StockTake: Apple shareholders shouldn’t shrug off Irish tax mess

Also: Europe’s indices hit bottom; is September the cruellest month? dullish markets

The European Commission's announcement that Apple owes Ireland €13 billion in back taxes stunned most observers, but Apple investors were nonplussed – shares barely budged.

Although €13 billion is a huge sum, Apple can afford it. It makes as much in an average quarter. Sitting on a cash pile of $231 billion (€207 billion), the firm is valued at $575 billion (€515.3 billion). And anyway, Apple may never have to cough up the money; legal appeals may drag on for years.

Still, shareholders shouldn’t be complacent regarding potential reputational damage.

Chief executive Tim Cook likes to emphasise Apple's ethical credentials, whether becoming a carbon-neutral company by building solar plants, taking on the FBI and fighting government surveillance, or making the case for gay rights.


In 2014, Cook was lauded for telling a conservative finance group that Apple doesn’t “consider the bloody ROI” – return on investment – when it comes to matters such as accessibility, environmental issues and worker safety. He added: “If you want me to do things only for ROI reasons, you should get out of this stock.”

Reports of poor working conditions for Apple's Chinese workers have not dented iPhone sales, and global consumers may well shrug off this tax controversy. But Amazon and Starbucks have already agreed to pay more tax in Britain following public protests, and Apple will want to "avoid becoming the poster child for all things that are wrong with globalisation today", as CCS Insight said last week.

In 1997, Apple’s legendary “Think Different” advertisement associated the company with rebels and troublemakers, the “round pegs in the square holes, the ones who see things differently”. Being seen as tax dodgers doesn’t fit that image.

Fleeing Europe

The exodus from Europe continues. European equity funds have now suffered net outflows in each of the last 29 weeks, according to EPFR Global, surpassing 2008’s 27-week record.

This is in sharp contrast to last year, when money flooded into Europe. Although indices sold off sharply after peaking in April 2015, Europe nevertheless outperformed the US. Fund flows remained healthy, fund manager surveys indicated bullishness, and Europe was the favoured region among investment strategists in early 2016.

Now, instead of leading the way, European indices are languishing near the bottom of international performance tables. Ongoing under-performance, coupled with increased political uncertainty in the wake of June’s Brexit vote, is gradually extinguishing investor hope. Two-thirds of last year’s fund inflows were reversed in 2016.

The current exodus may go on for some time; there is no hint of capitulation in the air, and the index remains stuck in a well-established downtrend.

Still, long-term investors will note Europe’s two distinct advantages. For one thing, stocks are much cheaper than US equities. And a dividend yield of 3.6 per cent is attractive – especially in a world of negative-yielding government bonds.

Fearing September

Might volatility hit markets in September, historically the worst month for stocks?

Since 1896, notes Marketwatch’s Mark Hulbert, the Dow has lost an average of 1.1 per cent in September, compared with average monthly gains of 0.8 per cent. In more than half of all decades, September ranked 11th or 12th in performance terms. It is the only month, says Bespoke Investment Group, which averaged monthly losses over the last 20, 50, and 100 years.

Investors shouldn’t make too much of the stats, however. First, it is likely a seasonal fluke – various explanations have been offered, but none stand up to scrutiny. Second, Bespoke notes that over the past century, minor gains were actually eked out in September if stocks if risen over the January-August period.

This has been especially true in recent decades. LPL Research data shows that September is almost invariably an awful month in down-trending markets, but decent gains tend to be registered in up-trending markets.

The moral: don’t fear the calendar.

Boredom hits new heights

It’s official: market boredom is reaching historic proportions.

Since July 8th, the S&P 500 has closed within 1 per cent of 52-week highs every day, the second-longest streak in 50 years, notes money manager Dana Lyons.

August’s monthly range of 1.54 per cent was the smallest since August 1995, according to Ryan Detrick of LPL Research. Stocks moved by just 0.75 per cent over a recent 17-day period, the narrowest range since 1970; the second-longest narrow streak occurred in July. We have also witnessed the smallest 30-day range since 1965.

Global bonds, currencies and commodities have been similarly sleepy. As noted by Deutsche Bank's Jim Reid, August "was as about as dull you could get in markets".

The path of US interest rates and the presidential election may jolt markets out of their slumber. Certainly, it’s reasonable to assume things will, as Detrick predicts, “heat up”: the current non-volatile streak has already proved to be abnormally long one.