for a reason no one anticipated or could control.

In reply to by Cosmicserpent

buzzsaw99 Wed, 05/02/2018 - 11:33 Permalink

yeah except it doesn't work like that because those dividends and stock buybacks will be almost immediately reinvested by the recipients.  it may have a bigger impact on foreign markets.

Pool Shark buzzsaw99 Wed, 05/02/2018 - 11:55 Permalink

Exactly.

This article also proves that the old "Cashed Trapped Overseas" meme was always just a myth.

Any company with overseas cash that wanted to spend it domestically simply issued bonds using the overseas cash as collateral; effectively bringing the cash 'home' and spending it here.

Now we will see the effects of the retiring of all those debt securities... 

In reply to by buzzsaw99

pitz Pool Shark Wed, 05/02/2018 - 12:30 Permalink

Or they could just have the "cash-rich" offshore subsidiary do the investing in the US.  Sure, the investments in the US would be titled with the "offshore" subsidiary, but the profits would still be available to shareholders.

Of course 'repatriation' is a complete lie, see my comments below.  The whole thing is a shell game with the government/IRS, and even the voting public misled by the meme.

Trump should've implemented punitive taxes on the "offshore cash" hoarders/tax-scammers, rather than rewarding them with lower rates.  Look at the biggest culprits, they're no friends to the base that supported Trump.  They're some of the most prolifically offshoring, outsourcing, and H-1B abusing companies known to America.

In reply to by Pool Shark

Cosmicserpent JLarryL Wed, 05/02/2018 - 12:27 Permalink

Exactly. Sell $400 billion in overseas bonds (driving up interest rates), buyback shares but the resultant increase in interest rates drives the economy into recession. The stock market crashes 30% (a real crash not the asinine ZH down 1%).

This wipes out the $400 billion in stock buy backs.  Essentially that money invested in overseas bonds as "cash" has now disappeared.  Now zombie companies can't borrow money, i.e; issue bonds to prop up their shares leading to layoffs, bankruptcies and a further decline of the stock market and rise in interest rates.  Eventually the Fed steps in and has to engage in quantitative easing, but not before cleaning house and destroying useless, imprudent, profligate, corrupt companies.

In reply to by JLarryL

Cash Is King buzzsaw99 Wed, 05/02/2018 - 12:37 Permalink

Buzz, you’re right about the increased div but the stock buybacks are not something that can be reinvested. They buy stock from the street, you enjoy the price appreciation (as do they with huge option grants) or, if you sell to them you wouldn’t turn around and reinvest it back into the same security. If they were more concerned about shareholders it’d be all cash dividends but that doesn’t move the needle enough to get above strike prices. 

In reply to by buzzsaw99

bigkahuna Wed, 05/02/2018 - 11:50 Permalink

This article speaks of logic? Since how long have we been able to rely on logic? Not to say logic will not eventually win - because it will!

As one of the guys said earlier, it is nice to read an article with some trend information we can at least keep an eye on - if not use.

JLarryL Wed, 05/02/2018 - 12:00 Permalink

Good points. Liquidity issues are an age-old catalyst for market disaster. And we have big debt overhang which probably depends on liquid markets to be serviced.

Stocks have definitely been in distribution since January. It's gone on too long; something's up. Good news doesn't have the impact now. And the old "retail suckers" are largely replaced by "corporate suckers" vacuuming up their own stock and piling on debt for the sake of CEO compensation. If corporations can't borrow or stop buying for other reasons, stocks will crater.

Yen Cross Wed, 05/02/2018 - 12:03 Permalink

   Who's buying all the debt APPL is off loading? 

  My bad, pension and fixed income bucket shops. Once again the serfs are left holding the bag.

 

the Dood Wed, 05/02/2018 - 12:03 Permalink

The Fed is going to have to adjust all its levers and knobs. Turn down the heat! Turn up the heat! Turn the cold on! Quick buy securities to emplace floor! Ok remove floor! Tell me no Fed mistake is coming!

pitz Wed, 05/02/2018 - 12:25 Permalink

*sigh*, that 'offshore cash' crap again?  Repeat after me, "the cash is not offshore, the cash it not offshore".  Yes, it may be titled with legally "offshore" subsidiaries for tax purposes, but investment of such cash is mostly in debt obligations of US-based issuers and is managed in the United States.  

So sick and tired of hearing the dishonest meme advanced by some of these companies, for the purpose of political propaganda, that they're going to be 'bringing back' money, or that money is 'offshore'.  Characterization of such is a way to deliberately mislead politicians and the public that if only these tax-abusing firms were given lower tax rates, that they'd magically start investing in the US again.  Oblivious to the fact that they're not investing in the US because the social/political/economic climate is so uncompetitive.

pitz Cosmicserpent Wed, 05/02/2018 - 12:49 Permalink

No, not 'offshore' at all.  Apple, for instance, manages their 'offshore' cash at their Braeburn Capital unit in Nevada, and is mostly invested in USD$ securities issued by US issuers or in the case of actual 'cash', by the US government.  Most other US firms with "offshore" cash have similar schemas.

"Offshore" cash invests just like "onshore" cash, except that its pre-tax as far as the IRS is concerned.  So 'repatriation' was merely an event to settle with the IRS, *not* an actual mechanical 'repatriation' of value, and certainly not the conjuring of additional value into existence other than perhaps providing shareholders a discount on the conversion of pre-tax to after-tax profit.  On which many such firms recorded a one-time accounting gain.

Of course, the pump and dumpers want you to believe that this is beneficial to US corporations, that magically such 'cash' will be invested in the US but that's an extreme exaggeration.  The "offshore" cash titlers have always had the option of using their offshore subsidiaries to invest in the US with or without "repatriation" and preferential tax rates associated with such, but have chosen not to due to the terrible US investment climate.

In reply to by Cosmicserpent

pitz Cash Is King Wed, 05/02/2018 - 14:53 Permalink

Sure, as a bet that there would be a 'repatriation' tax give-away.  And unfortunately Trump caved in, and was snookered by companies that are mostly his ideological enemies in allowing the tax amnesty.

This is a big part of the problem with the US economy, that such shams actually proved to be profitable for companies like Apple.  

 

In reply to by Cash Is King

Savyindallas pitz Wed, 05/02/2018 - 18:27 Permalink

Well they should invest in the US. After all -we do have the most expensive (and corrupt inefficient) health care, education and criminal justice systems.  We are the greatest debtor nation of all time. We waste all our money on endless wars, making corrupt billionaires and banksters richer, as we all get poorer. We have mindless and limitless "legal" and illegal immigration, sustained destruction of our family unit, religion, the middle class and historical revisionism which seeks to wipe out and erase our tradition of Freedom, Liberty and opportunity. In other words-we suck eggs. Once we hit bottom and everything collapses-we hopefully will be the best investment opportunity in History. Maybe the time is to invest now. 

But then again, maybe not. Maybe the elites will have successfully set up a permanent Orwellian feudal system where we remain serfs and slaves for centuries -or until nuclear annihilation wipes out the human race. 

Too early to tell if the USA is just another great buying opportunity. I think the elites see a great opportunity-for themselves maybe, but not for the rest of us. 

In reply to by pitz

Honest Sam Wed, 05/02/2018 - 13:37 Permalink

What they really need to do is replace 90% of their Apple brick and mortar store employees with REAL techs, and peeps who can actually help you much much quicker than waiting for a half hour only to have them tell you,

"well we can't repair this Ipad because you removed the broken screen and you won't get your data back either because our techs are just too stupid and uninformed as to how to do it here.  We could send it in to our repair facility in Vanuatu, but be prepared to be without it for at least 6 months and even then it may not work right.  I don't know why. 

So do we have a deal to getting your new Ipad for $600.00 with spiffy new features that are to die for?" 

 

Aireannpure Wed, 05/02/2018 - 13:53 Permalink

Corporate buybacks illegal right now. Hmmm we need this more often for true price discovery. Remember corp. buybacks used to be illegal like just about every other financial reg. Glass Stegal?

hannah Wed, 05/02/2018 - 14:03 Permalink

having good financial facts is good and all but how does this repatriated money effect the reversal of the poles or a super volcano....?

ThanksIwillHav… Wed, 05/02/2018 - 17:49 Permalink

So Crook will spend the nest egg on buybacks then when capital is needed to build company he will have to sell more debt.   We saw this last time Steve was not running the ship.   After the fanboys are done buying X the real pain starts.   Apple's software experience gets worse and worse.   My 2017 MacBook Pro 15" Touchbar is docked today to external monitor.  When I came back to computer the graphics were frozen ala MS.   Luckily I could pound the Apple Key and recover.