Microsoft (MSFT) Offering Indicates Continued Pessimism

Microsoft (MSFT) offered $4.75 billion in AAA-rated bonds yesterday at rates nearing record lows. The software behemoth boasts an impeccable balance sheet with $37 billion in cash on hand against a minor $6 billion in strategic debt. Microsoft is a cash machine generating $24 billion in operating cash flow over the last 12 months. Given the company's standing, investors would clearly be willing to accept very low yields. Yet, the pricing was still fairly astonishing given what it implies about expectations for economic growth.

The company’s $1 billion of 0.875 percent notes due in 2013 and $1.75 billion of 1.625 percent debt maturing in 2015 have the lowest interest rates of more than 3,500 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt. (Bloomberg)

The 0.875 percent on the 3-year notes is a minuscule 22.5 basis point spread over Treasuries. Investors' willingness to accept a yield well below 1% for the next 3 years shows continuing pessimism about the economic recovery in the United States and globally. The most recent run in Treasuries can largely be traced to heightened fears of a double dip and festering worries about the potential for a deflationary spiral. I was quoted saying just such in Investor's Business Daily this morning:

The yield on the benchmark 10-year bonds closed at 2.56% Wednesday. Yields are pricing in an overly pessimistic view on the economy, said Brandon Rowley, a trader at T3 Capital Management. The Fed's comments Tuesday suggested it is willing to do what it takes to create inflation, which would drive yields higher. (IBD)

I am much more optimistic about the recovery occurring within the United States and around the world. Granted, the employment picture is troublesome as the unemployment rate remains persistently high. Yet, every other metric for gauging economic growth is on the mend. Investors are never rewarded by waiting until the outlook is bright and the massive shift into bonds we've seen throughout 2010 is likely a mistake in the long run. Safety of principle is great but the Fed is committed to inflating and growth is happening, at blistering paces in some emerging economies. A sub-1% return for the next 3 years is far from attractive in my mind.


Brandon R. Rowley
"Chance favors the prepared mind."

*DISCLOSURE: Nothing relevant.

Stocks Gap Up and Hold, Buffett Sees No Double Dip

Stocks gap up 1%, trade sideways to close where they opened

All the fun in the market today was accomplished before the open with stocks gapping up 1%. The market spent the trading session in consolidation mode trading up, then down, then back up into the close for a relatively uneventful day. Doctor Copper jumped over 2% confirming the move in equity markets. Treasuries saw some support to halt the decline but there doesn't look to be a substantial reversal yet.

Microsoft (MSFT) investors were excited at the end of the day with a report that the company plans to sell debt to pay dividends or buy back shares. With $37 billion in cash it seems strange MSFT would see the need to raise debt but I suppose they find the extraordinarily low cost of debt to attractive to ignore. MSFT closed up over 5% on the day.

I sold my second half of Amazon (AMZN) today from my original buys two weeks ago. The 16% move from my buy at $125 in just two weeks was too much not to take the trade off. While AMZN is an exciting company with a large presence is the rapidly-expanding cloud space, I have a hard time seeing the logic of a 40x forward PE. Without the fundamental logic, I have to play the stock as nothing more than a momentum play so I'm happy to jump off the bandwagon after grabbing a nice chunk in the market's latest move. When contrasted with Apple (AAPL) trading at 15x forward earnings, the relative valuation appears expensive and I'd prefer working my way into a larger AAPL position. Though, I realize the "expensive" valuation has long been the case in AMZN's history.

Buffett sees no double-dip

Warren Buffett said the prospects of a double-dip recession are off the table based on what he's seeing in Berkshire Hathaway's (BRK.A) numerous businesses. "I am a huge bull on this country. We will not have a double-dip recession at all. I see our businesses coming back almost across the board." (Bloomberg)

Few have their hands on the pulse of so many varied companies across the United States as Buffett does. I certainly give his opinions much greater weight than economists and academics espousing their claims of major economic weakness. Buffett said further "I’ve seen sentiment turn sour in the last three months or so, generally in the media. I don’t see that in our businesses. I see we’re employing more people than a month ago, two months ago." I have my bets placed in line with Buffett. I see the sentiment shifting in equity markets and the economic dialogue improving in just the last two weeks.


Brandon R. Rowley
"Chance favors the prepared mind."

*DISCLOSURE: Long SPY, AAPL. Flat AMZN.

Amazon (AMZN) Takes Beating, Microsoft (MSFT) Encouraging

Amazon terrible, Microsoft excellent

Amazon (AMZN) shocked the Street missing estimates by 9 cents coming in at $0.45 versus expectations of $0.54. The top line was decent beating estimates of $6.5 billion with revenues of $6.6 billion. Demand was high for Amazon's products but the drastic price cut for the Kindle to $189 from last year's original price of $399 is taking the blame for much of the EPS shortfall and margin squeeze. Shares of AMZN are down 11% pre-market and dropping low enough to challenge the psychological $100 post-earning last night before rebounding.

Eddy over at Crossing Wall Street had an excellent evaluation of AMZN's earnings reaction. He has been bearish on shares for a long time and this report highlights the dangers of investing in companies with valuations like the 50 times trailing earnings AMZN holds.

This is the problem with owning a richly valued stock. Despite getting the enormous growth potential of the company, you always have to impress analysts. You have zero room for error. If you make one small misstep, you’ll be punished harshly.

Think of it this way. Amazon missed earnings by nine cents a share, yet the stock was down $15 a share. That’s the equivalent of a Price/Earnings Ratio of 166 for those marginal nine pennies. That’s obviously very high but that’s what you’re buying when you go after a hi-flier like Amazon.

Microsoft (MSFT), on the other hand, "saw strong sales execution across all of our businesses, particularly in the enterprise with Windows 7 and Office 2010". MSFT even offered investors some of the exciting developments: "Our transition to cloud services is well underway with offerings like Windows Azure and our Business Productivity Online Services, and we look forward to continuing our product momentum this fall with the upcoming launches of Windows Phone 7 and Xbox Kinect." MSFT exceeded on both the top and bottom line with EPS of $0.51 versus $0.46 expectation and revenues of $16 billion versus $15.5 billion. Shares are up a marginal 80 basis points pre-market.

S&P continues to bounce around, waiting to clear 1,100

Last week Friday the market looked horrible falling out of bed and dropping 261 points. Monday gave us a small bounce and Tuesday opened lower. Yet, buyers stepped in on Tuesday and mounted a large upside reversal. Wednesday though, proved that the sellers were not to be outdone and Bernanke spooked investors by talking about everything we already knew and the market dropped 1%. Even with a minor sell-off before the close yesterday the market still gained 2%. The S&P 500 is within 5 handles of the 1,100 level pre-market today.

It is fair to say most traders have been thrown for a loop this week as the S&P 500 is currently up 2.2% for the week yet follows the drubbing seen in stocks last Friday. I had short on the brain all last week and thought Friday confirmed my thesis. Now, I have taken all the shorts in and am anticipating an upside breakout. Perhaps I am being whipsawed, perhaps not. Honestly, I don't know, I'm just working on getting good prices and keeping stops tight. Today's action should clear things up a bit.


Disclosure: Long SPY.

Foxconn Manufacturing Employs 800,000!

Andy Grove has a great article in the recent issue of Bloomberg Businessweek titled "How to Make an American Job". Below is an excerpt:

Today, manufacturing employment in the U.S. computer industry is about 166,000, lower than it was before the first PC, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer manufacturing industry has emerged in Asia, employing about 1.5 million workers--factory employees, engineers, and managers. The largest of these companies is Hon Hai Precision Industry, also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenues last year were $62 billion, larger than Apple, Microsoft, Dell, or Intel. Foxconn employs over 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard, Intel, and Sony.

Until a recent spate of suicides at Foxconn's giant factory complex in Shenzhen, China, few Americans had heard of the company. But most know the products it makes: computers for Dell and HP, Nokia cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless other familiar gadgets. Some 250,000 Foxconn employees in southern China produce Apple's products. Apple, meanwhile, has about 25,000 employees in the U.S. That means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods, and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies.

You could say, as many do, that shipping jobs overseas is no big deal because the high-value work--and much of the profits--remain in the U.S. That may well be so. But what kind of society are we going to have if it consists of highly paid people doing high-value-added work--and masses of unemployed?

This is an excellent question Grove asks. I have often made a similar argument to the one he is refuting: that it is not a bad thing to ship off the low-value-added work to other countries as long as we continue innovating here in the U.S. Yet, as Grove points out, this results in a much lower number of total employed persons.

The disparity between Apple's U.S. and Chinese workforce is simply staggering. The 25,000 in the U.S. take the lion's share of the profits while 250,000 in China share the lowered manufacturing wages. With unemployment at 9.3% in the U.S. perhaps we are beginning to see the effects of the consistent policy in domestic companies to move jobs overseas.

At the very least, this is a trade-off we must consider. Do we want more jobs with lower wages, or less jobs with higher wages? Chinese employees are certainly making far less than the average American, their low wages being the chief reason to move the factories there. Do we want those jobs here while realizing that minimum wage requirements and health care benefits would likely need to be skirted to maintain margins?


Disclosure: Long AAPL.

Markets Up After China Denies FT Story

Volatility is king! This highly volatile tape offers opportunity if you are flexible and active yet it can be highly painful if you are stubborn and committed to positions. While active traders should not be complaining about a VIX at 35 it seems that most active traders would not mind a little more sanity in price movements.

Tuesday's 269-point upside reversal was followed by a 205-point downside reversal yesterday. The Financial Times reported yesterday that China's State Administration of Foreign Exchange (SAFE) was reviewing its €630 billion of Eurozone holdings. These rumors incited fear across trade desks and investors sold into the close taking markets into the red for the day. Late last night SAFE issued a statement claiming the FT story is "groundless" and they support the European Union and International Monetary Fund's stabilization plan. Most Asian markets closed up over 1% last night and European markets were solidly in the green with many up over 2%. US futures are up 1.5% pre-market following the enthusiasm and recouping yesterday's afternoon sell-off.

Microsoft (MSFT) was a major drag on the indices yesterday losing 4.1% for the day. The weakness was attributed to comments from CEO Steve Ballmer talking about contagion risks in Europe. This only seems to be a random excuse to sell an already extremely weak stock that is down 19.2% YTD v. a market that is down less than 5% over the same time period. FBR Capital issued an upgrade on shares this morning offering a $32 price target. MSFT now trades at a very modest 13 times trailing earnings even while in the midst of a voluminous upgrade cycle in many of its key products. Clearly, this stock is a slow mover but could offer a nice, stable return as a value play for the patient. Microsoft's decline pushed Apple (AAPL) into the spot as the second-largest company in the United States at $222 billion besting MSFT's $219 billion market cap. Only Exxon Mobil is larger at $279 billion.

The euro continues struggling to mount a sustained bounce off the $1.2143 low made last week. Tuesday's upside reversal along with equity markets looked promising but selling has brought the embattled currency back to lows. The recent few days of relative stabilization have been helpful to calming contagion fears but it may be a transitory feeling. Now trading at $1.2232 a new break of lows will only continue the global volatility and further stoke contagion fears.

Ten Largest American Companies

Company	Symbol	Market Capitalization	Total Revenues	Total Earnings
Exxon Mobil	XOM	316.56B	277.02B	19.28B
Microsoft	MSFT	261.10B	58.69B	16.26B
Apple	AAPL	213.86B	46.71B	9.36B
Wal-Mart	WMT	212.74B	408.21B	14.41B
Berkshire Hathaway	BRK-A	201.93B	112.49B	8.06B
General Electric	GE	195.26B	156.53B	10.92B
Procter & Gamble	PG	184.91B	79.12B	11.34B
Google	GOOG	180.20B	23.65B	6.52B
Johnson & Johnson	JNJ	178.60B	61.90B	12.27B
Bank of America	BAC	178.17B	71.07B	-2.21B

Data Source: Yahoo! Finance
*Revenues and earnings are TTM.