APPLE’S LESSON FOR WASHINGTON
MARCH 2012
I sure do love the management team at Apple. It’s not because I own shares in the company (this has nothing to do with whether my clients or myself own shares), but because of the lessons they can teach all of us, especially our friends in Washington, D.C. about removing uncertainty from the investment landscape.
Specifically, on Jan. 24, 2012 when the company released its earnings, it became evident that Apple’s cash hoard was going to pass $100 billion in 2012. In politics, this is what would be called a flashpoint issue.
An accumulation of so much cash could only provoke constituents (read shareholders) into wondering why it was holding onto that much of their money. At the annual meeting less than 30 days later, the issue was discussed, and on March 19, the issue was settled with the announcement of an annual dividend of $10.60.
A lot of people didn’t agree with the decision. But that’s beside the point. The fact is they made a decision, and by doing so, removed all of the uncertainty regarding the dividend issue. Now Apple shares can trade on fundamentals rather than speculation.
Now let’s take a trip from Cupertino over to Washington D.C. where no decisions seem to get made. I’m not bringing this up just to rage against the machine (well maybe a little). I’m suggesting that the absence of decision-making on important fiscal issues not only leaves an overhang of uncertainty – which is bad for investors — but that ultimately some of these issues will come home to roost in ways that are very bad for all of us. Here are three.
1. Inability to approve a federal budget. OMG, who operates without a budget? Apparently we do. It’s been more than a 1,000 days since the federal government approved a budget. What does this mean? It means that we are running the pearl of capitalism on a series of makeshift resolutions.
This matters because it could, at some point, have a huge influence on the price at which we borrow money. If the Chinese said, “We’ll buy Treasury securities, but since you are in essence flying blind, we think there’s more risk, and we need a higher yield,” there’s not much we could do. Just like all those homebuyers who bought houses with teaser rates, we may find that life becomes very difficult when rates rise.
2. Fighting over the debt ceiling. With the next raise — and I have to assume there will be one, because for politicians, it’s going to be easier to go along than do the difficult work of drawing a line in the sand — U.S. debt will likely exceed the size of our economy, a ratio that is reverberating across Europe right now.
Currently the government has spent about 55% more than it collected this year. If the gap were closer, say 10% or 15%, you could have a debate about whether or not we have a spending or revenue problem. But 55%? It’s pretty clear we have a spending problem, and it’s pretty clear that fighting over the debt ceiling will not solve it.
3. Tax-cut expirations: the payroll tax, the Bush era tax cuts. Will they expire? They are set to at the end of the year. I do know this though, that another $20 a week out of the paychecks of Americans to fund government operations is the very opposite of stimulus.
And this gets me to my final point as it relates to Apple and what they can teach us. In its press release announcing the dividend, the company said, “we anticipate utilizing approximately $45 billion of domestic cash in the first three years of our programs.” Note the use of the word domestic. Most of Apple’s cash hoard is overseas.
In fact according to my research, companies like Apple,Microsoft, and General Electric, among others, have about $1 trillion stashed overseas. If that were to come home, its sheer size alone would dwarf the latest $300 billion stimulus proposal by the Obama administration.
What’s it doing there? Avoiding a regressive tax system. And maybe they’re just plain scared. After all would you take money to a place where there was no operating budget, the people in charge were at each other’s throats and the revenue outlook was cloudy at best? Of course not.
And that’s what I mean when I say that sooner or later unresolved fiscal issues will come home to roost in ways that are damaging. The tab for the first of these issues is about a trillion dollars. I wonder how much we can afford.
