Reasons to buy

Microsoft is a cash generating powerhouse. The company prints over a billion dollars of cash flow per month. Moreover, Microsoft has a ttm profit margin of 28 %, an operating margin of 39%, and a return on equity of 54%.

In addition to those very attractive profitability ratios, Microsoft has very little chance of declaring bankruptcy in the foreseeable future  – zero chance in my option – which is very important given current market conditions. With a debt/equity ratio of .06 and a current ratio of 1.52, Microsoft is about as solvent as water! This  software giant also has 20 billion in cash and only 2 billion in debt. The large cash position is great because it gives Microsoft the option to acquire other companies or buyback their stock at depressed levels. You Always Have Other Options right?* Tell that to Jerry Yang!

In addition to sound solvency ratios Microsoft is currently yielding 2.7%, and sports a trailing twelve-month price/earnings multiple of 10.1 compared to an industry average multiple of 14.1.
Aside from strong fundamentals Microsoft also has a several interesting prospects. Firstly, Microsfot has signed a deal with major health insurer Aetna that will allow patients to access their health record via Microsoft’s HealthVault platform. Microsoft is also looking to expand their exposure to the rapidly growing search advertising field – either organically with Live or by the acquisition of a search platform such as Yahoo’s.

Reasons to be wary
A large portion of Microsoft’s revenues come from selling software such as the Windows OS and Office suite. This software is typically sold when someone buys a new PC. The global slowdown will indubitably mean slowing PC sales growth even when we consider emerging market growth. Moreover, piracy is a huge risk for Microsoft going forward. In China, Most Windows OS’s (90% according to one study) are pirated. Everyone knows the Chinese do not fully grasp the concept of intellectual property rights. If you want evidence of this just take a stroll down Canal Street - “Gucci!, Prada!, Gucci!, Prada!”. I foresee the relative ease at which programs can be pirated as becoming a bigger and bigger problem as Microsoft expands its software business into the poorer emerging markets.

Another risk is that posed by search giant Google. Not only does the GOOG control about 70% of the search market but it is also starting to infringe upon Microsoft’s territory via browser based applications such as Google Spreadsheet (which is like Microsoft’s Excel). Though these browser based applications are not a real threat yet, they could become one in the future.

Despite the risks I like MSFT because of its strong cash position, ability to generate additional cash, and strong product pipeline.

*Yahoo! Is commonly mistaken to be an acronym for You Always Have Other Options – when really it is an acronym for Yet Another Hierarchical Officious Oracle.

Disclosures - None

 It would seem that the January effect could be making a comeback (albeit only for this year). Essentially the January effect was/is an anomaly where by stocks experience a general increase in the month of, you guessed it, January. A commonplace explanation for this effect has been that investors ditch losers (stocks not people, don’t worry Palin you’re safe for now) in December to create a tax loss to help offset any gains. In recent years the January anomaly has become increasingly weaker, perhaps due to an increase in tax advantaged investment vehicles (such as a tax sheltered retirement plan) or perhaps due to the fact that investors are anticipating the effect well in advance.

 But this year losses have been so catastrophic and I think it is very possible that the market did not correctly account for the year end tax shelter selling. After all there are 301 stocks with a market capitalization over 1 billion USD that are down over 50% this year!

“I hope we surprised you,” said OPEC President Chakib Khelil after he announced yesterday that OPEC would cut production another 2.2 million barrels per day in light of falling oil prices and rapidly rising inventories. NOPE!

With oil below $40 OPEC is desperate. But unfortunately for them, and fortunately for the rest of us, the 13 country free trade hating cartel does not control enough of the world’s black crack to fix prices (they are missing the big bad Russian bear). Oil prices today are ruled by shifts on the demand curve, not shifts in the supply curve and OPEC is powerless to control demand in the short term. Also, to the advantage of the West, the cartel has been traditionally plagued by oligarchic game theory-esce problems; that is, not all nations abide by their quotas.

Where does oil go from here? Anyone who “knows” for sure is probably just guessing. It all depends on the depth of the world recession, the flight to quality (appreciating US dollar), and how aggressively OPEC ends up cutting production. In my opinion we could easily see 30 dollar oil given the world outlook and recent inventory numbers.

But I think the oil boom and bust has a very important lesson for America. Now is the time to divest into technologies that will enable us to import less oil and take advantage of more sustainable energy sources such as wind and solar.  Oil’s eventual ascent above 100 is inevitable in the long term given the rather stringent supply and unavoidable climb in demand due to population growth and raising standards of living. The smart money is in companies that can take advantage of pricey oil in the future.

My advice to the cartel, stop trying to manage supply, let oil prices fall as they may; cheap oil will stimulate the world economy and you guys will be able to make more money in the long run. My advice to America, cheap oil is not sustainable; we need to either start developing alternative fuel sources now or start preparing to fight China, Russia and India for the world’s dwindling supplies. In my opinion, oil is a stupid thing to go to war for given how possible it is to develop substitutes. We all saw what happened in Iraq; let’s use our brain and not our brawn in 09’.