When No News Is Good News
Also, Details on Microsoft and Skype
World markets were higher as financial anti-gravity forces -- a.k.a., the residual effects of money printing -- continue to trump most problems, which saw the indices here in the U.S. higher by about 0.5% through midday. The afternoon saw another surge to the upside, with the indices gaining roughly 0.75% for the session.
Away from stocks, the dollar was mixed, bonds were a little bit lower, and oil gained a buck as it shrugged off a much-discussed margin hike by the CME. As for the metals, silver added 2% to gold's fractional gain.
Just Covering Their Assets
On the subject of margin requirements, I continue to get emails from people who think that every increase has some conspiratorial thought process behind, which is just not true. Futures contracts trade on very thin margins, which are nothing more than good faith deposits. If exchanges don't want people "blowing up" on them, they have to make sure there is enough money in their accounts to make good on their losses. Thus, when markets get volatile, futures exchanges raise margin requirements. It has always been that way.
Today's news brought forth an interesting nugget on the inflation front when Wendy's said it was planning for commodity inflation of 5% to 6%, which is slightly higher than McDonald's 4% to 5%. For the inflation component that comes from food, one probably would be smart to use at least a 5% number, regardless of what the government says.
Turning to important corporate news, overnight Microsoft announced that it was acquiring Skype for $8.5 billion in cash. I received a bunch of emails on this subject (nearly all negative, though I imagine that if Apple had purchased Skype, the world would be applauding its brilliance), so I thought I would comment on it.
I had not really thought of Skype as being an acquisition candidate for Microsoft, but after reading a number of articles discussing the details, it quickly became clear to me that this was a deal that Microsoft could not afford not to do. I have no idea what the right price for Skype might be, but we won't know the answer to that question until we see what Microsoft does with it. I have a hunch that, over time, this price could turn out to be quite reasonable. One thing folks need to do is lop off about 30% from the actual price, as Microsoft will be using overseas cash it will not have to pay U.S. taxes on, since Skype is headquartered in Belgium.
Bottom line: other than the valuation, which is not really worth worrying about given Microsoft's cash pile and cash generation ability (i.e., potentially paying an extra couple of billion doesn't change anything for Microsoft), this deal was a great idea and has a lot of potential. For what it is worth, I checked in with my good friend Fred Hickey and he was even more enthusiastic about this than I was -- and he really understands all the moving parts.
The Deal Is In the Details
Rather than trying to explain succinctly why it makes sense, I would like to quote from an article at Extremetech written by Lee Mathews, which was the best synopsis of the ones that I read:
"For starters, Skype has a massive user base (in the hundreds of millions) [roughly 700 million] and a healthy revenue stream (closing in on $1 billion annually). Both numbers are impressive, and they'll only increase as Skype becomes more readily accessible on mobile operating systems and additional wireless carriers. Microsoft did, of course, promise Skype for Windows Phone 7 last month -- and that's guaranteed now that Skype has been acquired. Windows Phone 7 needs some marquee apps, and Skype is certainly one of the most highly sought-after. While iPhone users might have Facetime, Skype will give WP7 users the ability to video chat with friends across a number of platforms using an app they're already familiar with.
"Another attraction for Microsoft is Skype's interoperability with another close friend: Facebook. Skype added the ability to SMS and call Facebook friends back in October of 2010, and coupled with Windows Live Messenger's Facebook integration, Microsoft has a very formidable presence in app-powered communication on the largest social networking site on the Internet.
"But while consumer uses for Skype are important, Microsoft is no doubt very keen on its enterprise-friendly features. Skype has become a leading collaboration and screen-sharing tool, and it also has a strong foothold in enterprise VoIP and nontraditional PBX systems. That presence bodes well for Lync, Microsoft's unified communications server, which will no doubt receive a healthy injection of Skype integration.
"Providing low-cost voice communications isn't all that Skype has to offer businesses, of course. It's a killer presentation tool as well, so when you add the red-hot Kinect and its slick motion capture abilities to the mix, the Skype-Microsoft combination easily becomes the go-to platform for video meetings and long-distance collaboration. Who wouldn't want to reach over, grab a .DOC off their desktop, and fling it into a Skype window to zip that fresh quarterly report off to a satellite office?
"Finally, there's one other thing that Microsoft is sure to love about Skype: it's much more visible and widely-adopted than Google Voice, and CEO Steve Ballmer is sure to be excited about anything that can slow or dampen Google's recent successes."
Once again the financial markets, dominated by Apple and Google lovers, voted thumbs down, as Microsoft stock was initially spanked for a couple of percent before closing with just a 0.5% loss. Anyone who owned the stock up to this point and sold it on this news is really just letting their impatience get the upper hand. So continues this fascinating real-time example of contrarian/value investing.
Positions in stocks mentioned: long MSFT, long MSFT calls.
About Bill Fleckenstein
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