Apple shares and lumber futures are soaring: The pros and cons

From the James Mackintosh’s “Fed’s Easy Money Pumps Up Winners Like Apple and Housing” ($) in Friday’s Wall Street Journal:

apple lumber futuresWinning investments this year include technology stocks, gold and, umm, lumber. Yes, lumber: pieces of wood may not be as glitzy as Apple or bullion. But like them, lumber and other assets linked to home construction have been big beneficiaries of the Federal Reserve. Helping home-building is one obvious way to help the economy.

Helping Apple shareholders, not so much. Yet, even the Fed’s contribution to soaring tech stocks should trickle through eventually, in a convoluted way. That’s lucky, because the Fed’s new way of thinking laid out by Chairman Jerome Powell on Thursday suggests easy money is here for the long run…

Consider Apple. Helping a $2 trillion company issue low-rate bonds to buy back its shares is hardly a national priority, but is one of the side effects of Fed action. It isn’t only a side effect, though. The benefit should, in a roundabout way, eventually end up helping the real economy.

Since the pandemic began, Apple has raised billions of dollars in bonds at low rates, most recently paying 1.25% on 10-year debt, in part to finance buybacks. It can raise the money more cheaply thanks both to the Fed’s rate cuts and Fed support of the corporate bond market, boosting Apple’s profits and allowing it to do more buybacks (assuming Apple’s expansion plans are already fully financed).

The buybacks put some of that money into the hands of an Apple shareholder, who might invest it elsewhere, save it or spend it. Money spent is simple, helping the economy. Money saved in a bank is simple too, hindering growth. If the money is reinvested, it’s more complex. It goes into the pocket of the seller of the shares, who then faces the same choice. If everyone keeps reinvesting, prices get pushed up until eventually someone decides to spend the money, or a company decides to issue stock. That, in turn, could be to finance a new project or recapitalize a struggling business, or—more likely—to allow investors in a private company to get out via an IPO (then starting the process all over again as they are left with cash and the choice to spend or reinvest).

Investor preferences get in the way of this process, because investors want to buy the winners. So the Fed’s easy money pumps up the stock prices of the winners, but does little for the companies that investors can see are suffering, such as airlines, clothing stores and anything connected to tourism.

My take: Trickle-down economics, according to the Wall Street Journal, would work so much better if Apple—and Apple shareholders—didn’t keep pouring money back into shares of Apple. Who knew?

12 Comments

  1. Bart Yee said:
    Gee, I haven’t seen a dime of the Fed’s easy money come directly into my pocket. But I don’t have a mortgage to refinance, I’m not yet buying a new car to finance, and I didn’t get a stimulus check. I do Understand where Apple is using low interest debt to finance buybacks and well it should, a sound and cost effective use of its clout in the bond market. But Apple has also been issuing debt in other countries because of the same issues, every one of the major regions it operates in is trying to stimulate their Covid ravaged economies with liquidity and lowest interest rates. So don’t point the finger solely at the Fed (they have been accomodative for the last 3-6-8-10 years or so, just more extremely recently), its all over. And Apple has done handsomely with the buybacks.

    4
    August 28, 2020
    • Romeo A Esparrago Jr said:
      Great points, Bart!
      Because I’m in an unretired state, I only sell AAPL in squirt amounts and only when share price is on a climb. Like last week’s sell at 515.11 of six shares LOL.

      For the rare times my wife and I need aid in paying off house, car, or taxes, we sell at larger amts, but always when share price is moving uphill.

      We try to spend using only earned money vs saved money (which includes investments like AAPL).

      2
      August 28, 2020
  2. Fred Stein said:
    Ah, the old magician’s trick of making us focus on the wrong thing.

    “..billions of dollars in bonds at low rates, most recently paying 1.25% on 10-year debt..”

    The entirety of the last raise was less than 1/2 of 1% of AAPL.

    The real story is the 30% of AAPL they bought at prices less than 1/2 of today’s prices. Ballpark: that gave us an extra $600B.

    Still, real people with no stock ownership are suffering. That’s important.

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    August 28, 2020
  3. Gregg Thurman said:
    Trickle-down economics

    There’s no such thing as trickle down economics. Wealth flows uphill until held by the wealthiest where it stops circulating through economy., thereby shrinking the middle class.

    Don’t believe me? Check out the size of the middle class in the US, then contrast that to the wealth gained by the Uber rich since Reagan’s tax cut.

    8
    August 28, 2020
    • David Emery said:
      “inevitable” is an interesting concept.

      A friend sent me this paper, which was a revelation. https://www.scientificamerican.com/article/is-inequality-inevitable/ It took me a while to understand the argument, which is on the 2nd bet you’re betting $120, not $100. Then the consolidation made sense to me.

      So we need to consider both the mathematics (this paper) and the policies. It’s important to deal with more than just anecdotal evidence, since there are so many variables that contribute to the anecdote.

      3
      August 28, 2020
    • Robert McDonald said:
      Well stated Gregg. It is amazing how many people don’t understand that reality. The Covid cycle is again taking money from the lower and middle classes due to lost small businesses, lost jobs, lost health care benefits via employers, loss of permanent employment that they may never get again. This is just as it was when the banks lost money by reckless home lending causing the last major recession. The Trump tax cuts in the early part of his term were yet another example of wealth transfer to the rich.
      Americans of normal means had better wake up and take action at the ballot box as this is the only way this trend can be reversed.

      1
      August 28, 2020
  4. Jerry Doyle said:
    “…. My take: Trickle-down economics, according to the Wall Street Journal, would work so much better if Apple—and Apple shareholders—didn’t keep pouring money back into shares of Apple. Who knew?”

    PED: Perhaps you being a new Apple shareholder with one share soon to be split into 4 shares, you do not understand fully the Apple “wealth” effect on Apple shareholders like me who never sell their shares and who only purchase periodically at opportune times, new shares. That “wealth” effect when Apple catapults me to new financial heights causes me to spend, and sometimes to spend more on “durable” goods. Knowing fully the feeling of Apple being my new-found wealth is my financial backstop, I am willing to go with increasing debt that in the absence of that new-found wealth, I would have circumvented. I know many Apple shareholders like me who do similarly.

    0
    August 28, 2020
  5. John Konopka said:
    I don’t see how money put in the bank is hindering growth. Except for reserves banks don’t sit on cash, they loan it out for mortgages, car loans, boat loans, etc.

    In fact, money in the bank actually increases the money supply as banks loan out more than the money you deposit.

    The only way to hinder growth, that I can see, is if you put your cash in a wall safe.

    0
    August 28, 2020

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