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Bernanke Surprises Investors with No Tapering

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Federal Reserve Chairman Ben Bernanke

Federal Reserve Chairman Ben Bernanke

The Federal Open Market Committee issued a release today stating that although it has seen improvement in the labor market and economic activity since the beginning of its bond buying program, it will hold off on tapering its purchases. “The Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the committee said in a statement.

Both retail and institutional investors reacted positively to the news; the S&P 500 index shot up 1% in the first hour after the committee’s decision was released.

In the Federal Reserve’s previous news release issued on July 13th, 2013, it stated that the federal funds rate of 0 – 0.25% would “be appropriate at least as long as the unemployment rate remains above 6-1/2 percent.” Of course, this is not a hard a fast rule. The unemployment rate is viewed with growing skepticism as it doesn’t include discouraged workers who have given up looking for a job given a defined period time.

A more stark portrayal of the overall employment rate is the labor participation rate, which was calculated at 63.2% in August 2013 according to data from the U.S. Bureau of Labor Statistics. The rate represents a 35 year low. In light of this, some members of the Federal Reserve board have proposed revising the unemployment target downward, but have met with opposition from other members. Those opposed believe that changing the target could weaken the credibility of the Federal Reserve and in turn cause uncertainty among investors.

Labor Participation Rate vs. Unemployment Rate – United States – Click to Enlarge
bls_laborparticipation_unemployment

Source: U.S. Bureau of Labor Statistics

In a press conference this afternoon, Federal Reserve Chairman Ben Bernanke reiterated to reporters the dual mandates of the Federal Reserve: fostering maximum employment and maintaining price stability. He acknowledged the disparity in the unemployment rate and the labor participation rate saying, “The unemployment rate is not a fully representative indicator” of the overall labor outlook, but continued “most of the drop in unemployment is due to employment gains and not due to a lower participation rate.”

Bernanke was also pressed regarding the hints he gave in June that the Fed might begin tapering their bond purchases near the end of the 2013. Bernanke stressed that “communication” was a tool that would lend greater credibility to the Federal Reserve and that the Fed’s decision to put off tapering was “consistent” with those communications.

He conceded that the Fed may have been “overly optimistic about growth” and that a near zero federal funds rate will be likely to continue until 2016. However, he clarified that there would be “no calendar for policy” and that decisions about raising the rate and tapering purchases would occur “at the right time.”

CNBC reporter, Steve Liesman, asked Bernanke about his future plans and the supposed rift with President Obama. He declined to comment on his possible exit in January nor the possible nomination of Federal Reserve Chairman front runner Janet Yellen.

SWFI First Read, January 18, 2018

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Celgene Eyes Juno Therapeutics

Celegene Corporation is in discussions to buy Seattle-based Juno Therapeutics. Juno Therapeutics has backers which include the Alaska Permanent Fund Corporation (APFC). Celgene has roughly US$ 12 billion in cash and already has a relationship with Juno Therapeutics.

Auckland International Airport Sells Down Airport Holdings in NQA and Cairns

Perron Investments and The Infrastructure Fund, current investors in North Queensland Airports, which includes Cairns Airport, agreed to acquire Auckland International Airport’s 24.6% stake in the holding entity for A$ 370 million. Perron Investments is the privately-owned investment entity of Australian billionaire Stan Perron.

Pemex and Mitsui in Final Talks on Tula Project

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Apple’s Ginormous Corporate Cash Pile Plans to Come Home

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The positive economic effects of U.S. President Donald Trump’s tax reform have already altered the financial behaviors of major U.S. companies such as Wal-Mart Stores, Apple Inc. and AT&T.

In response to the tax law reform, many American businesses, large-to-small in annual revenues, have issued bonuses, granted awards and signaled plans to increase capital expenditures in the United States. For example, Apple announced plans to give its employees US$ 2,500 each in stock awards. A key section of the new U.S. tax reform law includes a provision for firms to take advantage of a one-time payment of 15.5% on repatriated funds down from the 35% rate.

Initial Plans

With the Dow Jones Industrial Average (DJIA) reaching new highs and the tax reform deal signed into law, Apple revealed they would invest US$ 350 billion into the United States economy over a period of five years, as they repatriate massive piles of money from overseas. The iPhone maker estimates they will payout roughly US$ 38 billion in tax payments from the overseas repatriation – thus shifting back some US$ 245 billion out of the US$ 252.3 billion it has held offshore. Apple also plans to spend an estimated US$ 30 billion in capital expenditures over the next five years, with roughly US$ 10 billion in U.S. data centers, according to the company. Apple has plans for 20,000 more jobs to create. The company that was once led by Steve Jobs had faced substantial criticism in the press over outsourcing its manufacturing to China to avoid paying U.S. taxes and lower manufacturing costs. Many of those facilities in China had labor issues such as environmental concerns, slave-like wages and extremely long work hours.

“We believe deeply in the power of American ingenuity, and we are focusing our investments in areas where we can have a direct impact on job creation and job preparedness,” said Apple CEO Tim Cook in a statement on January 17, 2017. He added, “We have a deep sense of responsibility to give back to our country and the people who help make our success possible.”

Liquid Financials and Fixed Income Changes

The sales growth of the iPhone has been a major factor in the growth in Apple’s cash pile. In 2006, Apple moved to act, forming a subsidiary in Nevada to manage investments, initially starting with around US$ 13 billion to manage. Nevada has no corporate income tax and no capital gains tax. Apple manages its investments through an outfit in Reno, Nevada called Braeburn Capital Inc. (Braeburn is a type of Apple), a subsidiary of Apple. Apple also employs some 40 to 50 external fund managers to handle the massive portfolio, according to sources. Braeburn has tried to reduce money management costs by using more separate accounts, while reducing dependence on money market funds.

As of September 30, 2017, Apple has a large investment portfolio worth an excess of US$ 300 billion, with US$ 194.714 billion in long-term marketable securities. Some US$ 128.645 billion are in current assets, with US$ 20.289 billion in cash and cash equivalents.

Focusing on the investment portfolio, some US$ 152.724 billion is held in corporate securities, with US$ 55.245 billion in U.S. Treasuries. Most of the portfolio is held in fixed income investments, including mortgage-backed securities – generally mandating investments be investment-grade and the avoidance of losing principal. Since 2012, Apple has been hoarding more corporate debt, rivaling some bond funds. Only about US$ 799 million are held in mutual funds (non-money market). Apple is also a major buyer of commercial paper across the globe. For example, the company participated in a US$ 500 million issue of 3-year floating notes from Hyundai Capital Services. The tech giant even uses derivatives to hedge against currency and interest rate movements.

The Old Scheme Ends

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CPPIB Partners with Lendlease on £1.5 Billion U.K. Build-to-Rent Venture

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The Canada Pension Plan Investment Board (CPPIB) has announced the launch of a £1.5 billion venture with Australian listed construction giant Lendlease Group centered around the development of build-to-rent private housing in the United Kingdom. The new infusion of capital will bolster the £800 million already committed to various projects in the Britain’s housing sector by Lendlease, which will develop, construct, and manage homes built through the partnership.

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