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Apple: A Weird, One-Sided Relationship with Australia

Apple: A Weird, One-Sided Relationship with Australia

Apple: A Weird, One-Sided Relationship with Australia
Here is the opening of this informative article from the Australian Financial Review.  Lost in the collective freak-out over Apple's quarterly results this morning is the fact that the tech giant's cash stash is now above $US200 billion ($270 billion). And some of that is thought to be invested in Australian assets. How much? We don't know for sure.
Wall Street wasn't particularly thrilled with Apple's quarterly results on Wednesday morning. Shares dived by nearly 9 per cent - losing around $US62 billion dollars from its market value in a matter of minutes - after sales of iPhones underwhelmed and the impact of the much-heralded new Apple Watchfailed to move the needle. Apple is still growing (revenue was up 45 per cent, year on year) at rates most companies would die for, but investors are incredibly fickle beasts when it comes to results from the world's biggest company.
The tech colossus added another US$9 billion to its vast position in cash and short-term investments, bringing it to $203 billion - more than the foreign reserves of countries like Germany, the UK, France, Canada and yes, Australia.
Since Australia has one of the highest iPhone penetration rates in the world, it's reasonable to assume it generated some of that money in the last quarter (and all those quarters before) by selling devices on these shores.
Yet, as reporting by the likes of The Australian Financial Review's Neil Chenowethhas shown, Apple doesn't pay much tax on its sales here, using notoriously complex schemes to shifts its profits to lower taxing jurisdictions. Apple doesn't repatriate profits generated outside the US into its home country due to steep taxes, but its cash is managed by a secretive offshoot in the Nevada desert called Braeburn Capital. It's not unreasonable to think Braeburn has invested some of that cash into Australian government debt (which carries a triple A rating and offers higher interest rates than other countries do). The company didn't immediately respond to our enquiries on this issue.
Apple also quite possibly owns debt issued by Australian banks. A recent report by Bloomberg said representatives from all of Australia's big four banks, heavily reliant on overseas funding to write loans domestically, had sent representatives to visit Braeburn.
If so, this would mean Australians aren't just buying iPhones and other devices, they're also effectively paying Apple interest. In return we get...great products. It's pretty clear who's getting the best out of this relationship, and it's not Australia.
Not that this is going to change anything when it comes to Apple's products, of course.  They're so incredibly good, it's practically a given that Australians will continue to feverishly buy them.
David Fuller's view
This five-year weekly chart of Apple shows trading during Wall Street’s official market open hours, as the results were reported after Tuesday’s close.  However, I can tell you that iconic Apple is trading over $10 lower, uncomfortably close to retesting prior support near $120.
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Commodity Rout Worsens as Prices Tumble to Lowest Since 2002
Here is the opening of this report from Bloomberg: The rout in commodities deepened with prices touching the lowest since 2002 as the prospect of higher U.S. interest rates sent gold tumbling.
Raw materials are losing favor with investors as the dollar gains amid signals from Federal Reserve Chair Janet Yellen that the central bank may raise rates this year on the back of an improving U.S. economy. Higher borrowing costs curb the attractiveness of commodities such as gold, which doesn’t pay interest or give returns like assets including bonds and equities.
The Bloomberg Commodity Index dropped as much as 1.4 percent, falling for a fifth day in the longest stretch of declines since March. Gold futures sank to the weakest in more than five years while industrial metals, grains, Brent crude and U.S. natural gas also slid as a measure of the dollar climbed to the highest since April 13.
David Fuller's view
Expectations for global GDP growth are cautious for the second half of 2015, not least because of slumping commodity prices.  However, growth could also improve given stimulative monetary policies and cheaper energy prices at least six-and-a-quarter years after the worst credit crisis recession since the 1930s.  It usually takes at least this long for economies to recover from a cycle of extensive corporate and private deleveraging, leading to falling tax revenues, as we have been seeing. 

Wall Street Lenders Growing Impatient With U.S. Shale Revolution
Here is the opening of this article from Bloomberg: Halcon Resources Corp. almost ran into trouble with its banks in June 2013. And again in March 2014. And in February 2015.
Each time, the shale driller came close to violating debt limits set by its lenders, endangering a credit line that provided as much as $1.05 billion in much-needed cash. Each time, Halcon’s banks, led by JPMorgan Chase & Co. and Wells Fargo & Co., loosened their restrictions, allowing Halcon to keep borrowing.
That kind of patience may be coming to an end. Bank regulators have issued warnings on the risks involved in lending to U.S. drillers, threatening a cash crunch in an industry that’s more dependent than ever on other people’s money. Wall Street has been one of the biggest allies of the shale revolution, bankrolling thousands of wells from Texas to North Dakota. The question is how that will change with oil prices down by half since last year to $50.36 a barrel.
“Lenders in general are increasing pressure on oil companies either to raise more equity or do some sort of transaction to pay down their credit lines and free up extra cash,” said Jimmy Vallee, a partner in the energy mergers and acquisitions practice at law firm Paul Hastings LLP in Houston.
David Fuller's view
The benefits of lower oil prices, while significant, are spread thinly throughout economies.  In contrast, the problems for producers of oil and gas at lower prices are considerable and therefore highly visible.  This can have a knock-on negative effect, affecting banks with loans to the energy sector, the number of people employed in the oil and gas industries, tax revenues from these sectors, and economic slumps in previously booming oil towns. 
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Email of the day
On low commodity prices:
I understand your point about low commodity prices being a positive to overall global economy, especially net importers. However, is not low commodity prices (especially industrial metals) a sign of weakening economies and especially the high growth economies such as China? Coupled with weak transport index in US, it appears to me that fundamentals are not supportive of equity market valuations. Thoughts?
David Fuller's view
Thanks for an interesting and challenging email of general interest.
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European Stocks Snap Nine-Day Winning Streak Amid Mixed Earnings
This article by Alan Soughley and Roxana Zega for Bloomberg may be of interest to subscribers. Here is a section:
“The earnings season is in focus for now and there’s a consolidation after the big rally post Greece -- people are taking profits,” said Konstantin Giantiroglou, head of investment advisory and research at Neue Aargauer Bank AG in Brugg, Switzerland. “Some investors are a bit more cautious today seeing the markets have gone up a lot.”
A nine-day winning streak pushed the Stoxx 600 to within 2 percent of its record as Greece and its creditors reached an agreement paving the way for a new bailout and the European Central Bank increased emergency liquidity assistance. The nation reopened its banks on Monday after a three-week shutdown. The Athens Stock Exchange remains closed.
Eoin Treacy's view
Eurozone equities experienced an impressive bounce following the Greek government’s decision to acquiesce to creditor demands not least because it removed some of the uncertainty that has assailed the region’s markets.

Eoin personal portfolio stock market short increased July 21st
Eoin Treacy's view

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Won Falls for Second Day on Concern Economy Slowing, Fed Outlook
This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section:
Official data due Thursday will show South Korea’s gross domestic product expanded 2.3 percent from a year earlier in the April-June period, the least in nine quarters, according to a Bloomberg survey. The central bank has lowered its key interest rate by 50 basis points this year to spur growth. In the U.S., Federal Reserve Chair Janet Yellen indicated last week that policy makers are on track to raising borrowing costs in 2015.
The Federal Open Market Committee will next meet on July 29.
“Heading into the FOMC, I think the market continues to look for indications of a hike this year,” said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. In South Korea, “we are not putting in another rate cut in the forecast table, but we feel that, between hiking and easing, the bias is still toward easing,” she said.
Eoin Treacy's view
While the majority of commentary focuses on what effect the Fed’s eventual rate hike will have on other currencies, the actions of the Bank of Japan are of greater important to South Korea. Both countries compete in many of the same markets for consumer goods and South Korea benefitted enormously from the strength of the Yen in the aftermath of the credit crisis.

There is Hope Beyond Botox as Pharma Races for First Migraine Fix
This article by David Wainer for Bloomberg may be of interest to subscribers. Here is a section:
An early look at the drugs Teva Pharmaceutical Industries Ltd., Amgen Inc., Eli Lilly & Co., and Alder Biopharmaceuticals have developed shows they work for about half of migraine victims tested, snuffing out some of the episodes that wreck their lives. The drugmakers are racing to cash in on a market that analysts say is worth between $4 billion and $8 billion and relieve the recurring spells that cost the U.S. economy an estimated $13 billion a year in lost work productivity.
“There’s very little recognition of the suffering migraine inflicts,” said Cathy Glaser, a 63-year-old patient advocate from New York City who started her own organization to fund research in 2006 because she was frustrated by the lack of relief options.
Glaser as a child recalls seeing her mother take to bed with a cloth over her eyes, and years later found she and her sister were migraine-prone as well. Her daughter suffers from a chronic version that has landed her in the emergency room. 
Eoin Treacy's view
Migraine headaches are an affliction people who do not suffer from them have difficulty understanding but they are no less real. The potential for therapies that can prevent migraines is a great example of how the healthcare sector is capable of delivering solutions that directly enhance productivity. Think of everyone you know and the number of days-off taken because of headaches. If the first solutions on the market only cure half of the people affected the cost of the treatment will be outweighed by the economic benefit on aggregate.

Costco-meets-Amazon.company Jet.com launches
This article from CNNMoney highlights how high the barrier to entry has become in online retail. Here is a section:
As a way to prove its marketing promise, Jet tested its service with some customers who were given early access by showing its prices against those found on multiple competing websites. While Amazon often has the lowest prices, it doesn’t always. Sometimes the differences were as big as $15.
“We have an assortment that’s vast like Amazon’s, and pricing that’s similar to a wholesale store and membership”, Lore told CNNMoney. Forbes explained in February, “Though the company has yet to launch, it has gained a large amount of attention, namely due to the previous success of Lore, who created Quidsi and sold it to Amazon.com in 2010 for $550 million”. That’s slightly less than a Costco membership, and half the price of Amazon Prime. “Because Jet’s business model is to only profit from membership fees, not from the products we sell, all cost savings are passed back to the customer”.
Eoin Treacy's view
On first inspection Jet.com appears similar to other online retail sites such as Boxed.com, but its focus on membership fees as a source of profits and Alibaba’s investment suggest it may be able to survive in the event competitors such as Amazon or Costco engage in a price war. Its partnerships with larger number of additional companies offering rebates for goods purchased on sites such as Apple, Burberry, 23andMe and hundreds of others represent an attractive reason to visit the site.

Speaking Engagements
Eoin Treacy's view

I’ve agreed to conduct a one-day seminar for UCLA Extension focusing on our approach to behavioural technical analysis. This will be on August 29th. Here is a link to the brochure and the university’s website where you can book a place. The early booking rate of $139 expires on July 29th.

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