Gates and Ballmer

I was actually an employee at Microsoft the day that Bill Gates announced that he would be shifting to part-time at Microsoft to work full-time at his foundation: "Starting two years from now, I will shift, work full-time at the Foundation, part-time at Microsoft as Chairman and as a senior technical adviser." That was just over two years ago, June 15, 2006. I actually attended the employee "town hall meeting" at which Bill and Steve Ballmer discussed the announcement. That was certainly an interesting experience, both from a business and corporate culture perspective. I had only been an employee for exactly one month at that point. You can read the press release and the transcript of the the press conference. It was certainly a surprise and somewhat of a shock, but as an investor and a technologist the decision really didn't bother me much at all. I have always had mixed feelings about Bill's technical role and whether he really was as "essential" to the technical development of products as a lot of people imagined or whether his real brilliance was in how to look at markets and figure out the right angle of attack to enter and dominate those markets. Even then, his "brilliance" was not always as dazzling as one might hope, as we have seen with Microsoft's forays into online services and even Vista. On the other hand, I have always been deeply impressed by Steve Ballmer's dogged persistence, his "we just keep coming and coming and coming" attitude and competitive spirit that has in fact helped Microsoft  achieve a higher level of success than any other company might have done with similar technical capabilities. I attended a bunch of company events at which he spoke and never once came away with an impression other than that he was really sharp, really on top of the market and customer needs, and a really great corporate leader.

Although it may appear to be "bad" news that Bill will be "gone", the truth is that Bill will still be working part-time at Microsoft and, as the press release stated, "after July 2008 Gates would continue to serve as the company's chairman and an advisor on key development projects." That is a key distinction from this misguided view that Gates is "leaving" Microsoft and will no longer be helping to shape the technical and product directions of the company. Bill will still be participating in helping to shape "key development projects."

I have great faith in the technical and product abilities of Craig Mundie and Ray Ozzie. In fact, the truth is that neither of these two technical leaders really needs Bill at all. But the two of them plus Bill part-time is a very awesome technical leadership team.

I really do have great faith in Steve Ballmer's ability to run the business and oversee the overall marketing direction of the company. Sure, there have been some stumbles, notably with Vista and Yahoo, but the truth is that you can't be as big and successful as Microsoft without taking big risks, and the nature of big risks is that sometimes they do not work out as well as planned. A Microsoft without risk-taking would not be a Microsoft.

I wish Bill luck on his charitable ventures and remain confident that Microsoft is in good hands with Steve Ballmer, Craig Mundie, and Ray Ozzie. We can all look forward to a Microsoft that "keeps coming and coming and coming."

-- Jack Krupansky

The ongoing saga of the role of speculators in the huge rise in commodities prices

One Reuters article by Russell Blinch entitled "Lawmakers' zeal versus speculators could backfire" strongly insists that the huge rise in commodities prices is solely the result of supply and demand, referring to "the real culprit behind soaring commodity prices -- American consumers' addiction to oil." Meanwhile, a second Reuters article by Matthew Robinson, Robert Campbell, Robert Gibbons, Gene Ramos, Jane Merriman, Fayen Wong and Marguerita Choy entitled "Oil hits record near $143 on rising investor flows" informs us of the reality of investment and trading money flows. The lead paragraph tells us that "a drop in global equities markets sent fresh investors into commodities." The article goes on:

"The renewed attraction of commodities as an investment vehicle is contrasting with the unattractiveness of the stock market," analysts Ritterbusch and Associates said in a research note. "As additional traders abandon the stock market, the appeal of commodities as a trading vehicle is enhanced."

This is the heart and soul of the hige price leap: "attraction of commodities as an investment vehicle" and "appeal of commodities as a trading vehicle." That captures both the players who are bidding up longer-term futures contracts and holding them (or even taking delivery as the contracts expire) and the players who are bidding up short-term futures contracts.

The article goes on:

Additional support has come from a flood of cash from new investors buying up commodities to hedge against inflation and the weak U.S. dollar, which fell further on Friday.

It does not really matter why people are speculating in commodities, but what is so curious is how so many people can act oblivious to the fact that such speculation, as referenced in the Reuters article, is happening on a daily basis and has been for the past couple of years.

The article refers to the great debate over the true role of speculation in rising commodities prices:

Some experts insist supply and demand are behind oil's record rise, while others, including OPEC, say rising flows of speculative cash are behind this year's gains.

"We believe the factors driving oil prices higher are fundamental and not speculative," Deutsche Bank said in a research note.

As far as Deutsche Bank, I would note that they have a conflict of interest and are one of the big players in the commodities markets, collecting transactional fees from clients who are speculators, as well as speculating themselves via their proprietary in-house trading desk.

As far as the overall thrust of the first article that "Lawmakers' zeal ... could backfire", I myself in fact worry that Congress will aim poorly and fail to hit the nail sqaurely on the head and miss yet another golden opportunity to reform more of Wall Street's most egregiously scandalous, but still legal "investment" schemes. The fact that Wall Street is permitted to "market" commodities as an "investment vehicle" is simply indicative of how deep the Wall Street swamp muck really is.

The problem before us is not speculation per se, but speculation which takes on a scale that overwhelms the real markets for real supply and real demand and distorts the traditional hedging strategies used by real producers and real consumers of the commodities. There is also some amount of outright market manipulation by financial speculators who "take delivery" of expiring commodities contracts. They are speculating that the commodities will continue to rise, but they are also restricting actual supply by taking those commodities off the market.

The proper, traditional role for speculators is to "fill the gap" between producers and consumers, but what we are seeing now is that the mind-boggling volume of speculative activity is in fact distorting and worsening the gap bwteeen producers and consumers.

Eventually the current "speculative bubble" in comodities will come to and end and prices will head back down towards earth, but meanwhile there is no telling how much longer speculators will continue to pump vast sums of money into commodities.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls modestly and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell modestly (-0.18% vs. +0.09% last week) but the six-month smoothed growth rate remained steady (at -5.8), which is still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "The Weekly Leading Index fell for the fourth time in five weeks, and its smoothed growth rate, while unchanged, stayed solidly negative. The unambiguous message is that the economy has not veered away from the recession track."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there is a lot of stimulus as well as potential problems in the pipeline.

I will keep my personal assessment at a high level confidence that there is no more than a 65% chance of recession and a moderate level of confidence that there is no more than a 35% chance of recession based on the fact that we are seeing some hints of moderation mixed in with all of the gloomy news.

I am somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signaling to me, as well as ECRI's assessment and recession "call."

I would note that half of the most recent 24 weeks of WLI data (12 out of 24) are higher than the current level. That means that even if the WLI remains flat, within three months the very negative readings on the smoothed growth index will have risen to 0.0. Alas, that is more an artifact of how the smoothed growth rate is calculated than an indicator of economic strength. But, that rise cannot occur if the so-called recession "worsens." The smoothed growth rate rising to 0.0 presumes that the economy does not weaken further.

The bottom line is that the economy remains at "the edge" of a recession, but persists in refusing to overtly "fall" into recession.

-- Jack Krupansky

Microsoft as the standard for valuation

I happen to be a shareholder of Microsoft (MSFT) and do consider my position a "value" investment, meaning that the stock price has been beaten down and any over-valuation has been eliminated so that the price is much closer to the "true value" of the company. Not everyone agrees with me on that, but I was amused today when I read in an article in The New York Times by Louise Story entitled "In Bear Stearns Case, Question of an Asset's Value" that:

Investors are increasingly complaining that banks have become too opaque about the assets they own and the trades that make -- or lose -- them money. Financial companies flocked en masse in recent years to trading assets that are far harder to value than, say, shares of Microsoft.

At least it is somewhat comforting that a reporter for The Times sees some value in Microsoft.

-- Jack Krupansky

Global energy and oil supply and demand

I am going to see if I can track global energy and oil supply and demand a little more closely since the proponents of speculation in oil and commodities  seem quite intent on misrepresenting the reality of global supply and demand for oil and other energy commodities. I have been closely tracking the weekly report on domestic U.S. petroleum supply and demand, but now I want to see if I can help to shed some true light on what is going on at the global level. Sure, demand is growing in China and India, but the question is what the rate of growth is, what the global rate of demand growth is, and whether the price "growth" is or is not in sync with supply and demand. I'll focus initially strictly on petroleum, since that is the #1 concern right now.

The main source for global energy data seems to be the International Energy Agency (IEA). They have a monthly Oil Market Report.  Their most current data is only available on a subscription basis, but they do make at least some of the data available with a two-week time delay on their free OMR Public Access site.

There is a lot of data on the site, but not necessarily organized in a form that can be easily massaged to get all of the answers that one might seek. I poked around a little, but I could not immediately see any data that suggests that there has been any sharp rise in demand or sharp decline in supply over the past year to justify the very sharp rise in prices that we have seen if "the law of supply and demand" were the primary driver of the market.

The latest publically available IEA Oil Market Report, dated May 13, 2008, informs us about global demand and supply:

Global oil product demand has been lowered for both 2007 and 2008, to 85.8 mb/d and 86.8 mb/d respectively. Slower economic growth, high prices and 2006 baseline adjustments suggest that OECD oil demand will contract for the third successive year in 2008. Non-OECD demand growth in 2008, led by China and the Middle East, remains strong at 3.7% or 1.4 mb/d, leaving growth for the world as a whole at 1.2% (+1.0 mb/d).

April global oil supply fell by 400 kb/d month-on-month to 86.8 mb/d, pulled lower by North Sea outages, lower FSU output and weaker OPEC supplies. Although 1Q08 non-OPEC supply (ex-Angola and Ecuador) was unchanged from a year ago, OPEC supply stood 1.7 mb/d higher. Non-OPEC output growth in 2008 is now seen averaging 680 kb/d, compared with 550 kb/d in 2007.

Note that the report tells us that "OECD oil demand will contract for the third successive year in 2008." Sure, China and India are growing, but much of the rest of the developed world is seeing less demand. OECD stands for Organisation for Economic Co-operation and Development and consists of 30 member countries: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece,  Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg,  Mexico, the Netherlands, New Zealand,  Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States. China and India are not members.

Oddly, the report does not discuss demand and supply in the same terms so that they can be directly compared.

But at least the report gives us the "true" numbers for China and India ("Non-OECD demand), telling us that "Non-OECD demand growth in 2008, led by China and the Middle East, remains strong at 3.7%." That is not precisely China and India alone, but does include them.

The important piece of data is that slowing demand in the rest of the world results in a total demand "growth for the world as a whole at 1.2%." Somehow, that number falls very far short of all of the hype about growing demand that the speculators are pumping out.

There is in fact reason for underlying petroleum prices to rise, since supply is in fact growing at a slower rate than demand, although the report does not put the data indirectly comparable form, especially when pieces of the data are sometimes total, sometimes OPEC-only, sometimes OECD-only, etc. What a pain. Eventually I will sort through this and figure out what the comparable numbers are. But just because the underlying cost may be rising does not justify the pricing offered by speculators.

The report does tell us that the April global oil supply was 86.8 mb/d (million barrels per day) and that the global oil demand for 2007 was 85.8 mb/d and is projected to be 86.8 mb/d for 2008.

As I said, so far I have not seen any numbers that would justify the very sharp run-up in the price of crude oil over the past year. If somebody does know how to numerically justify the discrepency based primarily on supply and demand, they need to "show your math."

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls modestly and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell modestly (-0.27% vs. -0.19% last week) and the six-month smoothed growth rate fell modestly (to -6.2 vs. -6.0 last week), which is still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With the WLI falling for the fourth straight week, its smoothed growth rate slipped from the 22-week high. Thus, U.S. growth prospects remain gloomy."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there is a lot of stimulus as well as potential problems in the pipeline.

I will keep my personal assessment at a high level confidence that there is no more than a 65% chance of recession and a moderate level of confidence that there is no more than a 35% chance of recession based on the fact that we are seeing some hints of moderation mixed in with all of the gloomy news.

I am somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signalling to me, as well as ECRI's assessment and recession "call."

I would note that slightly more than half of the most recent 24 weeks of WLI data (13 out of 24) are higher than the current level. That means that even if the WLI remains flat, within three months the very negative readings on the smoothed growth index will have risen to 0.0. Alas, that is more an artifact of how the smoothed growth rate is calculated than an indicator of economic strength. But, that rise cannot occur if the so-called recession "worsens." The smoothed growth rate rising to 0.0 presumes that the economy does not weaken further.

The bottom line is that the economy remains at "the edge" of a recession, but persists in refusing to overtly "fall" into recession.

-- Jack Krupansky

Is it time to short oil and commodities?

Although there has been a global increase in demand for oil and other commodities, that increase in demand is relatively tiny compared to the huge jump in oil and commodities prices. And there is clearly no shortage of oil. And demand for oil from the U.S., the largest consumer of oil, is actually declining. Speculative buying of oil and commodities really is behind the vast bulk of the big price leap. Yes,this is a true "bubble". Global demand for oil will continue to grow, but the speculative bubble is fueled by investment funds, and even the richest of them will eventually be "all in." Timing is everything when judging the state of a bubble. The oil "bubble" looks and acts a lot like the old NASDAQ dot-com bubble in a lot of ways. The future for the Internet and Web was indeed very bright and actually does continue to get even brighter, but the hype greatly exceeded the reality. And that is where we are with oil, where the hype about demand is vastly greater than the reality of demand. The big question is whether we are in the "1999" of the oil and commodities bubble or in the early "2000" stage. Oil could continue on up to $150 and $200 and beyond, but are the investment funds that have fueled the bubble really standing by to dump vast new piles of cash into the commodities markets, while a wide range of government investigators are actively probing just such activity? Oil and commodities may be in more of a short-term "trading frenzy" right now, with the focus on very short-term trading of volatility rather than taking on large new longer-term speculative positions. I am sure there is a fair amount of this kind of trading going on, but whether it was the main source of the jump this past week is unclear.

So, the question of the day is when will it be "safe" to successfully short oil and other commodities?

As I said, timing is everything. Some people lost a lot of money shorting NASDAQ and dot-com late in 1999 and early 2000, but they really were fairly close to judging the market top in March of 2000.

Personally, I do not have the capital to short anything in quantity, especially with the prospect of margin calls, but buying "put" options is a possibility. The only problem is that they are probably getting pricey since a lot of people have this same idea. The main downside risk with a put option is that you could lose all of your money if we really are in 1999 rather than March 2000 for the oil market.

There is one safe way to short, namely "against the box", where you short a security that you actually own. That means that there is no chance for a margin call since if the trade goes south you simply surrender the underlying security, with your only loss being the failure to make money on the increase in value of the security. I did this a few times way back in the 1980's. I'll have to check up on the current rules. At a minimum you would have to wait three days for the "buy" trade to settle before you could execute the short against the box trade, I think. Better to buy on a sharp decline, and then maybe pick up the next spike upwards before opening the short position.

I do believe that some of the recent upward spikes in the price of oil were due to short covering layered with piling-on by momentum speculators. That kind of behavior will continue until large investment funds begin liquidating their large investment positions. Some big Wall Street firms are also beating the drum for $150 oil, which is within reach, so I suspect that we could see $150 oil in the coming weeks, fueled primarily by short-term traders, short-covering, and a loyal band of diehard momentum investors.

Besides the activity of investment funds, the big wildcard is the increasing activity of government regulators., especially in a big election year where the Democrats are developing a lot of mementum for "change." I strongly suspect that there will be big changes governing speculation in commodities, but it may take months or longer before "rules" get drafted and then eventually put into effect.

At some point I may make a small, symbolic bet on declining oil, but I certainly do not feel comfortable doing so today. Maybe I will become more "inspired" when oil hits $150 or $175. Or maybe the day the Democrats formally nominate Barack Obama will be a great symbolic turning point. No hurry. Great investments are never made in a hurry.

-- Jack Krupansky

Employment continues to be soft but not recessionary

The monthly employment report for May did show that employment continues to be soft, but the decline was still only modest in comparison to what we would normally see in a recession. The decline in household employment was a modest -0.2%, which is just barely significant. Sure, the headline unemployment rate "jumped" to 5.5%, but the number of people employed in May was still greater than the number who were employed in March. The "gap" is explained by a sharp rise in the size of the overall labor force coupled with a sharp decline in the number of people who were not in the labor force in March. That meant that there was a big jump in the number of people looking for jobs who were neither employed nor looking for a job in April. Payroll employment declined a very slight -0.04%, which is essentially flat or no significant change.

Some of the jump and decline is simply due to the quirky nature of seasonal adjustments. Before applying the seasonal adjustment, houshold employment actually rose, albeit very slightly, by 5 thousand. Unemployment did still rise before the seasonal adjustment, but from 4.8% to 5.2%.

Nonfarm payroll employment actually rose by 648 thousand before applying the seasonal adjustment. Private employment rose by 640 thousand before applying the seasonal adjustment.

Most significantly, year over year, which does not depend on seasonal adjustment, nonfarm payroll employment is up by 104 thousand, which although quite modest, is not the kind of year over year change one would expect to see in a recession. Unadjusted household employment is up by 62 thousand year over year, which is also nothing to write home about and is indicative of a slow, sluggish economy, but is not indicative of a true, full-blown recession. Even with the seasonal adjustment, household employment is up by 133 thousand, again a sign that we are not in the middle of what is traditionally known as a recession.

The total decline in private payroll employment since January has been 318 thousand or a modest -0.3% over four months. That is (barely) noticeable, but such a vert modest decline is not indicative of a true, full-blown recession.

We may still end up in a recession, eventually, but we are certainly not there yet on the employment front.

-- Jack Krupansky

Treasury I-Bond rate at 4.84%

Back in mid-April I noted that the six-month inflation rate to be used for calculating the rate of return for the U.S. Treasury I-Bond for the May 2008 to November 2008 period appeared to be running at 2.42% and that the I-bond rate could reach 6%. I was dead-on for the inflation rate (meaning that I read the same tables that Treasury would be reading), but Treasury literally blew people away by lowering the fixed rate portion of the overall rate from 1.20% to 0.00%! Still, the new rate for new I-Bonds works out to 4.84%, which is better than just about everything else around at a comparable level of risk and liquidity. But, if you had purchased an I-Bond in the six months before May (such as in April when I wrote that post), you would still have the old fixed rate or 1.20%, giving you a current rate of 6.07%!

Read it and weep. But don't weep or wring your hand too much since you can only purchase $5,000 of I-Bonds per calendar year.

Still, it does show that there are some decent investment choices for the proverbial "little guy" without the need to get your hands dirty dealing with the so-called professionals of Wall Street.

Reread my April post for more details about U.S. Treasury I-Bonds.

-- Jack Krupansky

Fidelity Select Money Market Fund

Yesterday I switched the bulk of my cash from the Fidelity Money Market Fund (SPRXX) to the Fidelity Select Money Market Fund (FSLXX), which has a higher yield and is currently #1 for retail money market fund yield. You can in fact get significantly higher yield from some banks (with FDIC protection to boot), but for now I prefer and need to convenience of keeping my cash at Fidelity where I can easily shift it into my checking account.

I am not positive but I believe that this Select fund was previously only available when trading between Fidelity Select mutual funds, but now there is no such restriction. Oddly, FSLXX has only a $2,500 initial investment requirement compared to the $25,000 minimum for SPRXX. I talked to a Fidelity rep on the phone, she consulted with two other people, I read the Fidelity web site, and shifted through the fund prospectus, but I could find no explanation as to why anybody would want SPRXX rather than FSLXX.

As of this morning the 7-day yield for FSLXX is 2.64%, compared to an annual yield of 3.73% for a money market demand account at Countrywide and 3.44% at Capital One Online Savings. I actually opened an account at Capital One Bank as my local bank here in New York City (Capital One bought North Fork), but the online savings is completely separate from the bank.

-- Jack Krupansky

Picking an electricity supplier for New York City

This morning I signed up with Energetix to supply my electricity that is delivered by ConEdison here in New York City. Energetix is what is known as an Energy Service Company (ESCO). They buy electricity on the wholesale market and resell it to consumers and businesses. The delivery and billing is still handled by Con Edison, but each ESCO has its own plans, policies, and energy sources. I signed up for their 100% Clean Energy Option which is based on 60% "low impact" hydro energy and 40% wind energy.

I selected them by simply starting at the top of the list of "green power" suppliers supplied by Con Edison and calling each one until I actually managed to get through to a "real person" in a reasonably short period of time. I had been thinking of going with 100% wind as I had when I lived in Colorado, but the combination of hydro and wind is good enough. I had a 100% renewable plan out in the state of Washington.

I have no idea how the price will work out compared to other options. I did pick the market rate as opposed to a fixed price contract, which could be a really bad deal in the summer months, but leaves me free to switch to another supplier at any time over the next year without a cancellation penalty. In theory, green power may be a penny higher per kilowatt hour or a couple of bucks a month. We'll see.

I also get a $25 reward check as a new customer. That check is supposed to arrive in 8 to 10 weeks.

One concern I have is that if electricity demand is high for traditional fossil-fuel electricity this summer, traders and speculators may artificially bid in the green market to resell to non-green customers. In other words, my cost will not necessarily be based on the costs of the ultimate producer of the electricity. Sure, that is how a "market" works, but it seems awfully unfair for non-consumers of electricity to be using the market strictly for financial profit rather than adding value to either consumers or producers.

-- Jack Krupansky