Time of Greed

"It's Too Expensive to Be Defensive" is the headline in today's Breakout on Yahoo Finance.

Insurance is a wonderful thing — especially when you need it. But it's definitely not free. In fact, the cost of protecting your assets in the stock market has become really expensive, which is why some investment pros are of the mind that the cost of protection just isn't worth it anymore.

The cost of insurance for stocks is put options. With volatility low, that cost remains quite reasonable. However, the author is of course referring to the opportunity cost of not investing, instead of the costing of insuring the downside of an invested portfolio. That cost had certainly been very high for the past few months.

"It's too expensive to be defensive." But too expensive for whom?

Does it mean not investing or under investing will be costly in terms of clients' portfolios? Or does it mean the asset manager will lose his job because he is under-performing? Here lies the conundrum for professional fund managers. Not investing is simply not an option.

I am certain that most investors have heard the famous quote from Warren Buffett, "Be greedy when others are fearful. Be fearful when others are greedy." It seems we have once again entered the time of greed. It proves once again how hard it is to actually implement the wisdom of the the most famous investor. Judging by the speeches of his recently concluded annual meeting, the doctor is also having a tough time heeding his own advice.

Apple Issues Debt

Apple was in the market yesterday to sell a record amount of bonds in 6 different tranches, including floating rate notes of 3 and 5 years and fixed rate papers of 3,5, 10 and 30 years in duration. For a company with $145 billion in cash on the balance sheet, why would it even consider issuing bonds? The reason is of course most of Apple's cash is sitting overseas and can't be easily repatriated without adverse tax consequences. So to return money to shareholder, Apple has to resort to the bond market.

NEW YORK (AP) -- Apple Inc. sold $17 billion in bonds Tuesday in a record deal spurred by the company's plan to placate its frustrated shareholders.

The Cupertino, Calif., company sold the bonds in its first debt issue since the 1990s to raise money to pass along to shareholders through dividend payments and stock buybacks. The payments are part of an effort to reverse a 37 percent drop in Apple's stock price during the past seven months amid intensifying concerns about the company's shrinking profit margins as it faces more competition in a mobile computing market that Apple revolutionized with its iPhone and iPad lines.

Apple has $145 billion in cash, more than enough for the $100 billion cash return program it announced last week. However, most of its money sits in overseas accounts, and the company doesn't plan to bring it to the U.S. unless the federal corporate tax rate is lowered.

With interest rates so low, it makes sense for Apple to borrow a large sum of money rather than pay a big tax bill.

Apple bonds are well received by the market place. All the papers are currently trading at a slight premium to the issue price. For example, Apple's 10 year 2.4% bond is trading at 100.4 to produce a yield to maturity of  2.36%. While Apple is AA+ rated by S&P, its bond is actually trading at comparable yield to the AAA rated Microsoft. For those who are chiefly concerned with principle risk, I think the AA- rated IBM bond presents a slightly more attractive option. Its 7% 2025 bond trades at 142 and has a yield to maturity of 2.93%. On balance sheet strength and leverage ratio, IBM certainly looks weaker than Apple or Microsoft. However, one may very well argue that even though the short and intermediate term security of Apple is very high, its long term prospect carries greater uncertainty than IBM. Apple's products carry short refresh cycle and must rely on constant innovation just to stay relevant. With a few missteps, Apple is not far from becoming RIM or Nokia.

However, for those who are not only concerned with principle risk, but also the risk of diminishing purchasing power, it seems the stocks of IBM and Apple offer much more compelling risk and reward than their fixed income counterparts. In fact, even after a significant rally, blue chip stocks in general offer dividend streams comparable to highly rated corporate bonds. The deciding factor that favors stocks over bonds is due to the fact that dividend streams grow over time.