Tue, Sep 17, 2013|Sean Goldsmith

Microsoft's big announcement...

Microsoft's big announcement... Dan Ferris reporting from New York City... Free access to Extreme Value... Economy is still grinding higher... Bill Bonner's video application for Fed chairman... An angry reader...

Today, the world's largest software company, Microsoft, announced it would buy back $40 billion in stock and raise its dividend by 22% to $0.28 a quarter.

The stock jumped as much as 2% on the news.

We're happy to hear the news. We've long said the software giant should return more capital to shareholders... and stop making bad acquisitions – like the $7.2 billion Microsoft spent earlier this month acquiring Nokia's handset division.

And while we've written about what Microsoft should do with its cash, other investors have taken their efforts even further...

Take Jeff Ubben and his hedge fund, ValueAct Capital. Ubben acquired around $2 billion of Microsoft shares in the spring (about 1% of the company). And early next year, a ValueAct representative will get a board seat at Microsoft – the first time the company has given a board seat to an activist investor…

And billionaire hedge-fund manager David Einhorn also tried to change things at Microsoft. He bought shares in 2006… then sold in the second quarter of this year.

Einhorn was critical of Microsoft's management. In his second-quarter 2013 investor letter, he said that a "decade of mismanagement has put Microsoft at risk of becoming a shrinking company." Microsoft has been battling a slowdown in PC sales in favor of tablets and mobile devices. (We'll explain later today why Microsoft will still thrive.)

Two years earlier, at the Ira Sohn investment conference in New York City, Einhorn said Microsoft CEO Steve Ballmer's "continued presence is the biggest overhang on Microsoft stock."

It's worth noting… Ballmer announced his exit from Microsoft less than two months after Einhorn disclosed he had closed his position.

Microsoft looks like it is on the right path. We asked Extreme Value editor Dan Ferris – who has been recommending Microsoft since 2006 – for his thoughts on the company's move...

It doesn't sound like management is worried about PC shipments (because it's not and shouldn't be). A $40 billion buyback is approximately 14% of the outstanding shares. Microsoft could and should do a lot more. But this is not shabby.

The company paid $7.5 billion in dividends over the 12 months ending June 30. It will probably pay around $9 billion this year... Still not half the free cash flow it will produce.

Cash will continue to pile up in foreign subsidiaries. (It currently has $70 billion.) It will keep using the standard corporate accounting shtick, saying that money is "permanently reinvested." If that's true, Microsoft must be starting a hedge fund or a bank... because it's all sitting in cash (and things like Treasurys, agency mortgage-backed securities, stocks, bonds)…

Microsoft's big mistake is the foreign-held cash. It should bring every penny to the United States, pay the 35% corporate tax, and buy back its still dirt-cheap shares. A 35% tax beats a 100% MSFT "mergers & acquisitions (M&A) tax," which we risk with MSFT's poor acquisitions.

A hedge-fund manager I talked to yesterday owns the stock and reduces the company's free cash flow by $2 billion a year in his models for M&A risk…

This is a good day for MSFT holders. But the company still needs to be a lot better. I'm going back to the annual meeting. This time, I'm getting in line and telling Ballmer he's a great software-business operator, the very best on Earth… and the worst capital allocator.

Today, the USA Today quoted Dan on his view on Microsoft. The paper ran a story about Microsoft's dividend boost and share buyback… and how the company could still do more to reward shareholders. You can see the story here. Kudos, Dan.

This week, Dan spoke at the Value Investing Congress in New York City. The "VIC," as it's known, is one of the best investing conferences in the world – one of the few we attend every year.

In his comment to attendees, Dan talked about Microsoft and why it will survive despite declining PC shipments. In his most recent Extreme Value, he put it this way...

Ballmer has not spent the company's excess profits well. But he's good at creating those profits. And despite his acquisition blunders, he's running a great business that will remain financially strong and popular with its customers for years to come...

It gushes rivers of free cash flow on a very small equity base (if you remove the excess cash). It owns 16 billion-dollar businesses – almost half of which are growing revenues at double-digit annual rates and most of which have incredibly thick profit margins. And despite popular belief, 58% of Microsoft's sales have nothing to do with PC shipments or Windows. So even if PC shipments continue to decline, the company will be safe.

Microsoft is one of the all-time greatest businesses in history. That's why I keep recommending it. If it stops the big acquisitions and puts more of its excess cash in shareholders' pockets, it will provide even more shareholder value.

One final bit on Microsoft...

In his November 2012 issue of Extreme Value, Dan wrote an open letter to Microsoft's board of directors... He expressed his concerns about capital allocation, foreign cash, and Steve Ballmer. We believe it's one of the finest issues he's ever written.

And slowly, it seems, Dan's wishes for Microsoft are coming true. As a courtesy to Digest readers, we've "unlocked" Dan's issue... It's available for everyone to view for free here.

Stay tuned... Next week, we're releasing a special video series from Dan. In this series, Dan will share the secrets he uses to find the world's best companies... and how you can do the same thing to compound your wealth in the market.

If you sign up for Extreme Value today, you'll be able to access these videos when we make them available... And you'll get immediate access to Dan's World Dominator portfolio. These are the best companies in the world... They mint cash and, in most cases, return increasing amounts of money to shareholders via dividends and share buybacks. Microsoft is a quintessential example.

Currently, four of Dan's World Dominators are in buy range. To learn more, click here...

While we continue to be wary that the markets – and the economy in general – face a looming downturn… for now, the economy is still grinding higher.

A recent Bloomberg survey showed deliveries of new cars and light trucks could hit 16.1 million next year. That's half a million more vehicles than we're on pace to sell this year and close to 2007's 16.15 million.

And according to the Federal Reserve's latest numbers, industrial production just enjoyed its biggest monthly increase in six months. Industrial production jumped 0.4% in August, after being flat in July.

And steel and shipping stocks, two sectors we monitor for proof of an economic recovery, are both ripping...

U.S. Steel (X) is up more than 2.5% today to $20.50 a share... It was trading for less than $18 a share on August 30. And Genco Shipping (GNK), a dry bulk shipper, is up 3% today to $4.10 a share... Genco has more than doubled since August 20.

Over a month ago, Amber Lee Mason and Brian Hunt encouraged DailyWealth Trader subscribers to buy U.S. Steel. It was a fantastic contrarian call… and still is. Steel stocks have suffered a huge fall since early 2011. Sentiment toward the sector remains terrible. Readers are already up more than 10% on the position. More gains are ahead as steel enjoys a "bad to less bad" rally.

Yesterday, we told you about Larry Summers withdrawing his name from consideration to succeed Federal Reserve Chairman Ben Bernanke.

Our friend Bill Bonner, the founder of Agora Inc., has been writing great commentary on the deliberations and rumors surrounding the nomination of our next Fed chair…

In his free, daily e-letter, Diary or a Rogue Economist, Bill has slammed Summers... Our favorite jab being when Bill referred to the former Treasury secretary as "mildly retarded." (Bill wasn't much gentler on other candidates, Janet Yellen and Don Kohn.)

In yesterday's piece, "Larry, We Hardly Knew Ye," Bill takes one last look at Summers – who is frequently lauded in the mainstream press as "brilliant." Bill concludes:

According to our friend Gillian Tett at the Financial Times, more of the same: "Insane financial system lives post-Lehman," is the headline atop one of her recent articles.

"The bad news," she continues five years after Lehman Brothers went bust, "is that the system is just as insane – perhaps more so."

Why?

The big banks are even bigger.

The rich are richer.

Fannie and Freddie are still at it.

Shadow banking plays an even bigger role.

And the system depends even more on central bank management.

So you see, the next Fed chief is likely to be an even greater threat to the financial health of the world than Ben Bernanke has been. Which brings us back to our question:

How smart do you have to be to be a good Fed chief? Do you need an IQ of 150? 180? 200?

What do you get for all that computing power? Does an extra 10 points of IQ somehow reduce debt levels? Does it help you create jobs? Does it help you spot a bubble before it pops?

Not on the evidence!

Here's a corollary question: Isn't it possible that Larry Summers is too smart for his own good... and too smart for the good of the world economy?

Our view: Driving the financial system isn't rocket science. It's more like driving a truck. The idea is not to invent new theories and complex innovations. The important thing is not to run off the road!

Larry Summers? No thanks. He's been in too many accidents already.

During the course of his commentary… Bill has even thrown his own hat into the race for chairman of the Federal Reserve. He just recorded a short video announcing his candidacy. In it, Bill shares his thoughts on the opening at the Fed and announces his candidacy.

To watch the video, you'll need to sign up to receive Diary of a Rogue Economist every day for free in your e-mail. We highly encourage it. Bill is one of our favorite writers on finance and history… And again… it's free.

You can watch the video by clicking here… You'll first have the chance to fill out a poll on who should be the next Federal Reserve chairman. The video will begin after you submit your answers and enter your e-mail to receive Bill's e-letter.

New 52-week highs (as of 9/16/13): American Financial Group (AFG), ProShares Ultra Biotechnology Fund (BIB), Emerson Electric (EMR), EnerSys (ENS), Ericsson (ERIC), iShares Germany Fund (EWG), SPDR Euro Stoxx 50 Fund (FEZ), Fluidigm (FLDM), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares Nasdaq Biotechnology Fund (IBB), KLA-Tencor (KLAC), Longleaf Partners Fund (LLPFX), 3M (MMM), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), Constellation Brands (STZ), Triangle Petroleum (TPLM), and Walgreens (WAG).

An unfortunately timed plea in today's mailbag... Send your notes to feedback@stansberryresearch.com.

"ENOUGH MICROSOFT!!!!!!!!! Get an original idea!!!!!!!!!!!!!!!!!!" – Paid-up subscriber Paul D. Hefley

Goldsmith comment: What terrible timing, Paul. Today's Digest explains why Microsoft is such a great company... It gushes cash. It's a leader in its field. And it's beginning to return large sums to shareholders.

Simply buying and holding stocks like MSFT is one of the surest ways to achieve wealth in the markets.

Still, we welcome e-mails like this... though we have a hard time understanding why people chastise us for winning picks.

When everyone is writing to pat us on the back for picking Microsoft, we may change our tune.

Regards,

Sean Goldsmith
Miami Beach, Florida
September 17, 2013

President OBAMA! wants to force neighborhoods he doesn't deem "inclusive" enough to integrate... The current administration is penalizing cities for not having enough minorities. And the penalties could involve withholding of federal funds from local and state government agencies.

This is a really terrible idea. Moreover, these efforts always fail because they dump a bunch of people into communities where they have zero investment. They don't own property. They don't take part in the PTA or go to church there… or otherwise invest in that community.

If you look around Baltimore, many of the communities were destroyed because the government decided to force racial integration through the use of public housing. The result was devastating. It was devastating for the neighborhoods. It was devastating for the banks that held the notes on the mortgages surrounding the public housing. It was devastating for the families who owned the property there.

In the 1950s, Bolton Hill was one of the most expensive neighborhoods in the city. It had the most beautiful grand homes in the city. But today, Bolton Hill is a nightmare of crime, prostitution, and drugs because that's where they wanted to force integration.

I (Porter) want to be very clear. This has nothing to do with race. I certainly don't think that anyone should be forbidden from buying real estate near me… or living near me… or sending their kids to the public schools near me.

But the government has a terrible track record of trying to force this. And the fact is, it has no authority in the Constitution to do it… Freedom of association is one of the primary hallmarks of a free society.

It's a travesty. People should live where they can afford to live with people whom they choose to live around. And the government should stay out of it.

– Porter Stansberry with Sean Goldsmith

OBAMA!'s latest social experiment will be a disaster…

OBAMA! wants to force certain neighborhoods around the U.S. to be more "inclusive." And his administration is prepared to levy penalties for these areas that don't have enough minority representation.

As Porter explains in today's Digest Premium, this type of forced integration is always a disaster.

To continue reading, scroll down or click here.

OBAMA!'s latest social experiment will be a disaster…

As Porter explains in today's Digest Premium, this type of forced integration is always a disaster.

To subscribe to Digest Premium and access today's analysis, click here.