Microsoft's real problem isn't SteveSi...

 The man who created Windows 8 has left Microsoft.

Steven Sinofsky – who's credited with revamping Microsoft's Office software package and saving Windows after the problematic "Vista" iteration – announced his resignation Monday night.

This isn't too much of a surprise. "SteveSi," as he's known around the industry, has been reported a number of times to be an abrasive character, rigid, and rule-oriented. Some thought he was in line to become the next CEO of Microsoft… but he didn't seem like a great choice to me (Dan Ferris), given his reputation.

Some people say this is a big loss for Microsoft… But I think the huge, World Dominating, cash-gushing software giant will be OK. It holds a 90% market share and maintains 76% gross margins. Its free cash flow totaled nearly $30 billion last year.

Microsoft can and will find someone new to run its Windows division. What should trouble shareholders much more is a simple question:

Why the heck are they sitting on all that cash?

 Microsoft has $66.6 billion in cash and securities, most of it sitting offshore. It doesn't want to bring it home and pay it out to the owners of the company because U.S. corporate taxes are higher than the corporate taxes the company pays overseas.

But that's a dumb idea – even though it's very, very popular on Wall Street.

 The U.S. corporate tax rate is 35%. That's not nearly as bad as the 100% tax on capital invested that investors were charged when Microsoft wrote down 100% of its $6 billion 2007 investment in online marketer aQuantive.

People are funny, aren't they? Charge them 35% and call it "income tax," and they freak out. Charge them 100% and call it an "acquisition," and they barely notice.

Microsoft is likely to see more such losses. It bought Skype from eBay last year for $8.5 billion – more than three times what eBay paid for it not too long ago. Is Skype three times closer to making a net profit? I sure hope so...

 It's not surprising that Microsoft is a bad capital allocator. Most corporations are. They're good at operating their businesses, but bad at making acquisitions. It's not shameful to be a typical bad capital allocator, unless you refuse to admit it.

And the idea that taxes are anywhere near as bad as leaving the money in Microsoft's corporate pocket – where it just burned an $8.5 billion hole – is a little rich. Shareholders should revolt against companies that think it makes sense to play tax games with shareholder money. They should insist the money be brought to the U.S. and used to buy back shares (as long as the stock is as cheap as Microsoft is).

Buying shares back at dirt-cheap prices is a great way to create shareholder value. If Microsoft did this with the bulk of its overseas cash, the share price would be a lot closer to the $40s than the high $20s, where it sits today.

 Don't get me wrong… I love Microsoft's business and its stock. But I just think it could do even more to reward its shareholders. I love to see a company with a healthy cash balance… it's a great safety net for our investments. But it'd be even safer deposited in our own brokerage accounts. I recently wrote Microsoft's board of directors a long letter encouraging it to share some of that cash with Microsoft's loyal shareholders. You can find the full letter in the November issue of Extreme Value…

 Steve Sjuggerud has been so right about housing, it's almost boring...

Steve's bullish housing thesis seems to get a new affirmation almost every day – with more and more supporting data from homebuilders, retailers, and real-estate firms.

As Steve's followers know, he says buying a house is the best investment you can make today. Mortgage rates are at all-time lows, lots of real estate is trading below replacement cost, and the economy is grinding higher. He's been calling the bottom in real estate all year.

Today, we see more good news...

 Home Depot, the world's largest home improvement retailer – and a bellwether for the economy – reported quarterly earnings of $0.74 per share (excluding closing seven stores in China). Analysts were expecting $0.70 a share.

Third-quarter revenue totaled $18.1 billion, beating estimates of $17.9 billion. And sales at stores open at least a year – a key retail metric – increased 4.2% worldwide.

In announcing the results, Home Depot Chairman and CEO Frank Blake credited "what we believe is the start of the path toward the healing of the housing market."

 Home Depot also raised its full-year earnings guidance to $3.03 per share from $2.95 a share last year. With the stock market down almost 6% from its mid-September high, Home Depot shares hit a new high, up nearly 5% today...

 We see more bullish housing data in the latest earnings announcements from homebuilders D.R. Horton and Beazer Homes...

D.R. Horton's homebuilding revenues for the quarter increased 21% to $1.3 billion. And the company sold 5,575 homes in the quarter, up 12% from a year ago. Net sales orders increased 24%.

As of September 30, the company's sales backlog of homes under contract was up 49% to 7,240 homes. The value of the backlog jumped 61% to $1.7 billion.

In a statement, Chairman Donald Horton said…

 And though its fourth-quarter loss widened (due to a debt write-off), Beazer Homes had a strong quarter... Revenue increased 11% to $370.9 million. And new orders rose 10% to 1,110 homes... Its backlog rose 31% from a year ago.

 In the November 1 Growth Stock Wire, Jeff Clark told readers how platinum was trading at a big discount to gold... Platinum, Jeff showed, hasn't been this cheap in 20 years…

 Today, at $1,584 an ounce, platinum is only slightly more expensive than when Jeff first wrote about it. But it's still trading at only 92% the price of gold. And the latest prediction from the most closely watched platinum forecaster, precious-metals refiner Johnson Matthey (JM), suggests platinum prices could go even higher...

JM believes platinum supplies will fall short of demand this year by the most in a decade – thanks in part to labor strikes and violence in the South African mining industry. JM forecasts platinum sales from South Africa will drop 12.5% this year to an 11-year low. The resulting shortfall with create a supply-demand deficit of 400,000 ounces.

JM says platinum could trade as high as $1,800 an ounce over the next six months, averaging $1,625 an ounce during that period – 2.5% higher than today's price.

 New 52-week highs (as of 11/12/12): Sandstorm Gold (SSL.V).

 We're always gratified when subscribers write in about the success they've had following our strategies… as two do in today's mailbag. Send your notes – good or bad – to feedback@stansberryresearch.com.

 "I'm always interested in learning. With you as a guide, I feel much more comfortable in giving this a try. So far I have only bought calls on one position earlier this year which currently is underwater.

"However, with your encouragement last year (along with Doc and Dan) in regard to selling put options and covered calls, I started this year to bite the bullet. As of the end of October, I have earned a little over $41,500 in selling options. And that is with January's total of only $460! November and December will add to that total unless the market completely falls apart in the next few weeks.

"I read over your fine article and I appreciate the handholding you provided. Why not do as you suggest and maybe start out slowly, 2-3 contracts and get a feel for how this goes?

"In the meantime, I need to clean up a number of my stock positions because this past week has cost me a sizable sum. I hope I can get out and raise enough cash to be able to use your option strategy more often. Thanks for all that you and your team does." – Paid-up subscriber Pete Lipke

 "I found your research on insurance co. stocks to be outstanding. Do you think there is any truth to Berkshire unsuccessfully trying to buy Chubb? Based on current prices being way below what Buffet would normally pay, I'm wondering, are these stocks as cheap as they appear?" – Anonymous

Ferris comment: Chubb is a well-known stock. It's popular with investors these days because it's raised its dividend every year for 47 years in a row. But I don't know if Berkshire wants to buy it.

If you're going to buy insurance stocks, you have to know the float per share in relation to the share price. Float is insurance premiums paid, which have not yet been paid out as losses. If you're a good insurance underwriter, you can grow your float over time because you're able to sell a lot of insurance without paying out too much in losses. Insurance companies can also grow their float by investing it.

This double-barreled growth opportunity is one of the most attractive qualities of the insurance business. So a good insurance company should be able to sell insurance at a profit AND invest its float wisely.

If you can buy a great insurance company for less than the value of its float, you're basically getting $1 of current float at a discount and all its future float growth for free. It's like buying a good bank at a discount to book value. Same premise. Right now, Chubb trades for about 25% less than the value of its float.

Porter and his research team have done a lot of work on the insurance sector recently… In the October issue of his Investment Advisory, he called insurance the "best business in the world." In that issue, he identified the six top property and casualty insurers in the world… and showed how they're trading at an incredible discount. He said their shares represent an opportunity that "only comes up every 20 years or so."

To learn more about subscribing to Stansberry's Investment Advisory – which gives you access to Porter's work on energy and insurance – click here.

Regards,

Dan Ferris and Sean Goldsmith

Medford, Oregon and New York, New York

November 13, 2012

Microsoft's real problem isn't SteveSi... A letter to the board... Steve's housing bet is going gangbusters... Home Depot hits new highs... Jeff Clark's platinum trade...