Stocktake: US shutdown holds no fear

Proinsias O'Mahony's take on the markets

Tue, Oct 8, 2013, 01:00

Much surprise was expressed at the muted market response to the recent US government shutdown.

The only surprising thing is the surprise.

Indices rose during the last two shutdowns, which were in 1995 and 1996.

With 17 shutdowns occurring since 1976, there was much evidence to show that markets tend to emerge unscathed: the S&P 500 has risen roughly half of the time.

The longer any shutdown lasts, the more potential for volatility. However, claims that “we are looking at a 5, 6 or 7 per cent correction” in the event of a three-week shutdown, as made by IG Index’s Evan Lewis, are not borne out by the stats.

Similarly, markets appear nonplussed about the looming US debt ceiling negotiations.

“We will go right up to the point of extreme idiocy, but we won’t cross it,” Warren Buffett quipped.


Rising stock takes the sting out of fines
Five years on from Lehman Brothers, what has Wall Street learned? Not much, judging by the acclaim lavished on JP Morgan chief executive Jamie Dimon. The bank faces a possi- ble $11 billion (€8 billion) mort- gage securities settlement with the US justice department.

It recently paid fines of $920 million after “admitting to some wrongdoing” in the London Whale trading scandal. It has paid $8 billion in fines since 2011.

The bank poses the biggest risk to the US financial system, according to Nobel economist Robert Engle’s systemic risk indicator. US political journalist Alex Preene said on CNBC that Dimon should go, as the bank was facing “the greatest fine in the history of Wall Street regulation”. He was ridiculed.

“It’s preposterous. The stock’s touching a 10-year high. It’s a cash-generating machine,” one contributor replied. It churns out “tens of billions of dollars in earnings and hundreds of billions of dollars in revenue”, said another. “How do you criticise that?” A third noted the stock is up 18 per cent in 2013 – it was “almost ridiculous” to be having the conversation.

This is peculiarly outdated thinking. Bob Diamond resigned last year as Barclays chief because some in the bank were manipulating Libor rates.

That Barclays was wildly profitable and not facing nearly as many charges as JP Morgan was not deemed relevant. JP Morgan’s legal bills denote either “egregious incompetency and/or rampant illegality”, said market strategist Barry Ritholtz. Casually dismissing such criticisms seem cavalier, to say the least.


Apple is top of the tech cash pile
Apple’s $147 billion cash pile means it now holds nearly 10 per cent of all corporate cash held by US non-financial companies, according to Moody’s. The top four cash kings are all technology giants: Apple, Microsoft, Google and Cisco.

The tech sector holds $515 billion in cash, followed by the pharmaceutical and healthcare sector at $146 billion.

Both sectors are well represented in Ireland, thereby avoiding the US tax rate of 35 per cent.

Some 61 per cent of the overall $1.48 trillion cash pile is held outside the US, says Moody’s, which expects this percentage to increase.


Attention-seeking activist
Activist investor and Apple shareholder Carl Icahn is increasingly exercised by its cash hoard, arguing the company should do a $150 billion share buyback.

Icahn revealed last week he had a “testy” meeting with Apple chief Tim Cook. “I’m not going away until they hear a lot more from me concerning this,” he said, adding that he would be meeting Cook again within weeks.

It’s hard to see why Cook would bother indulging Icahn, who tends to hop from one company to the next. Yes, he owns some $2 billion of Apple stock, but that’s less than 0.5 per cent of Apple’s market capitalisation.

Apple has already announced a $60 billion share buyback. It can easily increase this figure, given it is generating so much profit that its cash hoard continues to grow.

Much of that cash is held in Ireland, however, so a $150 billion buyback would require a major borrowing splurge. A buyback might generate a short-term price pop and Icahn could take his profits and move on. However, studies show the jury is out on the long-term efficacy of buybacks, and a debt mountain would reduce Apple’s future flexibility.

Apple under Steve Jobs was famously focused on products, not shareholders. Cook should heed that example and not waste time on Icahn’s financial engineering plans.


In numbers
0.45
The average percentage daily change in S&P 500 in quarter three, the smallest since 2006.

1
The number of times S&P 500 has enjoyed a daily rise of at least 1.5 per cent in 2013, compared to 103 times between 2008 and 2010.

8
The consecutive down days suffered by Exxon Mobil at the end of September.