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By Adam Sharp

The number one cupcake play in America is going public.

Crumbs Bake Shop operates 34 cupcake stores from New York to California, humorously billing itself as "creator of the gourmet cupcake." Owners stand to make up to $100m from the IPO, and the deal could price higher, with cupcake-mania hitting a fever pitch. At $100m, investors would be paying about $3 million per cupcake store.

Management is betting on aggressive expansion to fuel growth, and plans to open hundreds of new stores. Naturally, growing a chain of stores from 34 to 300 is no easy task.

Recall the great donut bubble of 2003, when Krispy Kreme (KKD) was the darling of Wall Street. Its shares peaked at near $50 from a split-adjusted IPO price of $3.50, giving the donut maker a sky-high valuation of $3b (pdf). Shares trade around $7 today, up from a low of around $1.

KKD expanded too fast, took on too much debt, and nearly went bankrupt. It also had some accounting issues, but those likely were probably just a side effect of a business plan gone bad. Today Krispy Kreme is still muddling along, closing stores opened just a few years back.

Expansion is always risky — especially when financed with debt and equity offerings.

Hopefully Crumbs can avoid a similar fate, and follow the glorious path of Chipotle (CMG) instead, which is up 436% since its IPO in 2006.

In any case, I wish Crumbs well; I've heard its cupcakes are delicious.

The larger point here is about what this cupcake IPO says about the state of markets. After all, it almost certainly wouldn't be happening without all that Fed-injected liquidity sloshing around.

Bernanke has often stated that he wants to create a "wealth effect." Push stocks higher, the theory goes, and people will spend more because they feel richer. But the problem with easy money is that it inevitably spurs not just bad, but dangerous investments.

This is all solid economic policy, according to the U.S. Federal Reserve. It just so happens that enriching bankers is an unfortunate side effect of these necessary options. Until real bank reform is achieved, we will continue to see bubbles in new areas of the market.

Some bubbles are still young, like cupcakes. Others, like treasury bonds, are getting long in the tooth.

Source: Crumbs Bake Shop IPO: Krispy Kreme Redux?