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Apple Bonds Proven To Have A Nasty Taste

Reggie Middleton's picture




 

bite money

The Financial Times reports Apple bonds lose 9% in six weeks:

Investors are nursing losses of up to 9 per cent on Apple’s record-breaking $17bn bond offering, less than six weeks after the securities landed in their portfolios.

The technology giant tapped the white-hot bond market for the largest debt fundraising to date on April 30, but a sharp turn in interest rates has caused a sell-off in corporate bonds and wiped hundreds of millions of dollars off the value of the offering.

Apple sold $3bn of bonds maturing in 2043, locking in a low interest rate of 3.9 per cent for the next 30 years, but the market price of these bonds had fallen to 90.36 per cent of face value in late trading on Monday, according to Trace data.

Investors in the offering paid 99.418 per cent of face value for the new bonds, but institutional and retail demand was so high that they traded as high as 101.97 in the secondary market.

The debt sale was one of the most frenzied on Wall Street for many years and there were three times as many orders as there were bonds available. Issues by companies with high credit ratings have been among the hottest fixed-income investments because the interest they provide outstrips the meagre yield available on government securities.

Hmmm.. So-called "investors" need to look to the future, not the present, when deploying their capital. These so-called "investors" are definitely not subscribers to BoomBustBlog! Last month I posed the query, "Is It Time To Buy Apple As A Valuation Play? The Contrarian That Called The Top In Apple Weighs In". After all, it had fallen over 40% from its recent all time high, a fall which I clearly told subscribers would come. This question is quite pertinent, both for Apple's long term viability and its short to medium term investors. Case in point, Apple's (rather astute) management saw it fit to lock in 3.9% 30 year funding rates. Kudos! A very smart move... For them! The buyers of these bonds (an offering that was 3x oversubscribed, may I add) obviously did not subscribe to BoomBustBlog. Let's count the reasons why such an offering was both ill timed, and ill priced.

The Apple Profit Engine Has Stalled & Is Rolling Downhill

Apple is facing a shart decline in the margins of its top two value drivers. May I also add that these two value drivers are 83% of Apple's revenues and an even greater portion of its profits. Such a drastic concentration in only two products who have reached their zenith is not a good thing!

Click the graphic once to view, twice to enlarge to printer quality...

Reggie Middletonss Ultimate Apple Value InfographicReggie Middletonss Ultimate Apple Value Infographic

Apple's Competition Is The Greatest It Has EVER Been!

Apple's competition is the greatest it has ever been, and features companies who are literally at the top of their game. We are talking a lot of companies, and at the top of a very difficiult game as well. Reference What Sell Side Wall Street Doesn't Understand About Apple - It's Not The Leader Of The Post PC World!!!

Apple is Materially & Quickly Losing Global Market Share! Clear Indicators Of Permanent Downward Moves In Its Peer Group

Apple is rapidly losing global market share over and the trend is worsening. This has ALWAYS signaled the beginning of the end for its peers. Reference Is Tim Cook Cooked? Market Share vs Profit Margin, part 2 - Follow What I Do, Not What I Say!

We Clearly & Obviously Ending A 3 Decade Bull Market, Likely At The Tail End Of The Largest Global ZIRP Experiment Ever!

And this final aspect is the kicker. We are likely culminating the end of a three decade secular bull market in bonds. Why in the world would anyone want to buy debt now, in a good, bad or mediocore company? Reference a chart of ten year rates over time, and you will see that once you get this close to zero (and the applied end to excessive ZIRP), there's no way to go but up. As excerpted from theMarket Realist site:

For those who don't subscribe and/or haven't already seen it, here is the video that tells (nearly) all about Apple, from beginning (Q3 2010) to end.

Of course, there is a point at which Apple is a good buy. After all, they have a lot going for them. The question du jour is, exactly what is that point? I refer my subscribers to the research documents below for the answers... 

Subscribers, download the Q3 2013 valuation reports (click here to subscribe).

The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescient!

 

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Thu, 06/13/2013 - 14:37 | 3654826 Fuh Querada
Fuh Querada's picture

Of the $17 bn bond offering only $3 bn had 30 year duration. Anyone who buys that deserves everything they get. But what is the duration and issue price vs current price distribution of the remaining bonds.

Thu, 06/13/2013 - 10:42 | 3654044 disabledvet
disabledvet's picture

keep calling for the demise of Apple. good luck with dat. I do agree...for those that bought there bonds...you're as stupid as the ones who bought Facebook's IPO (and probably the same people.) "a fool and his money is soon parted" so i do agree...h/t for sound financial blogging. of course you have been pounding the table on Google as well so...there goes all your credibility too. Microsoft has been the big mover YTD...and obviously with Sony flat on its back right now...that gaming console war can become a victory for them. "and that's just one of 20 technology divisions" for that massive company. what's Google got again? "an integrated software platform"? don't get me wrong...i'm not criticizing them. Amazing IPO and stellar performer ever since. But there are a LOT of options out there right now "and demand is falling off a cliff." price wars are the norm in this space...i think we're on the cusp of the biggest they've ever seen. hence: "long consumer."

Thu, 06/13/2013 - 10:51 | 3654099 cocoablini
cocoablini's picture

Reggie says margin compression and loss of profits not a demise. We all saw it coming and the new iOS7 shows that Steve Jobs loss is a bigger deal. They are losing design as well

Thu, 06/13/2013 - 10:18 | 3653926 pitz
pitz's picture

TLT (the US long-term treasury ETF) has also lost also ~10% in the past 6 weeks.  So where's the beef? 

This is just plain old interest rate risk, with some random commentary about Apple thrown in.  Again, still don't see any correlation between the two, other than the obvious -- that long-term USD$ denominated obligations are for fools at this point.  No matter who the issuer.

Thu, 06/13/2013 - 10:57 | 3654021 Reggie Middleton
Reggie Middleton's picture

TLT (the US long-term treasury ETF) has also lost also ~10% in the past 6 weeks. So where's the beef? 

This is just plain old interest rate risk, with some random commentary about Apple thrown in.  Again, still don't see any correlation between the two, other than the obvious -- that long-term USD$ denominated obligations are for fools at this point.  No matter who the issuer.

There's the beef! You answered your own question. Where the TLTs 3x+ oversubscribed with demand bursting out of the seams to sell bonds at a premium at the top of a bond bubble with ZIRP threatening to end?

Better question... The US is a much better 30 year risk than ANY tech company, particularly a tech company who has just seen its zenith! Think... Is DEC the same risk it was 30 years ago? Polariod? HP? Thirty years is beyond eternity in the tech world. Yep, more beef.

Let's not get into the fact that the margins on 86% of its revenues are dropping faster than lead lined bird shit.

There's a lot more to be seen than mere interest rate risk if one bothers to look.

Thu, 06/13/2013 - 15:59 | 3655319 pitz
pitz's picture

"There's a lot more to be seen than mere interest rate risk if one bothers to look."

I'm looking, but just not seeing, at least from your article, a decline in Apple bonds relative to the obligations of other issuers. 

Really no different than me saying, "gold declined to $1350 because I dumped my girlfriend 3 months ago and am not going to be buying her a gold ring".  Yes, the two events are correlated, much like we know that Apple's business has reached its zenith (a conclusion which I also agree with), but to argue any sort of causation is pretty difficult to say the least. 

A more appropriate title in the future:  "This is why Apple's earnings are going to suck".  Or "long-term USD$ debt declined by 10% in the past weeks, look for a continuation of trend".  But trying to bring the two together leads merely to incoherence.

Thu, 06/13/2013 - 10:57 | 3654123 Toolshed
Toolshed's picture

I laughed as I watched Apple commit suicide in the consumer computer market in the 80's. They went from hero to zero in very short order as the PC platform ate their lunch. And now they do the same in the cell phone market. Too funny. Then and now they were Steve Jobless. Apparenty they should have named the company Steve Job's Stuff, Inc.

Thu, 06/13/2013 - 10:15 | 3653911 Notarocketscientist
Notarocketscientist's picture

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Thu, 06/13/2013 - 09:45 | 3653816 pitz
pitz's picture

Are these losses any worse than suffered on similar duration long-term corporate debt?  Seems that the hits have been somewhat broader than Apple.

Also, is there really such thing as a 'post-PC' world?  In light of the increasing loss of credibility of the 'cloud' solutions (ie: all the NSA spying, among other reasons), it seems that the impending death of the PC has perhaps been greatly exxagerated.

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