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The InterPrime Newsletter - Issue #4 - Apple's Corporate Cash

The InterPrime Newsletter
The InterPrime Newsletter - Issue #4 - Apple's Corporate Cash
By The InterPrime Team • Issue #4 • View online
We would like to wish all our readers a very happy start to the holiday season! We trust that you all had a fantastic Thanksgiving and were able to indulge in the traditional feasting.
“It’s important to remember how fortunate we are as a country to have a currency and a bond market that is seen in every way as a source of strength and it’s a huge responsibility for us to keep it that way.” - Lawrence Summers

How Apple manages their corporate cash
Apple is the largest company in the USA, and it’s arguably the most admired company in the world. They build products that delight their customers, and run their business to benefit all their stakeholders. They are also one of the slickest and most sophisticated operators out there, and we can all learn massively from them.
In this issue we are going to delve into how Apple’s treasury manages their ~$192B cash pile via their ‘hedge fund-like’ subsidiary Braeburn Capital (Braeburn is a cultivar of apple that is firm to the touch with a red/orange vertical streaky appearance on a yellow/green background). 
As usual Apple is pretty secretive about their operations, but we dug into their required SEC filings to glean some insights. All of this information is from their latest annual report filing (10-K) as of September 26, 2020.
Cash, Cash Equivalents & Marketable Securities = ~$192B
As you can see Apple being likely the largest banking customer in the world holds only about 10% of their liquid capital in cash. The lion’s share of their capital is in cash equivalents and marketable securities. This gives them absolute control over their cash, as well as allowing them to meet their stated goal of “capital preservation”.
The Company’s investment policy and strategy are focused on the preservation of capital and supporting the Company’s liquidity requirements. The Company uses a combination of internal and external management to execute its investment strategy and achieve its investment objectives. (source: Apple 10-K)
Cash Equivalents = $20B
Cash equivalents are highly liquid investments with maturities of three months or less at the date of purchase.
In addition to keeping 10% of their liquid assets in cash, they keep another 10% in cash equivalents. This gives them additional flexibility, but most importantly control on their capital, and away from bank accounts. Using cash equivalents is a simple way to maintain liquidity, control and earn a reasonable rate of return on your capital. 
Marketable Securities = $154B
Since Apple is one of the most profitable companies in the world, earning a net income of over $57B in FY 2020 (source - 10-K), they are positioned very aggressively with how they manage their corporate cash, with around 80% in marketable securities.
They disclose their split of marketable securities by maturity in the following buckets: 
  1. Current (maturities greater than 3 months but less than 1 year)
  2. Non-Current (maturities between 1 and 5 years)
Current (3 months to 1 year maturities)
Non-Current (1 to 5 year maturities)
The aggressive bent on their corporate cash management strategy is evident in how they manage their marketable securities with a lion’s share in corporate securities. One may be curious about why they hold slivers of Muni bonds & U.S. Agency securities - it’s because they are being opportunistic with their cash and taking advantage of good deals in high quality securities when they show up!
This positioning of their cash portfolio has allowed them to generate a 1.85% weighted average rate of return on their cash, cash equivalents and marketable securities. 
This translates to over $3.7 BILLION in interest income or 3.7 MILLION Macbook Airs - that’s one for every person in the city of LA!
As always there is a lot we can learn from best of breed companies such as Apple. Here are the key points as we look to leverage the learnings in managing our own corporate cash:
  1. Have a sound investment policy that suits the needs of your company. It’s very important to have a plan for your most valuable asset - cash! We recommend SIPS for startups.
  2. Apple goes out of their way to maintain control of their cash assets by owning securities directly, rather than storing money in bank accounts, mutual funds or ETFs. This enhances safety, security and gives them the ability to meet their specific needs.
  3. Even with all their sophistication Apple keeps things simple (relatively) by leveraging U.S government securities and high end investment grade corporate bonds to meet their stated goal of “capital preservation”. 
By leveraging our services at InterPrime you too can take advantage of the capital markets with your cash, like Apple. We can help you create a system that keeps your cash safe, liquid and earning a return while keeping you in control of your cash (rather than giving up control to the bank!).
Reach out to learn more!
Market update - To Hell with the Rules!
To hell with the rules! At least that is what the financial markets say.
It does not matter how involved in finance you are; rules can, should, and must be implemented. Assuming you want to be successful.
Diversification, measuring risk, determining profit targets and knowing when one has made a mistake. These are only a few of the things investors need to be aware of and consider.
One of the larger overarching rules of the financial markets revolves around how equities and bonds interact. Generally speaking they have an inverse relationship. Meaning, when one goes higher in price, the other should go lower.
Why does this happen?
For simplicity, this inverse relationship happens because investors are always weighing how much safety they want versus how much return they want to try to attain.
Bonds by nature lean toward the safest part of the spectrum. They are contracts between the bond issuer and the buyer. All the terms are laid out beforehand and you know how much you are going to get paid and when. Because of this predetermined nature of the contract, you go into the investment with a confident approach - a.k.a. safety. You can check out our bond primer to learn all the gory details.
When you buy stock in a company, you are buying a piece of the company, so you are along for the ride. Good, bad or indifferent.
When the economic landscape appears to be on a sure footing and investors believe growth is going to happen. i.e. stock prices can rise. They sell their “safe” bonds to get money to buy stocks.
When the economic landscape appears to be on shaky ground and investors believe growth is going to slow then stocks prices can go lower. They take profits on their stock positions and buy the “safety” of bonds.
This movement of investor money between stocks and bonds is called rotation.
Rotation happens consistently over time and is something market participants always keep and eye on. If you can pinpoint when the switches may take place you can enter into those investments before the herd changes direction. Hello profits!
But what if the expected rotation is interrupted or stops?
For the rotation to stop it is generally because of an unexpected large force entering the market. In COVID times this is currently happening because of the role the US Federal Reserve is playing in the markets
Thanks to COVID and global economic uncertainty, the US Federal Reserve is keeping bond prices stable by purchasing them in massive quantities. This is affecting the bond market and keeping the before mentioned rotation from happening naturally. If you want to get into the details of what the US Federal Reserve is buying you can read our November newsletter post here.
To illustrate how the normal rotation is currently NOT happening let’s look at a few charts.
The S&P 500 has been on an absolute tear since the lowest point of COVID terror in March. It is easy to see how the price of the index has moved in a swift up and to the right direction.
S&P 500 Index (YTD)
S&P 500 Index (YTD)
In normal market conditions, such a price rally in the index would push US bond prices lower.  Remember, when bond prices go lower, the yield goes higher.  Thanks to the US Federal Reserve buying bonds this has not taken shape.  In fact, at times, both stock and bonds prices have moved higher together!
30 year Treasury bond yield (YTD)
30 year Treasury bond yield (YTD)
To further illustrate this we want to highlight a recent post from a FinTwit must follow @tenyearnote:
Not only has the US stock market rallied substantially with bond yields not going higher, but other global indices like the FTSE 100 and STOXX 600 did as well.
Based on the above charts and information it leads many to believe the normal rotation between equities and bonds is currently on pause. For how long? That is impossible to tell because markets can act irrationally longer than anyone can foresee.
One key to this all is the US Federal Reserve. If you keep your eyes on what they are doing and saying, you may start to get hints as to when the rotation will resume. Until they change how they are operating - we must assume “normalcy” will be on hold.
Stay tuned for more interesting times ahead!
Thank you from all of here at InterPrime
With the start of the holiday season upon us, we would like to take this opportunity to give thanks to our community of supporters, our customers, partners and investors.
This has been a crazy and unexpected year for all of us, and we are grateful for all that you have done. Thank you!
Did you enjoy this issue?
The InterPrime Team

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