Apple Inc. (AAPL) Fiasco Proves That Fixed-Income Could Blow Up

Moreover, IPOs have become almost commonplace.  In 2012, for example, new offerings raised a striking $4.75 billion – more than 2010 and 2011 combined.

The problem is that the newest IPOs don’t have the asset quality of past IPOs.  Think “tech bubble.”  Instead of high-quality assets like storage and pipelines, as in years past, now some IPOs include less stable and more volatile assets, like refineries and coal.  Small quantities of such asset variations may be okay for a $5 billion ETF like Alerian.  But investors will receive a wake-up call if they find themselves holding smaller funds with the bulk of their dollars in riskier assets.

Apple

To illustrate the craze of “The Search for Yield,” just look to the exploits of fund manager David Einhorn.  He is trying to coax Apple into creating a special preferred security that would hold a “senior” claim to Apple’s steady stream of earnings.  He wants Apple to distribute the new security to Apple’s existing shareholders.

Note that Einhorn is not trying to get his hands on Apple’s $137 billion cash pile by coercing Apple to increase its 2.3% common share dividend.  Rather, Einhorn is trying to create value (for himself and his firm) where none existed before.

Einhorn is hoping that a senior Apple security would command a higher market valuation than Apple’s current 10x next year’s earnings.  If the senior security were to pay out 4% or 5%, then perhaps yield-hungry pension funds and other money managers would flock to it – and thus push up its price to say, 15x or 20x next year’s earnings.  In the end, the original holders of Apple’s common stock would hold an additional fixed-income-like security that had bolstered in price.

Yields at Any Price

In short, Einhorn is trying to talk Apple into creating a security that satiates the appetites of fixed-income investors.  Einhorn’s actions demonstrate what today’s fixed-income investors desire: high yields at any price.  And that idea is precisely why I believe that the fixed-income markets are a little too hot for comfort.

The article Apple Fiasco Proves That Fixed-Income Could Blow Up originally appeared on Fool.com and is written by Chris Marasco.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.