#m3

A worm has turned on Apple

Apple guided Q1 revenue around $84bn vs earlier guidance of $89-93bn. Consensus unsurprisingly pegged itself to the middle of the initial estimate. How original and staying ahead of the curve? It doesn’t take a rocket scientist to work out that pulling disclosure of handset sales was the precursor. It wasn’t so long ago that the US Federal Reserve ended disclosure of its balance sheet movements. Ahead of the GFC, Ben Bernanke pulled reporting of M3 money supply right before the GFC.

Apple has lost the entire GDP of Singapore in market cap terms since last September. How many funds are up to the eyeballs in this stock that they believed had endless growth. How soon before it loses another Singapore?

No doubt the iPhone 14S XR limited edition run of 100 million units won’t turn this around.

It is usually around this time in a decayed product cycle that companies launch into random areas they have no expertise in. Watch for M&A deals at silly prices to buy bolt on businesses that bring hopes of growth in a global economy that has maxed out! Cue the goodwill write downs in year 1.

Why discontinue?

USFEDBS

This is a chart of the change in the US Fed balance sheet, a series that has just been discontinued. Is this because the Fed is about to step up its activity and offering wider disclosure on tapering activity might spook markets? Given that 72% of the growth in S&P earnings has been driven by buybacks since 2012, it stands to reason the market is not exactly providing the type of confidence inducing organic lift the index reflects. Bank of America revealed that “net buying of Tech sector in the 1H was entirely buyback-driven.” 

Kind of reminds CM of the day Bernanke’s Fed announced it would no longer report M3 money supply a year before the financial markets headed into the GFC. CM estimated on p.4 of a report several years ago that M3 money supply by 2018 on constant long-term growth rates would turn into around $35 trillion from the $10 trillion at the time it was discontinued.

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Nothing to see here? Throw a deteriorating fixed income market with fewer buyers and corporates that have binged on cheap credit to fuel buybacks, it doesn’t look like the stuff dreams are made of. The chart below shows that quarterly pre-tax US profitability is struggling since 2011. Earnings (E) are not doing so well. It is by the grace of falling number of traded shares (S) that makes the EPS look flattering.

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We took the liberty of comparing corporate profitability since 1980 and correlating it to what Moody’s Baa rated corporate bond effective 10yr yields. An R-squared of almost 90% was returned.

US Moodys corp

Why not use the Aaa spread instead? Well we could do that but looking over the last decade the average corporate debt rating profile looks like this. We have seen a massive deterioration in credit ratings. If we look at the corporate profitability with Baa interest rates over the past decade, correlation climbs even higher.

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We shouldn’t forget that the US Government is also drunk on debt, much of it arriving at a store near you. $1.5 trillion in US Treasuries needs refinancing this year and $8.4tn over the next 3.5 years. Couple that with a Japan & China pulling back on UST purchases and the Fed itself promising to taper (but now hide the results of) its balance sheet. So as an investor, would you prefer the relative safety of government debt or take a punt on paper next to junk heading into a tightening cycle?

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Discontinuation of series always carries a sense of deep cynicism for its true intention. It is not an onerous data set to cull. Sure we can fossick around and try to find it hidden in the archives of the Fed website but the idea is that they probably don’t want to publicise how much more they intend to flog.