Saturday, January 26, 2008

Microsoft Massage v1.0

 Microsoft Massage v1.0 is the latest entry to their financial product line. Run against a balance sheet, and it will point out the best way to move the numbers to please investors and analysts, causing stock prices to increase.

With respect to the earnings bump reported on Friday by Microsoft, Honeywell and Caterpillar, traders are not fooled by results that are boosted as a result of huge share buy-backs.

To show how earnings are increased via financial balance sheet restructuring rather than from operations, look to the number of outstanding shares as reported by Value Line:

2005: 10700 mil shs
2006: 10062
2007: 9380
2008: 9000e

2005: 829.48 mil shs
2006: 800.59
2007: 745.00
2008: 745.00e

2005: 670.87 mil shs
2006: 645.81
2007: 635.00
2008: 615.00e

Despite higher internal rate of return from operations, these corporations were buying back treasury stock in the open market at cycle-high prices. As I see it, these companies seek to boost their per share profit in order to derive higher management bonuses and/or to rationalize extreme compensation.

It’s a case of everybody has to get theirs as soon as they can get it.

Source: Bill Cara: Daily Report for Sat, Jan 26, 2008

Note: There is no such thing as Microsoft Massage, though it could be a good idea.  Contracting the money supply (or in this case, the share supply) increases the value of the stock, even though corporate assets are being used to buyback shares at top value.  This is probably not the best way to deploy capital, but when you're a cash cow like Microsoft it probably doesn't matter a whole lot what you do... especially when you now have a profitable gaming system, and a bigger bonus to spend on cheap games from the Microsoft store.

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