The Federal Reserve was constructed to have a significant impact on the US economy.  As indicated in a recent blog post, it both reacts to economic forces and seeks to shape them. 

In a 2009 60 Minutes interview, then Fed chairman Ben Bernanke discussed the role of the Fed, particularly in regard to stabilizing the US economy.  This interview remains significant today because it offers a rare look inside the Federal Reserve.  It has the ability to help us understand not only the actions of the Fed following the Great Recession but also the actions it continues to take today.

Pre-Writing Activity
Do some background research into the Federal Reserve making sure to look into the following topics: What is the Federal Reserve?  What are its goals and role? Who owns the Fed?  How do its policy tools (open market operations, discount rate, reserve requirements) operate?

Blog Activity
As discussed in the interview, the Federal Reserve was created in large part to address economic crises in the United States.  After watching the video, consider the following question: How does the working of the Fed influence the way it operates and the actions it takes during financial crisis?  In other words, how does its structure and designated powers impact its approach to economic challenges?  Be sure to make connections between items discussed in the video and the information you gathered during pre-writing.  

Reacting to economic underperformance, the dollar continued to edge lower earlier this week following its worst-performing stretch in almost a year.  It dipped further on Wednesday as the Federal Reserve indicated it will continue to raise interest rates in the near future.  Concerns about weak first-quarter indicators, including inflation, will not alter the rising interest rate strategy. As the dollar fell 0.3%, the Dow Jones Industrial Average rose 74.51 points, or 0.4% while the S&P 500 increased 0.2% and the Nasdaq gained 0.4%.

Normally, higher interest rates themselves and the expectation thereof propel the dollar higher and market indicators lower. The market’s reaction to the Fed seems to indicate that the U.S. economy is weak but not terribly weak and that the Fed is cautiously optimistic about near-term economic activity.

Russia and Saudi Arabia Plan Extended Oil Cuts
 
The Wall Street Journal reported on May 15 that Russia and Saudi Arabia issued a joint statement indicating that they will continue cuts in oil output until March 2018. The stated goal is to reduce supplies so prices will rise. The immediate result was an increase is world oil prices. Crude oil prices in the U.S. rose 2.1% to $48,85 per barrel.
OPEC and a coalition of oil producers have tried to impact oil prices by reducing oil supplies. Renewed oil production in the Unites States from shale has hindered efforts to raise prices. In the coming weeks, OPEC is scheduled to meet and they too are expected to continue production cuts.

Higher crude oil prices push U.S. gasoline prices higher, so there is a clear impact on drivers and the U.S. economy. Also significant is the impact of higher prices on the Russian economy. Recent price increases have likely helped lift Russia’s economy out of a recession. Oil and gas is responsible for more than a third of Russia’s federal revenue. Remember 2008 and the financial crisis? Russia’s finances were severely impacted by the crash in oil prices and this correspondingly impacted Russian military spending. While Russia always strives to continue funding military modernization, low oil prices tend to slow the pace.

Promoting low oil prices may actually serve as a means of promoting U.S. national defense. It doesn’t require the deployment of solders or the use of arms. Money spent searching for oil and gas in the U.S., developing renewable energy sources and clean coal technologies would promote jobs, tax revenue and grow our economy. Even if the impact on Russian military spending is small, there is no loser in the United States. The impact on oil producing nations that tolerate or promote terrorism would likely be significant. Low oil prices would serve as an additional tool in the fight against ISIS.
 
Berkshire Hathaway Bites More of Apple and Deletes IBM Stock
 
Berkshire Hathaway, the company run by Warren Buffett, announced that it increased its investment in Apple by  more than 50% in the first quarter. It now owns 129 million Apple shares. Buffett indicated the it he understands the consumer products Apple sells.  During the last quarter, Berkshire sold its IBM investment. Buffett indicated that his initial evaluation of the company was wrong.

For those who study and imitate Buffett’s investing philosophy, both actions provide some insight. Buy stock when you sufficiently understand the company’s business. For years Buffett shunned investments in technology companies. He feels Apple’s business is now well-defined. Buffett also seeks well-established companies that are leaders in their field. Apple’s sustained ability to produce record amounts of cash puts the company in a position to lead for many years to come. He also prefers companies that pay dividends. Apple pays more in total dividends than any U.S. company.

It is well documented that Buffett’s favorite holding period is forever. He is a long- term investor. The IBM sale indicates his rationale for selling. When the investment has changed or you find you erred in your initial analysis, it is time to sell. 

According to Fortune Magazine, Berkshire Hathaway is now considering initiating dividend payments. Berkshire Hathaway is a publicly traded corporation led by legendary investor Warren Buffett. While Buffett considers dividends as part of his investment strategy, Berkshire has never paid a dividend. Buffett feels that Berkshire can make more money for investors by  reinvesting its profits rather than paying dividends. Yet he seeks dividend payers as he invests Berkshire funds. Additionally, Buffett has advised for quite some time that retirement savers invest in dividend payers as part of their personal investment strategy. Buffett, now 86 years old, is reportedly considering retirement. For years Berkshire has not bought back its stock. It is now considering stock-buybacks.

Berkshire has made substantial investments in Apple, the world’s top dividend payer in total dollars. According to the Wall Street Journal, Apple has repurchased almost 21% of its stock since 2012. Buybacks, along with the iPhone’s success, have contributed to Apple’s rising earnings per share and its record high stock price of $153.99 on May 9.  Apple’s market capitalization is more than $800 billion, a first for any U.S. company.

For many years the company, led by world’s greatest investor, has avoided paying dividends and buying back stock. It has now invested in America’s largest company which pays more in dividends than any company in the world and has bought back more than 20% of its stock.

Questions: What is a good stock buyback? When should a corporation pay dividends? Should an investor buy dividend-paying stock? 

The Wall Journal reported today the Apple’s quarterly profits rose 4.9% to $11.03 billion and revenue increased to $52.90 billion. and revenue rose while iPhone sales slipped as shipments fell 1%. This rise in revenue is the second consecutive quarterly increase after three consecutive declines. This reverses a trend of weak sales and falling profits. Is it time to buy Apple?

The better than expected results combined with Apple’s surging cash hoard of $256.8 billion is good news for both the company and investors. The Journal also indicated that Apples returned $25 billion to shareholders in the form of buybacks and dividends. If the proposed tax changes on cash repatriation are enacted, even more cash may be available for distribution.

The above results are positive but the Apple may have a blemish. Shipments of iPhones were down 1% due to weakness in sales in China. Sales in greater China are down 14%. Customers seem to be waiting for the next model which is expected in the fall. Apple is also losing market share to less expensive Chinese phone models. Apple’s stock price is down in early trading today so clearly there is concern that the bad news outweighs the good.

Current Apple stockholders should consider holding on as the Apple may ripen later this year. The seeds for price growth have been planted. Prospective buyers have reason to consider a purchase although it may be an aggressive move at this time. You would be purchasing stock in the world’s most valuable company at a time when the price has risen substantially. Those who buy should do so during down days on the market and in small bites.

According to the Wall Street Journal, Apple Inc. is expected to report having $250 billion of cash and more than 90% of it is located outside of the United States. This means that Apple has more money located in foreign countries than Britain and Canada combined. Apple has more cash than the total market value of Walmart and Proctor and Gamble. It has doubled its cash stockpile in the last four and a half years.

Apple’s ability to generate such a cash hoard is largely due to its hugely successful products. Its desire to retain cash is in part due to its near bankruptcy experience in the 1990’s. Equally important to Apple’s cash retention is the U.S. tax code. Cash repatriated to the United States is subject to a 35% tax. Tim Cook, Apple Chief Executive, was quoted in the article saying Apple was “eager to bring cash home if tax changes enabled it.” Apple’s Chief Financial Officer Luca Maestri indicated that tax changes could would provide “flexibility to do more capital returns. In 2012, Cook began a $200 billion stock buyback program.

News of Apple’s cash position surfaced at a time when the Trump Administration has reportedly proposed, for a limited time, a special tax of 9% on repatriated cash. This proposed tax discount is the subject of much political debate. Apple would pay a lower rate than most Americans pay. This does not sit well with Democrats. Republicans argue that the cash could be used for hiring U.S. workers and purchasing equipment. It would stimulate the U.S. economy, they argue. Democrats counter that Apple and other companies would use cash to pay dividends and buy back stock. They argue this favors the rich and is not productive.

What do you think?  Should the U.S. tax repatriated cash at the rate of 9% for a limited time? Why or why not?