I was born in the 1970s. But some of my most vivid memories — and the ones that are most pertinent today — are of the great U.S.-U.S.S.R. rivalry from the 1980s.
The serious stuff, like President Ronald Reagan’s “Evil Empire” speech, daily reports on the evening news about the bloody Soviet-Afghan conflict … or the Star Wars defense program designed to shoot down incoming ICBMs in space. And the comical, such as the cartoonish portrayals of Russians in movies such as “Spies Like Us” and “Rocky IV.”
Until recently, I thought those memories would remain safely locked up in the past. But Russian President Vladimir Putin sure looks like he wants to bring back the bad old days of Cold War geopolitics!
First, we saw Putin’s calculated, slow-motion takeover of the Crimean Peninsula. Now, Putin is helping fuel tensions in eastern Ukraine — aided by pro-Russian militants in cities like Slovyansk and Mariupol. His military machine is conducting military exercises near the borders of Ukraine, while the Ukrainian government is continuing what it calls an “anti-terrorist operation” to regain control in those restive regions.
Putin looks like he wants to bring back the bad old days of Cold War geopolitics.
The increasing tension has Russia and the U.S. trading barbs. President Barack Obama warned that new sanctions could be forthcoming if Russia doesn’t back down, while Putin fired back by saying “if the Kiev regime has started to use the army against the population inside the country, it, beyond any doubt, is a very serious crime.”
It’s unclear exactly how this very tense situation will play out. If one side or the other overplays its hands, things could quickly spiral out of control. That’s a key reason why stocks and interest rate markets remain unsettled late this week.
What IS clear is that the financial costs are mounting fast for Russia. The Russian ruble currency has plunged more than 8 percent so far this year. That’s driving up inflation, while crushing growth expectations.
The country’s central bank was already forced to raise its benchmark short-term interest rate to 7.5 percent from 7 percent today in an attempt to shore up the currency. But Standard & Poor’s slashed its sovereign rating on Russia to BBB- anyway. That’s one step above “junk” status.
If Putin keeps flexing his muscles, Russia’s GDP growth last year (1.3 percent, the worst in four years) will be nothing but a distant memory. Recession will strike, causing even more market chaos abroad!
So what do YOU think the endgame is here? Is Putin mad? Trying to put the old Soviet Union back together in practice, if not in name? Or are the Ukrainians bringing this on themselves?
And what about the market impact? Is this another flash in the pan, a mini-crisis that will fade quickly? Or is it grounds for dumping U.S. stocks and moving your money to safe assets? Hop on over to the Money and Markets blog to let me know what you think.
What You Said on Yesterday’s “Merger Mania” Piece
The general consensus seems to be that mergers and acquisitions CAN make you money as an investor, but they sure aren’t good for the economy as a whole.
Some of you also noted that the spate of deals is symptomatic of an economy where companies either can’t or won’t invest their money in anything “real” — factories, research & development, jobs, etc. But since there’s so much cheap money out there, they might as well use it to buy competitors and boost the value of their shares!
Ken P. said, “It appears that companies are using their overvalued stock as the currency with which to make their buys. This is not a long-term positive and may well lead to a blow-off top.”
And John added the following: “I have been downsized out of a great position back in the ’80s when LBOs ruled the day … I like making money as much as the next, but at some point we need to ask, ‘To what expense are we willing to go for the gain?’ Mergers wreck lives, families and local economies that may never recover … was that gain worth it?”
Personally, I would love to see companies treat their workers better and use more of their money to help boost this country’s economy from the ground up. But with all the red tape and regulation we’ve piled on corporate America, not to mention the other reckless monetary and fiscal policies we’ve pursued, I’m not surprised in the least at how companies have responded.
What about Apple’s Big Split?
Finally, I’m still reading and hearing a lot about Apple (AAPL) and its huge stock split announcement the other day. The company agreed to split its stock 7-for-1, effective as of June 2.
That means if the stock were to still be trading around $565 in June, you’d receive seven shares with a value of around $80.70 in exchange for every one of your shares. Apple also jacked its buyback up to $130 billion, and raised its quarterly dividend payout by 8 percent.
Technically speaking, stock splits don’t change the economic value of your holdings in a company. But Apple is a high-priced stock, one that some small investors balked at buying. So you could make an argument that having cheaper shares will actually draw in more investors.
Then there’s the whole issue of whether or not Apple could someday get added to the Dow Jones Industrial Average. The Dow is a price-weighted index, so Apple’s high per-share price made it an unlikely index component. It would have too much influence versus other stocks on a day-to-day basis.
But at a much LOWER price, Apple is a much more viable candidate. And if it were to be added to the Dow, you would likely see even more buyers step in. That doesn’t mean a move is imminent, mind you. Dow index changes don’t come around very often! But it is some food for thought down the road.
So what do YOU think? Do you own Apple shares and are you happy with the split? Or does the move have little impact on your investing decision? Let me know here!
Market Roundup
Here’s a quick recap of the OTHER important news of the day …
The Wall Street Journal covered the ongoing “Echo Bust” in housing that I’ve been warning about for some time. In a story titled “Demand for Home Loan Plunges,” the Journal noted that mortgage lenders originated only $235 billion in home loans in the first quarter. That was a 58 percent year-over-year plunge, and it left lending activity at its lowest level since 2000.
Speaking of housing, Bloomberg piled on, noting that “the U.S. housing market is going downhill just when many economists thought annual sales would be heading up.” Are those the same economists who told us all that “nationwide home prices never go down” back in the mid-2000s? Just wonderin’.
The earnings parade continued, with more tech bellwethers like Amazon.com (AMZN) and Microsoft (MSFT) hitting the tape.
Microsoft beat both top and bottom line expectations in its first reported quarter under new CEO Satya Nadella, leading to small gains. Amazon managed a 23 percent jump in revenue to $19.7 billion, but earnings per share only matched estimates at 108 million, or 23 cents per share. Concern about expansion costs and tight margins weighed on the stock.
China’s currency continued to tank in value against the dollar, falling for the sixth straight day to the lowest since December 2012. Investors are clearly worried about a “hard landing” for that country, not to mention scores of “Ghost Cities” full of empty apartments, shopping malls, and office buildings.
Reminder: If you have any thoughts to share on these market events, don’t hesitate to use this link to put them on our blog.
Until next time,
Mike Larson