Tariffs and Your Next iPhone
Posted on Sunday, August 4th, 2019
Corporations have been falling all over themselves to buy back stock and borrowing billions to do it. If you have read us for some time you know we are not fans of corporate buybacks. They really only enrich the corporate executives as they buy stock with reckless abandon – mostly because the money is not theirs it’s the shareholders. We were the specialist in Ford Motor back in the day and Chairman Greenspan announced a 50 bps emergency rate cut. Ford was off to the races. At one point, with the stock up $5, the corporate buyback trader was screaming that he wasn’t buying enough stock. Months later Ford halted their buyback completely in light of the Ford Explorer Rollover debacle. The buyback hit the mothballs for years. The cash had been wasted as the stock plummeted.
Apple’s recent buyback statistics are sobering. Apple’s net income is exactly the same as it was four years ago yet due to their extensive buyback. Apple’s earnings per share have vaulted from $9.22 to $11.51 all due to having less stock outstanding. The only growth in Cupertino is coming from financial engineering and now Apple has spent half its cash hoard. I’m having Ford Rollover Flashbacks. Corporate buybacks are increasing and so is corporate leverage. For the second year in a row US corporations have spent more on buying their stock back than on capital equipment. Now US corporations have borrowed billions to buy their own stock back in order to inflate executive bonuses while increasing corporate leverage all along the way. That Piper will need to be paid at some point. This doesn’t end well. If and when the indiscriminate buyers in the market place (corporations and algorithms) stop buying stock it will lead to a vicious spiral lower.
Say what you want about President Trump he sure keeps things interesting. As the Fed lowered rates this week in response to the slowing global economy and China – US trade war Trump responded by turning up the heat another notch. Trump wasted little time in adding tariffs to more consumer goods out of China including iPhones. Trump now knows that if he turns up the heat on China by raising tariffs the Fed will lower rates – just like Trump has been asking for.
We saw a market that wanted to go higher leading into the Fed meeting but we were wary as Transports and small caps had yet to convincingly break out higher. We held fire and were right to do so. The small caps and transports now have failed break outs in light of the spreading trade war – not a good sign for markets.
Global risks appeared to be increasing but investors seemed reluctant to fight the Fed. That may have all changed last week especially as we enter the always volatile months of August, September and October. We continue to position defensively.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.