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Mining BTC is harder than ever — 5 things to know in Bitcoin this week

Bitcoin wakes up to near $28,000 ahead of a jump to a new BTC mining difficulty record as billionaire investor Ray Dalio conjures the chilling thought…

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Bitcoin wakes up to near $28,000 ahead of a jump to a new BTC mining difficulty record as billionaire investor Ray Dalio conjures the chilling thought of "World War III."

Bitcoin (BTC) starts a new week firmly back in the “Uptober” spirit as the weekly close gives way to a classic short squeeze.

In a return to classic BTC price volatility of the kind seen earlier in the month, the largest cryptocurrency is tackling $28,000 ahead of the first Wall Street open.

While still in an established trading range, Bitcoin is keeping traders on their toes — both longs and shorts are getting caught out by short-term spot price moves, and liquidations are mounting.

Sentiment is fluctuating in step with these moves. Heading toward the top of the range, Bitcoin sees a flurry of bullish projections, with these replaced by fear and foreboding when downside reenters.

Well-known market commentators thus remain overall cautious, even as October — traditionally Bitcoin’s best-performing month — plays out.

Behind the scenes, the signs are solid — network fundamentals are headed to new all-time highs, and difficulty is due what could end up its third-largest hike of 2023.

With macroeconomic data giving way to a focus on geopolitical tensions in the Middle East this week, there is plenty for Bitcoin investors to keep an eye on when it comes to external sources of BTC price volatility.

Cointelegraph takes a closer look at these market phenomena and more in Cointelegraph Markets’ weekly rundown of BTC price triggers waiting in the wings.

BTC price: Short squeezes and "old" coins

Weekly close volatility on Bitcoin did not disappoint this week, with one short squeeze following another to see BTC/USD add $1,000, data from Cointelegraph Markets Pro and TradingView confirmed.

BTC/USD 1-hour chart. Source: TradingView

The climate headed into the first Wall Street open is decidedly different to that over the weekend and before, where downside characterized the landscape amid problematic macroeconomic reports from the United States.

Now, optimism is returning, with Michaël van de Poppe, founder and CEO of MN Trading, calling the trip to multi-day highs of $27,975 a “great move.”

“Dips are for buying, most optimal entry would be $27,300,” he told X subscribers in part of the day’s commentary.

Van de Poppe further predicted continuation of the uptrend.

BTC/USD annotated chart. Source: Michaël van de Poppe/X

Covering the impetus behind the latest action, monitoring resource CoinGlass noted liquidations among short BTC positions.

“At 27450, a large number of shorts have been liquidated,” it concluded alongside a liquidation heatmap for BTC/USDT perpetual swaps on largest global exchange Binance.

“Next focus on the liquidation levels of 26500 and 27660.”
BTC/USDT liquidation heatmap. Source: CoinGlass/X

Popular trader Crypto Tony was more cautious, having previously warned of the potential for significant downside pressure taking Bitcoin all the way back to $20,000 in the coming months.

For research firm Santiment, meanwhile, there was more to the change of tone than merely short squeezes.

“Older” BTC was on the move, it showed, having left their wallets after an extended period of dormancy immediately prior to the return to $27,000.

“The largest amount of dormant $BTC changing wallets since July, these spikes in our Age Consumed metric indicate price direction reversals,” part of accompanying comments on an illustrative chart stated.

BTC/USD annotated chart. Source: Santiment/X

Dalio warns over 50/50 outcome of "World War III"

In contrast to last week, the macro landscape in the coming days contains less by way of significant data prints from the U.S.

Instead, nerves over potential market impact from the ongoing Israel-Hamas conflict are taking center stage, while the specter of inflation lingers in the background.

The latter was previously all too clear, as successive data releases last week and before showed U.S. inflation persisting beyond market expectations.

The Federal Reserve’s next meeting to set interest rates is due on Nov. 1, and with two weeks remaining, inflation cues will be all too important for risk asset sentiment.

“2 weeks until the November Fed meeting,” financial commentary resource The Kobeissi Letter summarized on X while shortlisting the week’s main U.S. financial events.

These include a speech from Fed Chair Jerome Powell, one of a total of 17 Fed speakers due to take to the stage this week.

In a sign of the extent to which politics may end up influencing sentiment, Kobeissi was one of many who referenced a grim forecast from billionaire investor Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund.

In a LinkedIn post on Oct. 12, Dalio warned that the risk of “World War III” occurring had increased to 50% over the past two years.

“Fortunately, the progression toward a world war between the biggest powers (the US and China) has not yet crossed the irreversible line from being containable (which it is now) to becoming a brutal war between the biggest powers and their allies,” he wrote.

“If these major powers do have direct fighting with each other, in which one side kills a significant number of people on the other side, we will see the transition from contained pre-hot-war conflicts to a brutal World War III.”

GBTC "discount" closes in on two-year minimum

Beyond BTC price action, a firm resurgence is underway in the biggest Bitcoin institutional investment vehicle.

The Grayscale Bitcoin Trust (GBTC) is now trading at its smallest discount to net asset value (NAV) — the Bitcoin spot price — since December 2021.

As Cointelegraph reported, the discount, which was once a premium, was almost 50% earlier in the year, and GBTC’s turnaround has come in tandem with legal victories for operator Grayscale over U.S. regulators.

Now, markets appear to be more confident than ever that a spot price exchange-traded fund (ETF) — which Grayscale plans to create and launch out of GBTC — will get the go-ahead, opening up a flood of institutional interest in Bitcoin in the process.

“One significant feature of GBTC is that it doesn't offer a straightforward mechanism for redeeming shares for actual Bitcoin, and it trades over-the-counter (OTC),” popular trader and podcast host Scott Melker, known as “The Wolf of All Streets,” wrote in part of recent X analysis.

“This structural element can lead to instances where its market price deviates from the underlying BTC value. Factors like market speculation, investor sentiment, liquidity constraints, and even regulatory news can influence this price divergence.”

Melker continued that the door opening to GBTC becoming an ETF was “still far from a sure thing.”

“Concurrently, the U.S. Securities and Exchange Commission (SEC) is also scrutinizing several other spot Bitcoin ETF proposals, including those from financial giants like Fidelity, Blackrock, and Franklin Templeton, which adds another layer of complexity and uncertainty to the landscape,” he noted.

GBTC premium vs. asset holdings vs. BTC/USD chart (screenshot). Source: CoinGlass

Mining difficulty set for imminent new record

The latest BTC price increase has helped boost prognoses for Bitcoin network fundamentals.

Ahead of its next automated readjustment on Oct. 16, Bitcoin difficulty is currently forecast to expand to new all-time highs, per data from monitoring resource BTC.com.

Bitcoin network fundamentals overview (screenshot). Source: BTC.com

This is nothing new in 2023, the year in which both difficulty and mining hash rate have frequently achieved new records. The upcoming difficulty hike, however, could make it into the top three year-to-date at nearly 7%.

Should it lock in, difficulty will cross the 60 trillion mark for the first time, reflecting the increasingly stiff competition among miners and unparalleled Bitcoin network security.

Hash rate estimates meanwhile vary significantly by resource. Raw hash rate data from MiningPoolStats shows the latest all-time high of 497.66 exahashes per second (EH/s) hitting on Oct. 9.

Bitcoin raw hash rate data (screenshot). Source: MiningPoolStats

The high difficulty combined with comparatively modest BTC price levels inevitably opens questions over miner profitability. With expenses running ever higher per bitcoin, concerns periodically appear over how incentivized miners are to continue.

Just as with hash rate, estimates vary over how expensive the per-bitcoin aggregate production cost really is, with a multitude of factors including physical location all playing a part in the tally.

As Cointelegraph reported, next year’s block subsidy halving will additionally cut the amount of BTC received per mined block by 50%.

“I think price is okay for miners atm, but come halving and increasing difficulty needs to increase rapidly,” James Straten, research and data analyst at crypto insights firm CryptoSlate, wrote in part of X commentary last week.

A precarious "Uptober"

Does the fate of “Uptober” 2023 hang in the balance?

Related: Bitcoin signals potential range expansion— Will SOL, LDO, ICP and VET follow?

Even modest changes in BTC spot price can influence the month-to-date gains for October thanks to the strength of the current trading range, now in place since March.

While negative just last week, the push to $28,000 now means that BTC/USD is up 3.5% since the beginning of the month.

With two weeks until the monthly close, Bitcoin’s ultimate performance remains anyone’s guess. 3.5%, while far from poor, would still constitute Bitcoin’s weakest October month since 2018.

Data from CoinGlass further shows the worst October on record in 2014 produced “only” 12% losses for Bitcoin, leaving the door open for a new red record should conditions deteriorate.

BTC/USD monthly returns (screenshot). Source: CoinGlass

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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Yen Pops on BOJ Comments on Inflation, but the Dollar holds Most of Yesterday’s Gains against the other G10 Currencies

Overview: The dollar is mixed as the market awaits
the US personal consumption expenditure deflator, which is the measure of
inflation the Fed targets….

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Overview: The dollar is mixed as the market awaits the US personal consumption expenditure deflator, which is the measure of inflation the Fed targets. While there is headline risk, we argue that the signal has already been generated by the CPI and PPI releases. The yen is the strongest of the G10 currencies, up nearly 0.5%. The market shrugged off weak data that spurs speculation of a third quarterly contraction and focused on the comments from a BOJ board member that were consistent with the exit from negative interest rates in the coming months. Meanwhile, the Australian and New Zealand dollars remain fragile after yesterday's drubbing. Most emerging market currencies are firmer today, led by the Malaysian ringgit, where officials are threatening to intervene.

Asia Pacific equities were mixed, including in Japan where the Topix edged higher, but the Nikkei slipped. Mainland Chinese stocks rose with the CSI 300 up almost 2%. However, Chinese companies that trade in Hong Kong fell by about 0.2%. South Korea and Taiwan went in opposite directions as did Australia and New Zealand. Europe's Stoxx 600 is slightly firmer after falling by 0.35% yesterday. US index futures are trading softer. Bonds are selling off. European benchmark 10-year yields are 4-6 bp higher. The 10-year US Treasury yield is up four basis points to nearly 4.31%. Gold is a little softer but within yesterday's range (~$2024-$2038). April WTI is flattish near $78.50.

Asia Pacific

Japan's economy continues to struggle. After dropping 2.6% in January, the most since the early days of the pandemic, Japanese retail sales edged up by 0.8% in January. Although economists, including the IMF continue to bang the drum about weak Chinese consumption, though it has doubled on a per capita basis over the past decade and is growing, Japan has been given a free ride. In GDP terms, its consumption has fallen for three consecutive quarters through Q4 23. It might be stabilizing this quarter, but next week's labor earnings data will show real wages continue to lag inflation as has been the case since 2019 on an annual basis. Separately, Japan reported a dramatic 7.5% plunge in January industrial output. It grew by a little more than 1.2% all last year. Recall that a 7.5-magnitude earthquake struck northern Japan on January 1 and disrupted economic activity. There was also a safety scandal at a subsidiary of Toyota that also caused a temporary halt of production. A recovery appears underway this month. Factory output is expected to rise 4.8% this month and 2% in March. Separately, Japan reported a 7.5% drop in January's annualized housing starts, which last rose in May 2023.

However, the impact of the data was overwhelmed by the comments from Takata, from the BOJ board. He said that despite the economic uncertainties, the "price target is finally coming into sight." Takata said that the deflationary psychology was pivoting. Japan's 10-year yield edged up and the yen jumped. Indeed, the dollar was sold below the 20-day moving average (~JPY149.80) for the first time since the US employment data on February 2. The poor economic data and the softness of inflation may have seen some participants waver, but it still seemed to us that an exit from negative rates in April remained the most likely scenario. And that still is the base case.

China's PMI will be reported tomorrow. It will likely show the manufacturing sector continues to be challenged (below the 50 boom/bust level), as it has last March with one exception (September 2023). The non-manufacturing, which some suggest is a better reflection of domestic demand, held above 50 all last year. It finished 2023 at 50.4 and may have ticked up in February amid anecdotal reports of strong holiday activity. If it does rise, it would be for the third consecutive month. The composite PMI rose to a four-month high of 50.9. The Caixin manufacturing PMI will also be reported. It has fared better than the other one (from China Federation of Logistics and Purchasing.

The dollar held barely below the high set earlier this month near JPY150.90 yesterday and the BOJ comments today saw it fall to almost JPY149.60, the low since the US CPI on February 13. It recorded range that day of approximately JPY149.25-JPY150.90 and has been in that range ever since. The dollar settled last week near JPY150.50. It was the eighth consecutive weekly gain, and that streak is threatened now. The net speculative (non-commercial) short yen position in the futures market is the largest since last November. The Australian dollar stabilized after falling almost 1% yesterday but could not properly recover. After falling to about $0.6490, the Aussie could barely trade above $0.6505 in North America. Today, it rose slightly above $0.6520 in the Asia Pacific session but is slipping back below $0.6500 in the European morning. The $0.6475 area stands in the way of a retest on the year's low near $0.6440 when the US CPI was reported on February 13. The recovery of the yen helped Chinese officials defend the CNY7.20 level. The PBOC set the dollar's reference rate at CNY7.1036 (CNY7.1075 yesterday). This allows the dollar to trade in a range of roughly CNY6.9615 to CNY7.2457. The average projection in Bloomberg's survey was CNY7.1935 (CNY7.2004 yesterday). 

Europe

The preliminary estimate of the eurozone's February CPI will be reported tomorrow. The median forecast in Bloomberg's survey is for a 0.6% increase after a 0.4% decline in January. Recall that in February 2023, the CPI rose by 0.8%. That means that the year-over-year rate can slip to 2.5%-2.6% from 2.8% in January. The eurozone's CPI jumped by 0.9% and 0.6% in March and April 2023, and will be replaced with more moderate numbers this year. This means that when the ECB meets on April 10, CPI will be close to 2% and poised to slip below the target. German states reported softer year-over-year CPI today and the aggregate harmonized measure, due shortly, is expected to fall to 2.7% from 3.1%. France's harmonized measure fell to 3.1% from 3.4%. Spain's eased to 2.9% from 3.5%. The swaps market has nearly a 90% chance of a rate cut in June. Three cuts and about 40% chance of a fourth cut are reflected in the swaps market.

The euro briefly slipped below $1.08 for the first time in a week yesterday just at start of the European session. It recovered back to the session high, slightly below $1.0850 before it consolidated in dull dealings in the North American afternoon. The bulls may see a hammer candlestick, and the 20-day moving average held (~$1.0790), which is also the halfway point of the bounce from the February 14 low slightly below $1.07. The euro managed to settle above the 200-day moving average (~$1.0830). It had advanced for eight of the ten sessions through Monday and brings a two-day decline into today. It has traded with a firmer bias today and edged up to almost $1.0855. The week's high was set on Tuesday near $1.0865 and recapturing this would help the technical tone. Sterling's price action was also not impressive, and it did briefly trade below its 20-day moving average (~$1.2630). It recovered about half-of-a-cent before sellers reemerged and knocked it back to $1.2645. Sterling had not fallen since February 19. It is in less than a quarter-cent range today below $1.2675. With little market reaction, the UK named the OECD's Chief Economic Economist Lombardelli to succeed Broadbent as deputy governor of the Bank of England, whose term ends July 1. Today's byelection in the Rochdale is very idiosyncratic and will be difficult to generalize. Separately, there are reports of discussions between the US and the UK about the potential security risks of holding national elections around the same time. 

America

Although US Q4 23 GDP was revised lower (3.2% vs. 3.3%) consumption was revised higher (3.0% vs. 2.8%). The deflators were also tweaked higher. However, the January data reported yesterday disappointed. The advanced merchandise trade deficit widened to a six-month high of $90.2 bln, and retail inventories rose by 0.5% after a 0.6% increase in December. Wholesale inventories slipped by 0.1%. This is consistent with the recent pattern whereby wholesalers are reducing inventory while retails ae see their inventories rise. Last year, wholesale inventories fell by an average of 0.2% Retail inventories rose by an average of 0.4% a month last year.

Today's focus is on the personal income, consumption, and deflators. If US economic activity is going to moderate, the consumer is key. Personal consumption expenditures rose by an average of 0.5% a month last year. The weakness in retail sales hinted at a pullback in the American consumer, who buys more services than goods. The median forecast in Bloomberg's survey is for a 0.2% increase. Personal income rose by an average of 0.4% a month in both 2022 and 2023, which is also the average of the two years before Covid. Many participants are more interested in the deflator, but with CPI and PPI in hand, economists have a fairly good sense of the PCE deflators  A 0.3% increase in the headline deflator in January will bring the year-over-year rate to 2.3%-2.4% (from 2.6% in December 2023), which would be the slowest pace since February 2021. The core deflator is seen rising by 0.4%, which would allow the year-over-year rate to slip to 2.8% from 2.9%. When the January CPI was reported on February 13, the implied yield of the December 2024 Fed funds futures contract soared by 23 bp and the Dollar Index jumped by about 0.75%. Because of the limited new information in deflator today, the market response should also be constrained.

Canada reports December and Q4 23 GDP today. Unlike the UK and Japan, which reported back-to-back quarterly contractions, the Canadian economy is likely to have returned to growth after a 1.1% annualized contraction in Q3 23. A 0.8%-0.9% expansion seems likely. The monthly GDP estimates contracted in June and July and were flat in August through October, before the economy grew by 0.2% in November. It is expected to have grown by another 0.2% in December. Ahead of the data, which we think is in line with the central bank's expectations, the swaps market is pricing in about a 70% chance of a cut in June. It has three cuts fully discounted this year and almost a 25% of a fourth cut. At the end of last week, there was around a 76% chance of June cut and only three quarter-point cuts were envisioned for this year. 

The US dollar reached a new high for the year yesterday, breaching the CAD1.3600 level in early North American turnover. It pulled back and found support near CAD1.3560. It finished near CAD1.3575, its highest settlement since mid-December. We had seen risk extending to CAD1.3600-CAD1.3625. A move above there could spur another big figure advance (CAD1.3700-CAD1.3730). A break below CAD1.3525, and ideally, CAD1.3500 would neutralize yesterday's constructive price action. So far today, the greenback is quiet but firmly trading between CAD1.3570 and CAD1.3590. The Mexican peso is the strongest emerging market currency this month, gaining about 0.85% against the dollar. That puts it in third place for the year behind the Indian rupee, the only emerging market currency to have edged higher against the greenback (~0.35%) and Hong Kong dollar (~-0.2%). The peso has off by about 0.60% this year. Still, the dollar continues to fray the downtrend line that we have been tracking off the January 23 and February 5 highs but has not settled above it. We have it coming in near MXN17.09 today. 

 


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Dr. Phil Shocks ‘The View’ Hosts By Slamming Impact Of COVID Lockdowns On Children

Dr. Phil Shocks ‘The View’ Hosts By Slamming Impact Of COVID Lockdowns On Children

Authored by Paul Joseph Watson via Modernity.news,

Dr….

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Dr. Phil Shocks 'The View' Hosts By Slamming Impact Of COVID Lockdowns On Children

Authored by Paul Joseph Watson via Modernity.news,

Dr. Phil left The View hosts stunned after revealing the true impact COVID lockdowns had on children.

During an appearance on the ABC show, the television host began by explaining the harm smart phones and social media had wrought on childhood development.

“Kids stopped living their lives and started watching people live their lives and so we saw the biggest spike and the highest levels of depression, anxiety, loneliness and suicidality since records have been kept and it’s just continues on and on and on,” said Phil McGraw.

That narrative was palatable to the hosts, but when McGraw used the same logic to slam COVID lockdowns, the hosts bristled.

“Then COVID hits ten years later and the same agencies that knew that are the agencies that shut down the schools for two years – who does that? Who takes away the support system for these children?”

Dr. Phil also pointed out that COVID lockdowns prevented interventions for children who were being violently and sexually abused.

Whoopi Goldberg then shot back claiming “they were trying to save kids’ lives,” to which McGraw responded by pointing out that school children were almost completely unaffected by COVID.

Goldberg then tried to argue that this was thanks to the lockdown, before another host confronted Dr. Phil by saying, “Are you saying no school children died of COVID?”

“I’m saying it was the safest group, they were the less vulnerable group and they suffered and will suffer more from the mismanagement of COVID than they will from the exposure to COVID and that’s not an opinion, that’s a fact,” said McGraw.

The audience then started applauding, something which triggered Goldberg to immediately scramble to go to break.

“Audience clapping at end triggered those wicked witches,” commented Mike Cernovich.

Dr. Phil is completely correct in that COVID affected children far less severely than adults, something that Goldberg incorrectly claims is thanks to lockdowns but in fact was due to their superior immune response.

As we previously highlighted, multiple major studies confirm that pandemic lockdowns had devastating effects on children, harming their emotional development, social skills and driving mass clinical depression.

*  *  *

Your support is crucial in helping us defeat mass censorship. Please consider donating via Locals or check out our unique merch. Follow us on X @ModernityNews.

Tyler Durden Wed, 02/28/2024 - 10:45

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Apple’s Magic – Are Buybacks Worth Paying Up For?

Apple’s Magic – Are Buybacks Worth Paying Up For?

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Apple’s valuations are near…

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Apple's Magic - Are Buybacks Worth Paying Up For?

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Apple’s valuations are near their most expensive levels of the last ten years. Now consider that today’s valuation premiums are amidst a much higher risk-free bond yield than during most of the previous ten years.

Apple has a market cap of $2.8 trillion. Assuming its price-to-earnings ratio and margins remain stable, Apple must sell nearly $400 billion of products and services each year to keep its share price stable. To fathom that, consider that every man, woman, and child on planet Earth must spend about $45 on Apple products yearly.

The point of sharing those statistics and the valuation premium is to contextualize whether Apple can grow at the growth rate implied by its investors. Further, if its earnings growth alone doesn’t support a valuation premium to the market’s valuation, can the continued use of stock buybacks support the premium?

Apple’s Track Record

The graph below shows Apple shares have provided its investors with a fantastic 20% annualized growth rate for the last 39 years. That is more than double the 8.7% growth rate for the S&P 500 over the same period.

Its exceptional outperformance versus the market is warranted. Since 1993, Apple’s earnings per share have grown at over 3x the rate of the S&P 500.

Apple’s Recent Trends

While Apple may have an incredible record of earnings growth and share price appreciation, current investors must avoid the temptation to rest on prior trends. Instead, their focus should be on what may lie ahead.

The following graph shows the running 3-year annualized growth rates for sales, net earnings, and earnings per share. Recent growth rates are much lower than they have been. We truncated the graph to the last ten years to better highlight the more recent trends.

Earnings and sales were boosted in 2021 and 2022 by the stimulus-related spending and inflation caused by the massive pandemic-related fiscal stimulus. Many companies, including Apple, saw demand increase and could expand profit margins, as inflation was easy to pass on to customers.

However, Apple’s earnings and sales growth are returning to pre-pandemic levels. To better appreciate what the future may hold, consider the five pre-pandemic years highlighted in blue. During that period, sales grew by 4.2% annually. Net earnings grew by 4.3% and EPS by 10.4%

The Magic of Stock Buybacks

The price of a stock is not meaningful. Apple stock trades for $182 a share. Its market cap is roughly $2.85 trillion. If the company repurchased all but one share, its market cap would be unchanged, but its share price would be $2.85 trillion. 

That simple example highlights how valuable buying back shares can be for investors.

Back to Apple’s recent EPS, net earnings and sales trends. Its EPS grew roughly double that of sales or net earnings. The graph below helps explain how they pulled off such a feat. Once Apple started buying back shares in late 2013, its EPS grew 4-6% more than its actual earnings.

The following graph compares Apple’s annual EPS versus its EPS if it had not repurchased shares. The graph starts in 2013 when Apple began to aggressively buy back shares.

Why The Premium Versus The Market?

Apple has recently grown its earnings and sales at an approximate 5% growth rate. This is only about 1% higher than the approximate 4% nominal GDP growth from 2017 to 2019. But less than the approximate 9% EPS and sales per share growth of the S&P 500. 

So why are Apple investors willing to pay a premium for subpar growth?

Apple is an incredibly successful and innovative company with a long history of rewarding investors. Investors are willing to pay for the future potential of new products and services with enormous income potential. Such investor goodwill is hard to put a price on.

Passive investment strategies are a second reason. Apple and Microsoft are the two largest stocks by market cap. The increased popularity of passive investment strategies feeds the most extensive market cap stocks disproportionately to smaller companies.

Consider the holdings of XLK, the $52 billion tech sector ETF. Apple and Microsoft make up almost 50% of the ETF. If an investor buys $1,000 of XLK, approximately $500 will go to Apple and Microsoft, and the remaining 62 companies will get the rest.

Finally, and most importantly, are share buybacks. While we can’t quantify what future innovation, goodwill, and passive investment strategies are worth, we can grasp Apple’s ability to continue forward with buybacks.

Future Buyback Funding

The chart below shows Apple has been spending between $60 and $80 billion per year on stock buybacks. Keep that figure in mind as we walk through its sources of cash to continue buying back shares.

Debt, cash, and earnings are their predominant sources to fund buybacks.

Debt Funded Buybacks

Apple came to market with its first long-term debt offering in 2013, commensurate with its initiation of share buybacks. Apple’s debt peaked eight years later at $109 billion. Using debt to fund share buybacks made sense, with borrowing rates in the very low single digits. However, the calculus has changed, with rates now at 4% and higher.

Cash and Marketable Securities on Apple’s balance sheet are at $61.5 billion, about a year’s worth of buyback potential. While a massive amount of money, it is off its peak of $107 billion.

Lastly are earnings. Apple has been earning about $100 billion a year since 2021. Even if they regress to pre-pandemic levels ($50-$60 billion), earnings are enough to continue supporting its buyback program. However, if earnings are employed to buy back shares, it comes at the expense of investments toward innovations and product upgrades. Furthermore, Apple pays about $15 billion yearly in dividends, which also requires funding.

The graph below shows that from 2018 to 2020, Apple spent more on buybacks than it made. It was relying on debt and cash to make up the difference.

Over the last two years, buybacks only account for 60% of earnings, allowing cash to grow for future buybacks and investments. Hence, if $100 billion a year in earnings is sustainable, even without growth, $60 to $80 billion a year in buybacks is entirely possible. If earnings retreat to their pre-pandemic level, debt and cash will be required. If interest rates stay at their current levels, debt may not be financially sensible.

Summary

Unlike most “growth” companies, a bet on Apple is a bet on their ability to buy back shares. It appears that Apple can continue to buy back its shares with earnings and cash. Such would maintain their higher-than-market EPS growth with or without above-market earnings growth.

Other than negative earnings growth and high-interest rates, a buyback tax on corporations, as is being proposed, could also reduce or eliminate their buyback program. If such a bill were to pass or Apple cuts back on buybacks for another reason, its premium valuation may wither away.

Tyler Durden Wed, 02/28/2024 - 10:25

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