Thursday, September 30, 2010

Yahoo!'s Bartz Has a Lot of Work to Do

By Eric Jackson
RealMoney Contributor

9/30/2010 5:00 PM EDT
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After being in the headlines regularly, Yahoo! (YHOO - commentary - Trade Now) went radio-silent for most of this year. In fact, I Tweeted a few weeks ago about Yahoo! that "the only worse thing than being talked about is not being talked about."

I'd like to amend that statement. Yahoo! is back in the news -- and not for the right reasons.

After a year and a half, there are two certainties about Carol Bartz's tenure as CEO of Yahoo!: 1.) She's never at a loss of confidence or words defending her actions, and 2.) People keep quitting on her.

In fact, we've all lost track of the number of departing Yahoo! execs over the years. Bartz boosters dismiss the "fascination" that business blogs and others have had with all the people quitting the company. The party line from Yahoo! on the mass departures has been, "We didn't let the door hit their backsides on the way out. These guys were merely another example of the deadwood who didn't cut the mustard on the USS Carol."

No investors complained publicly about this disturbing quitting trend, although I can't say that really surprises me, because no one complained about Terry Semel and the general downward spiral of the company years ago, which inspired me to lead an activist campaign.

Yet the latest news out of Sunnyvale, Calif. -- broken by Kara Swisher last night -- is very odd and worrisome for investors. Three high-level executives, including the best-known remaining Yahoo! executive, Hilary Schneider, are leaving tomorrow.

These are senior people, and they're leaving together. These employees really want to send a signal about how unhappy they are with Bartz's leadership by coordinating to leave at exactly the same time. Maybe it's a mutiny. If not, they could have staggered their departures, just as all the other Yahoo! people have done in the past three years.


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Wednesday, September 29, 2010

Paul Tudor Jones - 1987 Trader Documentary

If you haven't already seen this, I highly recommend it.

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HP Directors Lack Skin in Game

By Eric Jackson, Senior Contributor09/29/10 - 05:59 AM EDT

Stock quotes in this article:HPQ, ORCL

By the time this article appears, we will likely know the next CEO of Hewlett-Packard(HPQ_). [Actually, we didn't find out yesterday.]

And leading the committee who selected the new CEO is Silicon Valley wunderkind Marc Andreessen. Andreessen was the public face of HP when it ousted former CEO Mark Hurd in August (after granting Hurd an estimated $35 million severance package to get him through in between jobs).

When HP and Oracle(ORCL_) crossed legal swords after Hurd became Oracle's next co-president 30 days after leaving HP, it was apparently Andreessen who called Larry Ellison to smooth things over.

HP shareholders might be surprised to learn, however, that Marc Andreessen owns exactly zero shares in HP. As an HP shareholder, I'm very disappointed that Andreessen and most of his colleagues on the HP board haven't dug into their own (deep) pockets to buy some HP stock.

I'd prefer feeling that my representatives on the board feel the same pain that I do when the stock tanks. For this reason, I've recently filed a shareholder resolution with HP to adopt high stock ownership requirements for all directors. I hope that HP will allow its shareholders to vote on this matter at the spring annual meeting.

Long-term shareholders have been disappointed in HP's stock returns relative to the S&P 500 index return over the last decade. As of Sept. 22, 2010, HP's 10-year stock return was 25.14% vs. -22.64% for the S&P 500.

Over that time period, HP's board has been criticized for lax governance practices, including (1) the recent decision to oust Mark Hurd for questionable behavior, while still paying him a rich severance package, (2) the decision to use "pretexting" to gather information on a Wall Street Journal reporter and some of HP's own directors in 2006, and (3) the decision to pay Hurd $98 million in total compensation (before severance) for the three years prior his departure even though HP's stock return for the three years prior to Aug. 6, 2010, was -2.33%.

The Corporate Library, a corporate governance ratings firm, has consistently rated HP's board as "high risk" for its inability to manage incentive compensation. Nell Minow, co-founder and executive editor of The Corporate Library, has called HP's board "a serial corporate governance offender."

I believe that HP's outside directors would be more vigilant and effective monitors of management, as well as better judges of effective compensation packages (including executive perks such as personal use of corporate aircraft, personal travel and meals expenses, and gross-ups at the expense of shareholders for these executive taxable benefits), if all of them owned a significant equity stake in HP which they had to dig into their own pockets to buy, rather than being granted stock or stock options.


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Credicorp: A Bank for All Seasons

By Eric Jackson
RealMoney Contributor

9/28/2010 7:47 AM EDT
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Last month, I wrote about my favorite Latin American bank at the moment, Credicorp (BAP - commentary -Trade Now).

At the time of the article, banks were swooning through a tough August. There was fear that September was going to bring more pain. Yet, as we know, September has been one of the best for equities on record. Still, market skeptics point out that financials have lagged the broader indices this month, which is a sign of more trouble ahead.

Despite this, little Peruvian bank Credicorp has defied its peers and staged an impressive ramp up in its stock price over the last month. The share is up 12.5% in the last 30 days, compared with almost a 10% gain for the S&P 500. Over that same period, Citigroup (C - commentary -Trade Now) and Wells Fargo (WFC -commentary - Trade Now) have only gone up 6%.

So, is it too late to buy in to the Credicorp story? I don't think so. There appears to be more upside ahead. Here are the top reasons for owning the stock, as I see it.

It's a much smaller bank: The bank is "only" just under $10 billion in market capitalization. This means it is large among its peers in the region and able to go after big deals that appear, yet it is not "too big to fail". It is not on the level of a large multinational bank, so should be able to retain the entrepreneurial zeal that has helped it grow to its current size for a number of years to come.

Latin America is still hot: As I argued before, an investment in Credicorp over the last 3-5 years has been an investment in the thesis that the region is going to grow significantly faster than more mature economies. This has played out, and there appears to be no immediate end to it in sight. As more multinationals continue to hunt for economic growth as the U.S. and Europe tread water, they're going as far afield as Africa. Latin America, by comparison, is more of a known quantity, with rich resources and newfound political stability. The region will continue to post above-average growth rates for the medium term, in my opinion.


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Thursday, September 23, 2010

Another Micro, Soft Dividend Increase

By Eric Jackson
RealMoney Contributor

9/23/2010 1:30 PM EDT
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Microsoft (MSFT - commentary - Trade Now) investors got very excited last week after the company leaked the news Bloomberg that it was going to raise additional debt in order to fund an increased dividend. In the two days after the story ran, Microsoft's shares jumped 6%.

The hope of many investors, including me, was that Microsoft was going to announce an enormous increase to its quarterly dividend, which would then cause non-investors to sit up and take notice of just how cheap "Mr. Softee" has become -- despite the fact that it is printing cash at a rate that would make the Fed blush.

I had been hoping that Microsoft would double its dividend, and, indeed, that's what I've been pushing for the company to do since this past summer when I filed a shareholder resolution on the subject. Shareholders will have the opportunity to vote on that resolution at the company's annual meeting this November.

But instead of a double-down, we found out after Tuesday's close that Microsoft would increase its regular dividend by only 23%. The company also announced that it would raise $6 billion in debt and do an unspecified amount of stock buybacks in the future.

It wasn't what the market wanted to hear and the stock has fallen 3% since Tuesday's close. The dividend increase was better than a stick in the eye for investors, but it was about as exciting as kissing your sister.

The decision shows Microsoft's inherent conservatism. The company took its time getting comfortable with doing a dividend in the first place. Then, it took even longer for the company to accept the idea of raising debt by using its bullet-proof, triple-A balance sheet. When Microsoft increased its dividend in the past, it's generally been a 10% bump. The company probably believes a 23% increase is akin to living on the edge. Hardly.


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Wednesday, September 22, 2010

Wall and Main Streets -- The Pensioners' Perspective

By Eric Jackson, Senior Contributor09/22/10 - 07:46 AM EDT

I attended the annual fall meeting of the Council of Institutional Investors over the past couple of days in San Diego. The council is a non-profit organization that exists to represent the interests of American pension funds with combined assets of more than $3 trillion (that's trillion with a "t"). The council's views on how our largest companies are run matter because, unlike many large institutional or mutual fund companies, these pension funds aren't afraid to rock the boat and speak up to corporate management.

The pension fund world sits at an interesting crossroads between Wall Street and Main Street. The people who oversee these substantial assets in their plans have to be sophisticated enough to understand how Wall Street works and the games that Wall Street plays to benefit itself (and not always the shareholders). However, these investors also live in the same world as their pensioners. They are keenly aware of their responsibilities to their members and the real-world challenges that their members face each day.

The keynote speaker for the conference was Neel Kashkari, the former Goldman Sachs banker, who worked in the Treasury Department under Hank Paulson and later oversaw the $700 billion Troubled Assets Relief Program. Now Kashkari works for Pimcocreating a new active equities program for the global asset manager.

Kashkari's talk was the standard Pimco "new normal" pitch, but it was enhanced with his views from three years spent on Capitol Hill. He said that he was amazed that both parties had come together to pass TARP. He confessed he didn't think that they would beforehand. He had believed -- based on his time in Washington -- that politicians could only respond after a crisis, not in anticipation of one.

Although most of the pension fund audience told me they thought very highly of Kashkari's talk later, there was no shortage of people lined up to challenge him during the Q&A session of his talk. He gamely tried to answer the questions of why Treasury couldn't save Lehman Brothers but just two days later saved AIG(AIG) . (His answer, which is a variation of Paulson's revisionist explanation, is that Lehman didn't have the collateral to pledge against a bailout while AIG did, giving Treasury the authority to act in one situation while not in the other).

However, the big questions posed by this audience to Kashkari were: "How can Wall Street, so quickly, start repaying itself huge bonuses when the rest of America is hurting?" and "When and how are things going to start to get better for the rest of America?"


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Monday, September 20, 2010

$RIMM: The Emperor Has No Guidance

By Eric Jackson
RealMoney Contributor

9/20/2010 5:00 PM EDT
Click here for more stories by Eric Jackson

Research In Motion (RIMM - commentary -Trade Now) put in a beat-and-raise Thursday, which helped the stock price hit $51 in the after-hours session. However, a 10% gain quickly became a loss by the end of Friday's after-hours session. That price action could be an ominous sign for the stock from this point onward.

RIM's second-quarter revenue totaled $4.62 billion, handily beating analysts' expectations of $4.47 billion. Earnings per share came in at $1.46, which also was much higher than the expected $1.39. During the call, the company confirmed that at least 2 cents of this EPS came from the $1.5 billion in stock purchases executed in the quarter.

RIM also raised its guidance on both the top and bottom lines for the third quarter, respectively to ranges of $5.30 to $5.55 billion and $1.62 to $1.70.

Clearly RIM's management and bullish investors were hoping these results would silence the company's growing chorus of critics. The Globe and Mail, the national newspaper of Canada, proclaimed, "RIM Defies Doubters" in a headline. However, The Wall Street Journal ran with a headline that showed quite a different verdict on the company's results: "BlackBerry Gets Squeezed By Rivals."

The reason for such different reaction boils down to two key details contained in the report:

1. RIM announced 4.5 million net new subscribers instead of the 5 million they'd previously guided, and;

2. The company decided that, after the coming quarter, it will no longer provide any future guidance about or details after-the-fact on the net new subscribers or the average selling price (ASP).

If you go back and look at the after-hours price chart for RIM, the cheery party for RIM bulls ended around 5:38 p.m. EDT. That's when Edel Ebbs, vice president of investor relations, dropped the bomb about the coming lack of guidance on net new subs and ASP.


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Friday, September 17, 2010

RIMM's Logic for No Longer Reporting Net Adds and ASP

From the Seeking Alpha transcript of yesterday's call:

Maynard Um – UBS

Hi, thanks. Just a clarification and then a question. I guess I understand not guiding the net adds but can you run through the rationale of not reporting the net adds afterwards because there is a big sensitivity particularly to the out years related to your service revenue, and then the question is just following up on the US and it sounds like on North America net adds will actually reaccelerate kind of given the Torch and the reinvigorations from that product, but that then implies that your international net adds will actually weaken so I'm just trying to understand the dynamics, or is something happening on the international side or is there I guess if you could just run through the dynamics there? Thank you.

Jim Balsillie

Well I think we're guiding kind of 20-ish percent growth in it, so quarter-over-quarter, so there's room in both there and you kind of take a number and roll them up to a discount and but it's also – you know, you get this variability because sometimes there's – they go out as phones, sometimes there's upgrades and they don't go with net, sometimes you get these different events and so, I mean, how much information is helpful and how much do you just put yourself in a position where it's got variability as Edel said and how much do you sort of competitively disadvantage yourself by over disclosing stuff but I mean we'll give you periodic indications of the overall subscriber base.

I mean, we'll let people know when we hit a hundred million or maybe 75 million, and you can sort of do the math. It's sort of how long that is going to take and the only question is it one quarter earlier or one quarter later really, I mean that’s how you do the stuff out how we do it and that's how we have to plan our infrastructure. It's basically number of subs and the utilization profile of those guys so we have a pretty good sense of it but, you know I mean, you can also pretty much deduce it. It's just how much granularity do you give? I mean, we – know that it is competitive and then you have a responsibility to in turbulence of business to keep people all updated on it and you know –

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Thursday, September 16, 2010

Balsillie: Unplugged on How RIMM will Stay Competitive

Thanks to Dan Frommer of Business Insider for presumably transcribing this from tonight's $RIMM call.

Here's Jim Balsillie's answer to RBC's Mike Abramsky's question about how RIMM will stay competitive with Apple and Google:

There's such an interesting dynamic going on in the market because first of all, when you talk about platform and design and future aspects, I think you're going to be pleasantly surprised at DevCon in a week Monday. I can't really give you too much here but I think you're going to be really interested there. More aspects of the design philosophy are going to come out there.

I think in terms of what BlackBerry does, you know, it still has a tremendous number of attributes that really serve the market in the way that we align it for the service and for the carrier and for the segment that it's supposed to address. And I think it's dangerous to frame all this in a high-end arms race. And I think you're going to see our capacity to go beyond what could have been expected by anyone and yet still address the issues of cost effectiveness, security, efficiency, and desired form factors.

Our specialty's been in resolving a paradox, and if you don't innovate to resolve that paradox… You know, robbing Peter to pay Paul isn't really a solution because you're just shifting strategies. The feature phones upgrading to a smartphone, I think our guidance just shows what's happening. And if you saw the roadmap and you saw the engagement strategies you would see that we are being very prudent in our approaches.

But this is a really promising space, and we can address lots of segments. And we can still respect carrier alignment and efficiency, and different price points.

But, I think you're going to see the ability to, I don't know how to say it better, than other than "resolve the paradox." Because if you make these things so high-end that they're not addressable to the market, or they're so consumptive of the networks they can't scale, that's not what we originally designed our business for.

And what we've done is innovate to really avail the capability but still not sell out our lineage, and that's the paradox that we're resolving. But be careful that just because you don't jump to Peter and abandon Paul, to sort of carry on with that sort of approach, that we don't have an answer. We're trying to innovate, forward our business, not be strategically erratic.

The core BlackBerry aspects are well defended and looked after and protected. But it's in a space where people have mushrooming expectations of what these things can do. And that's the essence of the paradox. And all I can say is it won't take long before you see how we've done that. And I think Torch and BlackBerry 6 is really an excellent step forward.

The promo campaigns are just really starting. But that's why you've seen the jump in guidance… and the subs is that. I hope I answered your question. It's hard for me to answer it too directly without sort-of violating confidential roadmap stuff.

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Research In Motion's Moment of Truth

By Eric Jackson
RealMoney Contributor

9/16/2010 2:15 PM EDT
Click here for more stories by Eric Jackson

Research In Motion (RIMM - commentary - Trade Now) will report its latest quarterly earnings this afternoon after the close. Here's a preview.

I have been short Research In Motion since mid-June, just prior to the last earnings call. Back then, my thesis was that the company was going to have a Nokia (NOK - commentary - Trade Now)-type swoon. New models were no longer going to excite. People would increasingly be drawn to the Apple (AAPL - commentary - Trade Now) iPhone 4 and new Google (GOOG -commentary - Trade Now) Android devices. I also believed that people would increasingly become trained on typing emails on flat screens and find that they were "good enough" compared with the tactile RIMM keyboard. Finally, the enterprise -- RIMM's stronghold -- looked vulnerable to me. Most people don't want to carry multiple devices, and I believed they would increasingly push to make their touch-screen phone their work phone.

This thesis is still valid today in my view (although it has become much more popular since June).

We got validation of the thesis from RIMM's June 24 earnings call, which did not paint a rosy view of the next earnings call (which is coming today). The stock sold off from $59 to the low $40s on the outlook, despite co-CEO Jim Balsillie's tough talk and optimism that his new devices would be a "quantum leap" for the company and really excite consumers.

The stock began to perk up ahead of the August announcement of the company's newest touch-screen BlackBerry, which kept the keyboard as a slide-out: the Torch. The new phone failed to inspire the critics and - a week later - when it went on sale, there were no lines outside AT&T stores or stories on your local late-night news about its debut.

Now, we hear news that JPMorgan (JPM - commentary - Trade Now) is letting its bankers use their iPhones instead of requiring them to carry a corporate-issued BlackBerry. Comscore says that BlackBerry's smartphone market share in the U.S. slipped from April to July by 2% (although it still had 39% share, making it No. 1). Nielsen released a report saying that 57% of current BlackBerry owners want to make their next smartphone something other than the brand they are using now (vs. 29% for Android users and only 11% for iPhone users).


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Wednesday, September 15, 2010

Microsoft Might Finally Use Its Cash

By Eric Jackson09/15/10 - 08:00 AM EDT

Late Monday afternoon, a Bloomberg article appeared quoting an unnamed source suggesting that Microsoft(MSFT) would look to tap the debt markets and use the money to fund a higher dividend and do more stock buybacks. The stock ended up more than 5% in the last hour of trading. For Microsoft, that's a monster move.

The company has come under increased shareholder pressure to disgorge its ample cash to shareholders. Last month, I filed a shareholder resolution to be voted on this November at the shareholders' meeting calling on Microsoft to dramatically increase its payout ratio on its regular dividend, as well as considering stock buybacks.

Last week, Microsoft CFO Peter Klein spoke at theCiti(C) Tech conference and got an earful frominvestors in the Q&A about the dividend and cap structure. Klein and Microsoft Investor Relations GM Bill Koefoed also spoke last week to many Microsoft holders, including me, about their views on these questions.

Although I can't disclose what they said during our meeting, here is a summary of my argument to them:

  • Microsoft is greatly under-appreciated by investors today at current levels. Yet, the company can take its greatest weakness (the perception that it has all this excess cash because it is not growing as quickly as its younger, nimbler rivals) and turn it into its greatest strength (by using its cash to payout a dividend that gets yield-hungry investors to sit up and realize that holding Microsoft is safer than U.S. Treasuries).
  • There is constant reference in the media these days for "the hunt for yield" by investors, but Microsoft is never mentioned even though it is best positioned to take advantage of this secular trend.
  • Every pension fund in America today has promised its pensioners it will deliver 8% annual returns forever. They are having trouble in the last three years meeting that commitment. They -- and other large and small investors -- would beat a path to Microsoft's door if there was a substantial increase in the regular dividend.
  • The status quo for Microsoft of stock buybacks and marginal annual increases to the regular dividend (which returned $16 billion in cash to shareholders last year) isn't working given thestock price. Microsoft needs to be bold.
  • There are 3 levers that Microsoft can and should pull to get investors' attention in the coming weeks:
  • 1. Most important, in my view, is to substantially increase the regular dividend. I believe it should be nothing less than a doubling of the dividend. Investors would be happy to sit and wait for the market to better see the value in the stock if they were getting a whopping payout. A large increase in the payout would also assuage investor fears that Microsoft might do a large, ill-advised acquisition (like Yahoo!(YHOO) or Research in Motion(RIMM)) which would waste shareholders' money on declining assets.

    Although some in the media have raised the question about how wise it is to increase the dividend with the uncertainty of the dividend tax rate, I asserted that I thought this issue was irrelevant. Even assuming the rate goes up, that argues even more for why a drastic increase in the payout is necessary just to tread water.

    2. Tapping the debt markets. Johnson & Johnson(JNJ) recently raised $1.1 billion in the debt markets selling 10- and 30-year notes at record low rates. JNJ paid 2.95% on their 10-year notes. In May 2009, Microsoft made its first foray into the debt markets, selling $3.75 billion. Back then, Microsoft paid 4.2% on their 10-year notes.

    Why not raise the cash at these levels, especially when Microsoft is seen as more creditworthy than the U.S. government and is one of only a handful of AAA corporate issuers. I reminded Klein that I'd written an article prior to their first debt offering where I pointed out that Microsoft could issue $60 billion in debt and only match IBM's (IBM) current debt-to-cash ratio.


    [** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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    Monday, September 13, 2010

    Basel III Barks Up the Wrong Tree

    By Eric Jackson
    RealMoney Contributor

    9/13/2010 5:00 PM EDT
    Click here for more stories by Eric Jackson

    All the bank stocks are rallying this morning on news that the Basel III requirements are not as taxing as feared. Many analysts are applauding the new rules, saying that the Basel Committee struck the right balance between stability and growth. The committee did no such thing, in my view, because these new standards will have no bearing on causing future growth or preventing future crises.

    The new rules which came out yesterday in the Basel Committee press release state that banks with now have to put aside 7% in capital for every loan they make. What's more, the banks will have eight years to get in compliance with this new standard. This 7% includes a 2.5% "buffer," which, I suppose, suggests that the committee believes it's really unnecessary. It's like the committee is saying that this buffer is the equivalent of putting banks under "extreme stress tests."

    The market feared much higher levels than 7%, thus leading to this morning's rally. But, put another way, 7% capital requirements really mean that for every $1 in deposits, banks can make $14.29 in loans -- eight years from now.

    Perhaps the Basel Committee thought 20:1 leverage -- when banks were asked to set aside only 5% of their capital on loans -- was perfectly acceptable and now 14:1 is severely conservative. Maybe when you compare it with the 25:1 ratio carried by Goldman Sachs (GS - commentary -Trade Now) or the 32:1 ratio carried by Morgan Stanley (MS - commentary - Trade Now) back in 2007, these new standards seem austere.

    Yet the Canadian banks such as Royal Bank(RY - commentary - Trade Now), Bank of Nova Scotia (BNS - commentary - Trade Now), Bank of Montreal (BMO - commentary - Trade Now) and Canadian Imperial Bank of Commerce(CM - commentary - Trade Now) have current leverage ratios (and did through the crisis) of 21x, 23x, 19x, and 29x respectively. Yes, you read that last one correctly: Canadian Imperial Bank of Commerce has a current leverage ratio of 29:1.

    I thought the Canadian banks were the ones we were supposed to emulate. I thought they were smart. I thought they were conservative. They had a single regulator who was on the job. Even men's magazines are writing articles declaring these obvious facts, so it must be true.


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    Friday, September 10, 2010

    Microsoft Gets an Earful From Investors

    By Eric Jackson
    RealMoney Contributor

    9/9/2010 5:02 PM EDT
    Click here for more stories by Eric Jackson

    Last month, I filed a resolution with Microsoft (MSFT - commentary - Trade Now) to bring to a vote at the planned November shareholder meeting the issue of dividend policy. I am in favor of a drastic increase in Microsoft's regular quarterly dividend (perhaps along with additional stock buybacks) -- on the order of doubling it. The company could easily support such an increase out of its operating cash flow, and doing so would attract new buyers and raise the stock price.

    During this past week, many other Microsoft holders have apparently been saying the same thing -- directly to Microsoft CFO Peter Klein.

    Klein, along with Microsoft head of investor relations Bill Koefoed, was in New York this week to present at the Citigroup Technology Conference. He took time during his visit to stop in and chat with many institutional investors in the city. According to Klein's comments at the conference, the dividend issue was front and center in those discussions.

    What's more, it appears as though the company's board is seriously considering the issues of an increased dividend, more buybacks and tapping the debt markets when money is so cheaply available.

    In my resolution, I suggested strongly that Microsoft double the regular dividend. Klein's comments on this point and other related thoughts are laid out below.

    Question: I'm curious about how high a payout ratio pro forma you'd be comfortable with. It could be the thing that really puts focus back on the stock in terms of all these other levers. If the yield is outside, or perceived to be outside, it just will drive the common price up. So, that analysis was, I think, about a 50% payout ratio. And you're around 25% now. So, is there any color you could give us about how comfortable you are in moving toward 50%?


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    Wednesday, September 08, 2010

    Economic Crisis Will Require Patience

    By Eric Jackson, Senior Contributor 09/08/10 - 06:00 AM EDT

    We live in an ADHD society, where we expect we can pop a pill anytime there's a problem.

    Perhaps that's why politicians are never short of answers for how to cure our current economic funk, although at least during congressional or senate hearings, they sometimes seem woefully short of any financial acumen). The trouble is both political parties' ideas about how to cure our current plight are wrong.

    Flip on one of the cable news channels at all hours of the day and you'll find politicians and talking heads pontificating about simple answers to complex problems.

    On the right, we have tax cuts presented as the ideal fix for high joblessness. If only we extended the Bush tax cuts, cut payroll taxes, and cut corporate taxes, we are told, small businesses would have no uncertainty. They would start hiring people. Small business is the engine of job growth for America. But will a tax cut -- in this malaise -- really give business leaders the confidence to start hiring? I doubt it.

    How do you give business leaders confidence to hire? They'll only hire when they'll make more money than if they don't. They need to see consumers starting to buy again in greater numbers. But we know consumers are hunkering down and saving more, partly because business leaders aren't hiring.

    It's chicken-and-egg. How do you goose consumers to spend when businesses won't hire? Through tax cuts? Again, that alone is not going to change someone's outlook with the headwinds of uncertain housing prices, still elevated debt levels and a poor job market.

    So, on the left, we hear the chants for more stimulus. Actually, this chant is virtually only being made by Paul Krugman, as most left-leaning politicians are fearful to support the idea because they suspect the electorate will react negatively to the idea.

    Krugman had an interesting op-ed over the weekend in which he compared 2010 to 1938 and effectively showed how politicians then were guided by the polls and how wrong the public had been (now with hindsight). In 1938, like now, the majority of the public wanted tax cuts instead of increased government spending, yet that wasn't what got us out of the protracted economic depression.

    It took a World War -- and the massive stimulus it brought with it -- to bring the world out of its funk back then. Krugman uses that historical fact as support for his call for a gigantic stimulus now.


    [** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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    Tuesday, September 07, 2010

    Digging for Gold Among the Miners

    By Eric Jackson
    RealMoney Contributor

    9/7/2010 11:30 AM EDT
    Click here for more stories by Eric Jackson

    There's been a lot of excitement about the mergers-and-acquisitions action in the tech sector lately. That has naturally spurred a great deal of speculation as to what other companies might be taken out next -- and, currently, those same dynamics are also present in the gold sector.

    Last week, Goldcorp (GG - commentary - Trade Now) announced it had agreed to buy Andean Resources for roughly $3.46 billion, topping another bid from Eldorado (EGO - commentary -Trade Now). Australia-based Newcrest Miningrecently completed its purchase of Lihir Gold, a deal that was worth some A$9.5 billion as of early May. Additionally, Kinross Gold (KGC -commentary - Trade Now) agreed to buy Red Back at the start of August.

    We're likely to see a number of similar deals to come, wherein the big gold players -- names such asBarrick Gold (ABX - commentary - Trade Now), Goldcorp, and Newmont Mining (NEM - commentary -Trade Now) -- look to buy assets of some of the junior gold miners.

    Why will these gold majors buy now? There are several reasons:

    • They have the cash and currency to do so. Just as in the word of large-cap tech, these large majors weren't doing deals two years ago when the walls were closing in on the global economy. The market hasn't returned to the 2006 buyout binge days, but the stock market has at least recovered enough to make the head honchos sufficiently confident to green-light deals.
    • The price of gold is near $1,300 an ounce. If you were a CEO of one of these large majors, you'd think twice before going to your board to buy an attractive junior at a time when the price per ounce of gold had collapsed (as had been the case in early 2009). You'd know that would be a tough sell, and that a few directors would be likely to ask, "What's the rush?" The higher price at this point means these boards will likely feel more confident in the economics of buying these assets.
    • A physical scarcity of gold has made these juniors even more attractive. There are 162,000 tons of gold in the world. That's it. Printing presses can't print more gold. Therefore, given that gold prices are hovering near all-time highs and that some are predicting event stronger upward moves, it makes sense for these large majors to act now and get a piece of the action.
    • These large majors need to add reserves each year. Barrick, in 2009 alone, produced 231 tons (or 7.4 million ounces) of gold -- which means it reduced its reserves by that amount. These large players need to keep filling the top of their reserves funnel in order to show their investors that they are keeping their reserves high. They can't do that through new finds by themselves. They need M&A.

    So, as to the virtually certain coming tide of consolidation in the gold space, I like these juniors:

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