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National

Capital

Axios Capital

The government shutdown "is abstract for most Americans," writes Axios' Mike Allen, but it's about to get very real very quickly. In the markets, nothing's going to get SEC approval while the shutdown is in effect. That means no IPOs, just for starters.

What's happening: The government also attempted to halt bankruptcy proceedings at a nursing-home chain, blaming the shutdown. Both debtors and creditors agree that would put patient health at risk. As Mike says, crunch time is coming. The shutdown will impose real hardship on the nation and its economy.

Most government workers' first payday without pay is fast approaching.

Food stamps for 38 million Americans could be reduced or even run out entirely.

Taxpayers who expect a tax refund want to file their taxes early. But with no IRS workers issuing refunds, that's not going to help them. The absence of tax refunds, in turn, is going to remove a formerly reliable boost to America's winter economy.

Our thought bubble: Mike thinks media coverage of those hardships could end up forcing the president's hand. 

Go deeper: The force that could end the shutdown

The shutdown is about to bite

Politics

Government shutdown

Business

Donald Trump

2024 will be an election year like no other, as President Biden seeks re-election amid economic uncertainty, two wars and questions about his age. His likely foe, former President Trump, faces felony charges and vows revenge on his political enemies. Meanwhile, Americans generally are dissatisfied with those choices and are divided over immigration, race, education and more.

Politics & Policy

Apple is the most successful and profitable luxury consumer-goods company that the world has ever seen. Its profit margins are stratospheric, its earnings per share continue to reach new all-time highs, and it has no real competitor in terms of being the high-end brand of choice in categories from personal computers to phones to digital watches.

Why it matters: It tops the list of retailers that any real estate developer wants if they're trying to create a luxury-shopping destination, and like Louis Vuitton, it never discounts.

Apple has extended its reach to hundreds of millions of customers around the world who would never buy Gucci or Prada. Still, luxury brands, by their nature, never reach everybody. Most people will end up opting for the cheaper, more utilitarian rival. At some point, any luxury brand will be selling mostly to repeat customers. Apple has definitely reached that point.

Apple's repeat customers are incredibly profitable and price-insensitive — which raises the ultimate luxury problem of what Apple should do with all its money. Even after spending more than a billion dollars a month on research and development, Apple generates vastly more cash than it can spend.

The solution: Stock buybacks, which return those profits to Apple's shareholders and help to keep Apple's per-share earnings on an upward trajectory. Buybacks are not an attempt to time the market and buy when shares are cheap; they're better thought of as a particularly flexible and tax-efficient form of dividend.

Not all public companies can, should or must grow. The magic of stock buybacks is that they can support the stock price even if the business doesn't grow at all. The rise of Apple's annual buyback budget is simply a sign that the company has matured.

Adapted from a chart by Above Avalon's Neil Cybart; Chart: Axios Visuals

The bottom line: If the job of a CEO is to generate profits that can be returned to shareholders, then Tim Cook has been vastly more successful at Apple than Steve Jobs was. That doesn't mean the end of the age of Apple. It just means Apple has achieved its potential.

The sign that Apple has ripened

The Apple Store in Hangzhou, China. Photo: Zhang Peng/LightRocket via Getty Images

Apple

Technology

Big Tech

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

This week's mega-deal was the announced $74 billion acquisition of Celgene by Bristol-Myers Squibb. BMS is paying one share of its own stock, plus $50 in cash, for each share of Celgene, which works out to about $68 billion at current prices. The combined company looks to be worth on the order of $150 billion, making it the 6th-largest pharmaceutical company in the world.

The big picture: Pharmaceutical mega-mergers are common. (Wikipedia has an exhaustive list.) Pfizer, in particular, is a product of M&A, having bought Pharmacia, Wyeth and Warner-Lambert in deals worth a combined $244 billion. Meanwhile, technology mega-mergers are rare, with the disastrous exception of AOL-Time Warner.

Yet despite the relative lack of M&A, the technology industry is much more concentrated than the pharma industry. The top 10 largest tech companies, led by Microsoft, Alphabet, Apple, Facebook and Tencent, account for 41% of the sector. The equivalent number in the pharma sector is just 29%.

Worth noting: A capitalization of $150 billion doesn't even get you into the top 10 in tech.

Be smart: Mega-mergers don't necessarily make for highly concentrated industries, especially not when it comes to pharmaceuticals. Patents have a finite lifespan, which means that if a company wants to stay big, it needs to acquire new drugs, either via R&D (which has a relatively low success rate) or else via M&A. Big pharma mergers are often a case of running to stand still.

Why pharma companies merge

They're often a case of running to stand still.

Mergers and acquisitions

Health Care

The U.S. health system faces critical questions about cost, access and equity. Technological advances and new discoveries about diseases like cancer and Alzheimer’s are transforming patient care and reshaping public health.

Health

Data: Apple SEC filings; Chart: Axios Visuals

The dueling narratives of Apple and Nike's fourth quarters — driven largely by their success (or not) in China — highlight how the world's second-largest economy can impact some of the world's most influential companies.

The bottom line: Apple is a big company on an absolute level, but it's a tiny part of the Chinese economy, where consumers are just as fickle as they are anywhere else. What we learned this week is that Apple looms unrealistically large in investors' imaginations. China can help deliver spectacular growth, but that growth will always be bumpy, especially for foreigners. Investors shouldn't be surprised when it is.

Data point 1: At the end of December, a huge American consumer brand announced a blockbuster quarter, driven largely by sales in China. Before accounting for currency fluctuations, Nike's quarterly sales soared 31% in China, with digital sales in the country growing even more.

"We have not seen any impact on our business from some of the U.S.-China dynamics that we’re all reading about," said CFO Andrew Campion on the earnings call. "We’re mindful of those, but in the context of being mindful of those, we continue to see very strong signs of momentum in China."

When Nike stock started trading after the results were announced, its shares were up more than 8.5% from where they had closed the previous day.

Data point 2: At the beginning of January, a huge American consumer brand announced it was going to have a disappointing quarter, driven largely by sales in China. For the first time this century, Apple will see a year-on-year revenue decline in the all-important final quarter of the calendar year.

"While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China," said Apple CEO Tim Cook. "In fact, most of our revenue shortfall to our guidance, and over 100% of our year-over-year worldwide revenue decline, occurred in Greater China."

When Apple stock started trading after the results were announced, its shares were down some 8.8% from where they had closed the previous day.

The big picture: This is how capitalism works. Brands seek growth, especially in China, which will drive most of the future increase in global consumer demand. When those companies succeed, their shares rise; when they fail, their shares fall. So far, so unremarkable.

The important difference between Nike and Apple is that while the former was considered to be a Nike story, the latter was considered to be a China story. Nike's earnings didn't boost the stocks of other companies with China exposure, but Apple's earnings sent hundreds of other stocks tumbling. There was even a significant effect on 10-year Treasury bond yields. That's bonkers.

The Chinese economy is not growing as fast as it was, but we knew that already. And there are lots of Apple-specific reasons why the iPhone might be seeing lower sales in China. Apple's news, on its own, is not an indication that the Chinese economy is doing worse than we thought; it's just one small data point among many.

Go deeper: The Chinese role in Apple's seismic iPhone warning

Apple is not China

It's a tiny part of the Chinese economy, where consumers are just as fickle as they are anywhere else.

World

President Trump told reporters outside the White House on Sunday that he’s "in no hurry" to replace his acting Cabinet secretaries with formal replacements, saying, "I have acting, and my actings are doing really great. ... I sort of like acting. It gives me more flexibility, do you understand that?"

Why it matters: Trump's attorney general, secretaries of Defense and Interior, EPA head, and UN ambassador are all working in acting capacities, despite being Senate-confirmed positions. The appointment of Matthew Whitaker as acting attorney general, in particular, came under fire as potentially unconstitutional — even from conservative legal scholars like John Yoo. And the Washington Post reported this week that Patrick Shanahan's position as acting Defense secretary could also be constitutionally murky. Furthermore, Trump, who campaigned on "draining the swamp," faced criticism for his acting secretaries' lobbying ties.

Trump says appointing acting Cabinet heads grants "more flexibility"

"I sort of like acting. It gives me more flexibility, do you understand that?"

Photo: Jabin Botsford/The Washington Post via Getty Images

Cabinet of Donald Trump

President Trump told reporters outside of the White House on Sunday that he "can relate" to furloughed federal workers, adding that he expects they "will make adjustments" while they do not receive paychecks during the ongoing government shutdown.

The big picture: Republican sources told Axios' Mike Allen that they believe the only thing that will make Trump cave on the shutdown and his border wall demands is the moment when the hardships of hundreds of thousands of furloughed government employees become a staple of local news coverage across Trump country. But Trump personally seems to believe that those workers will stand with him, telling reporters that "many of those people who won't be receiving a paycheck, many of those people agree with what I'm doing."

Trump says he "can relate" to furloughed federal workers during shutdown

"I'm sure the people who are on the receiving end will make adjustments, they always do."

Acting White House chief of staff Mick Mulvaney told Chuck Todd on NBC's "Meet the Press" Sunday that President Trump would be willing to "give up a concrete wall, replace it with a steel fence" at the U.S.-Mexico border in order to appease Democrats and end the government shutdown. 

Meet The Press-10 44 15 Am - 10 45 05 Am-2019-01-06

Background: While Trump floated his own "totally effective" and "beautiful" steel version of a border wall last month, Mulvaney's semantics on the issue highlight the still-vast distance between the White House and congressional Democrats. After a 16-day shutdown, little headway has been made in negotiations, and Vice President Mike Pence said yesterday that the White House won't accept anything less than the $5.7 billion in wall funding it originally requested.

Go deeper: Federal workers could be the force that ends the shutdown

Mulvaney: Trump would build "steel fence" as concession to Democrats

After a 16-day shutdown, little headway has been made in negotiations.

Mick Mulvaney sitting at a cabinet meeting

Acting chief of staff Mick Mulvaney. Photo: Jabin Botsford/The Washington Post via Getty Images

Axios AM

Finish Line

Axios Finish Line

With the departure of White House chief of staff John Kelly, the misinformation emanating from President Trump has only escalated. 

What's happening: Alumni of this White House see a possible reason. Although Kelly was thwarted in many of his efforts to control the president, one place he made authentic inroads was clamping down on the paper flow to the Oval Office. "Anyone who circumvented that process was going to have a serious problem," said a former official who saw the transformation up close. 

"It has devolved into anarchy," added another alumnus of Trump's White House.

"Someone mentioned to me a few days ago it's like the old [pre-Kelly] days of the administration, just with less people," this former official continued.

"The wild, wild west. ... At least during the early days, he had a bit of a buffer with Hope [Hicks] and [longtime bodyguard] Keith [Schiller] there."

Wednesday was Kelly's last formal day in the White House, but his influence had declined since he announced his departure on Dec. 8. 

Since then, Trump has made several unusually specific factual assertions that were quickly shown to be inaccurate, suggesting more unvetted information may be reaching him than had been the case in the heyday of Kelly's control: 

Arguably the most notable one: During Wednesday's devil-may-care, 95-minute Cabinet meeting, Trump said that back in 1979, the Soviet Union had invaded Afghanistan "because terrorists were going into Russia. They were right to be there." A Wall Street Journal editorial scolded: "We cannot recall a more absurd misstatement of history by an American President."

Walls as a weapon: Trump tweeted last Sunday: "President and Mrs. Obama built/has a ten foot Wall around their D.C. mansion/compound." The WashPost reported: "Obamas' neighbors [said] there is no such wall. The 8,200-square-foot structure, despite several security features, is completely visible from the street."

At the Cabinet meeting, Trump said: "[T]he Vatican has the biggest wall of them all." Dan Scavino, Trump's director of social media, had tweeted during the campaign: "Vatican City is 100% surrounded by massive walls." The NY Times reports: "Vatican City has walls, but they do not enclose the entire territory and visitors can easily enter some parts."

Also during the Cabinet meeting, per the NY Times, "Trump mocked India for doing no more in Afghanistan than building a library, which generated ... head scratching [in New Delhi] because, according to Indian news media, the country has not built a library in Afghanistan in many years."

And then there's the president's depiction of how tariffs work. "China is paying us tremendous tariffs. We’re getting billions and billions of dollars of money pouring into the Treasury," he said Friday at a Rose Garden news conference. The NY Times points out: "The United States does not send China a bill for the cost of tariffs, which are often passed on to American importers or consumers."

Be smart: The WashPost called the Cabinet meeting "a fact-checking nightmare."

Better rest up: The president believes he pays no price for escalating inaccuracies, even ones that have been repeatedly debunked. ("Bottomless Pinocchios," the WashPost Fact Checker calls them.) 

With most of his human guardrails gone, the unvetted language of Trump's rallies is once again a staple of his governing.

Reality check: Trump is pushing fake news on the migrant caravan

Inside Trump’s fake news recidivism

Inside the White House

The leadership of roughly a quarter of the world will be decided as three of the seven largest countries by population — Nigeria, Indonesia and India — will hold general elections in the next four months. They follow Bangladesh, the eighth largest, which went to the polls last Sunday.

Why it matters: It's a big moment for global democracy.

Nigeria (February): Four years ago, President Muhammadu Buhari swept into power on a surge of optimism, pledging to restore security and stamp out corruption. Since then, his record has been mixed, his popularity has dwindled and his health is poor (he recently had to deny rumors he’d been replaced by a body double). The old guard is clawing at the door.

Indonesia (April): President Joko Widodo is a charismatic reformer, but he’s in a bitter fight fueled in part by misinformation about his faith. He has picked an influential Muslim cleric as his running mate in an attempt to undercut his strongman rival. If he loses, observers fear a rollback of democracy.

India (April/May): Recent setbacks in state elections were a shot across the bow for Prime Minister Narendra Modi, whose Bharatiya Janata Party may struggle to win enough seats to form the next government. It's a stunning fall for a leader who, until fairly recently, looked untouchable.

One-fourth of the planet goes to the polls

Nigeria, Indonesia and India will hold general elections in the first four months of 2019.

Elections

Department of Defense chief of staff Kevin Sweeney has stepped down from his post.

 "After two years in the Pentagon, I've decided the time is right to return to the private sector."

Why it matters, from Brent Colburn, a senior Pentagon official under President Obama: "In normal times, the resignation of a chief of staff following the departure of a secretary of defense would not only be seen as unsurprising, but as expected. ... These are not normal times. With so many leadership gaps in the building, and so much uncertainty about future leadership, this will just add to the growing sense of instability in an institution that thrives on predictability."

Sweeney served as chief of staff to former Defense Secretary James Mattis, who resigned last month after President Trump's decision to withdraw U.S. troops from Syria. Pentagon spokesperson Dana White also announced her departure this week.

Pentagon chief of staff Kevin Sweeney resigns

Pentagon spokesperson Dana White also resigned this week.

Sunday's top stories