Apple just sold $2B dollars of 30 year bonds paying 3.45%. In technical terms, they have managed to get $2 BILLION REAL DOLLARS for a some cash up front followed by Monopoly money, magic beans, snake oil, Imperial Russian railways bonds, and a share of tolls on this bridge in Brooklyn…
Just stop and think for a second. Will Apple even be in business by 2045? They sell consumer products with a life-cycle of 2-3 years. Translation: they have to keep running (fast) just to stand still.
- Exhibit A for that sort of obsolescence risk is…. Apple. They were facing oblivion 15 years ago. Imagine an Apple 30 year bond sold in 1990 (when the Macintosh was flying high). It would have been worth near-zero 10 years later. Apple did come back, but a 3.45% coupon today isn’t pricing in that sort of risk.
- Exhibit B is the incredibly short list of consumer technology companies that have stayed viable over 30 years. Think about all the other “hot” consumer tech stocks of 1990. Or 2007 (Blackberry anyone?). Sony? OK, but would you buy Sony 30 year debt right now?
- Exhibit C is how few tech companies in general stay viable over the long term. IBM? Intel? TI? Cisco? Near-death experiences in there for all. And none sell shiny toys to fickle consumers.
Of course, finance professionals can see past these simplistic arguments to consider more sophisticated and complex strategies.
- The “next greater fool” theory of pricing. “I’m not really buying these bonds for 30 years, I’m planning to sell them to some greater idiot later on. Who will sell them on to another idiot. Until we run out of idiots…”
- The Louis XIV rule; “Apres moi, le Deluge” (After me, the world ends in [Noah’s] flood). “I am not really buying these bonds for 30 years, I am buying them for as long as I’m in my job (2-5 years). The next guy will have to deal with the mess.”
Cue the mortgage crisis, the tech bubble, the Nifty Fifty, the Roaring Twenties, the Railway Mania, the South Sea Bubble, the Tulip Bubble….
But even then, why not buy Apple stock? You’ll probably make more in (rising-with-inflation) dividend payments than this (fixed) 3.45% payout. You are already getting 1.6% in dividend yield today. And note that $2 billion of debt is going to fund…. (wait for it)…. buying back Apple stock?!?
OK, I do understand that reasonable buyer can actually reasonably buy them today. But there is still something fundamentally broken about the markets that birth semi-fantasy instruments like this.
They are free-floating mines that are going to end up sinking someone down the line. Probably some retiree in Florida or a German Landesbank. The usual next-greater-fools engulfed by Le Deluge… Underlying this all? The bedrock axiom of today’s financial markets. Just sell enough of these things and “Le Deluge” triggers “Le Bailout at taxpayer expense.“
Sigh.
