September 17, 2010 - Another Sign of a Bond Market Top

Featured Trades: (MSFT)

1) Another Sign of a Bond Market Top. As much as I like it, I am not accustomed to getting such instant gratification when I pick up a stock tip. But that is precisely what happened when Bill Fleckenstein told me he liked Microsoft (MSFT) at $23 last week (click here for my radio interview with Fleck).
Since then the stock has popped 10%.

There were rumors yesterday that the company was planning to issue long term bonds at current subterranean interest rates and use the proceeds to buy back its own shares, which are selling at a modest ten times earnings. At these terms, Mr. Softy should be doing this trade until the cows come home.

It reminds me of the type of financial engineering I saw in Japan during the late eighties, where companies could issue debt with attached five year equity warrants at 0% interest rates. Almost all of these warrants ended up expiring out of the money because of the stock market crash that followed, so the borrowers were able to obtain free money for five years. For leveraged, capital intensive industries this can have a huge impact on profitability. US companies were paying 8% for medium term money then. When investors are stupid enough to make these deals possible, the astute managers should take the gift.

If (MSFT) goes ahead with the plan, and they'd be nuts not to, it could only be great news for the stock. Microsoft has recovered from its disastrous Vista operating system, and is now hitting on all cylinders with a series of successful new product launches. A share price of $30 should be in the cards.

Can Microsoft Get Something for Nothing?

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