Microsoft Chisels Epitaph for Options - TheStreet

Microsoft Chisels Epitaph for Options

Ending the practice of granting stock options at Microsoft is not only correct, it's also smart.
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Editor's note: This column, which reflects market activity from the day before, originally appeared July 9 on To sign up for RealMoney, where you can read Bill Fleckenstein's commentary every day, please click here for a free trial.

Buckle up, folks, we've got lots to cover. To dispense with the uneventful first, the overnight markets were a snooze, except for Japan, which was higher. Of course, the big news of the evening was


(MSFT) - Get Report

announcement that it would replace stock options with restricted stock, and treat remaining options as an expense (more about that below).

In any case, after our market opened, we kind of flopped around, bolted higher, then commenced a zigzag process. To zero in on the particulars,


(CSCO) - Get Report

was higher on pontificating by pom-pom king John Chambers that "in the coming two to four months, spending by companies on information technology will recover." (Later in the day,

a Cisco spokeswoman said that Chambers' remarks were misconstrued, and that he had said that industrywide spending will start rising about two to four months after IT customers begin to see their own businesses turning up, whenever that is.)

Pom-Pom Pooh-Bah:

Mr. Chambers has no data to back this up, and he carries with him the reputation as pied piper of the Internet craze, but nevertheless, that vision lit a fire under his stock, and for some reason,


(INTC) - Get Report

as well. Meanwhile, folks completely and totally ignored the news from


(LOGI) - Get Report

(more about that below). I took advantage of this morning's frenzy to establish a position in October Cisco puts, and bought some more October Intel puts.

Back to the action, there was a whole lot of motion in the early going, but not much net change. Stocks sported red and green pretty evenly. After the morning's push higher, the market sold off, tried to rally back to a new high, couldn't do it, and sold off in the last half hour to set the prices you see in the box scores. When I put a summation sign under today's action and the action of recent days, when I look at sentiment, end-zone dancing, froth and my hate-mail indicator, this has all the hallmarks of exhaustion.

Of Frenzy and Fermentation:

Is it the final exhaustion for this move? I don't know. But when we finally witness exhaustion, it will look like this. (I myself continue not to short until I see some signs of a failed rally. But I have been stepping up my purchase of fall puts, as I think we will see a total collapse before the fall is out.) I cannot believe the frenzy we are seeing on arm-waving, while signs of deteriorating fundamentals are ignored. If tomorrow is a down day, one could construct the argument that the exhaustion has been seen. The bottom line is, even though earnings expectations set by corporate America for this quarter are quite low, expectations on the part of the bulls are extraordinarily high, and that is a recipe for a dislocation.







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I did think it was rather interesting that given all the hoopla surrounding John Chambers' thoughts this morning, and all the chatter about things getting better in the PC arena, comments from


(DELL) - Get Report

President Kevin Rollins received very little play. These comments were relayed to me by somebody who had them relayed from a dead-fish house that Rollins was very explicit about there being no signs of recovery in end-user demand. There is no meaningful increase in corporate RFPs (requests for proposals), no uptick in the consumer/government sectors. The only recovery had been in the stock market, not in demand.

Away from stocks, the dollar was weaker vs. the yen, lower vs. the euro, and stronger vs. the Canadian dollar. I have a sneaking suspicion that the yen may be set to appreciate, but we will see if that happens. The precious metals were mixed, with gold down slightly and silver up 2%.

Incubating Lustrous Catalyst:

My contacts close to the silver market note that it's "changing" (and they continue to be bullish). Finally, we are seeing the earliest signs of investment demand, something that's been missing from the silver market thus far. Folks have already decided they want to own gold as protection from the


printing presses, and it now appears that a little of the same kind of money is trickling into silver. As a much smaller market than gold, it stands to benefit disproportionately. That said, silver remains very volatile, and the uptick in investment demand is in its infancy, but this glimmer of change strikes me as a big deal.

Turning to fixed income, that market was slightly higher. It, too, may be witnessing an interesting change, on the back of today's news that Peter Fisher will step down as Treasury undersecretary. Fisher had been adamant that 30-year bonds wouldn't be issued on his watch. Now that he's going, and in view of our government's exploding deficit, perhaps the Treasury may start issuing 30-year bonds again. So for anyone who has an interest in the long bond, this may turn out to matter.

Of Restricted Stock and the Microsoft Flock:

Back to Microsoft, its move is an intellectually honest one, in my opinion, and a rather brilliant one at that. By awarding restricted shares to its employees, it's basically issuing a form of golden handcuffs, in that the shares vest over time, and the employees must remain with the company in order to sell them. Since Microsoft's stock amounts to a pretty stable form of currency (which is not to say it can't go down, but a total collapse is unlikely), I believe this will give the company an added edge in attracting top talent. Other companies interested in aping Microsoft may not have as stable a stock, and of course, most stocks in technology remain wildly, wildly overinflated. Microsoft may be expensive, but I don't consider it to be as egregiously valued as several others.

This ought to put pressure on other companies to start expensing options and go the same route, though lots of companies will resist the change. The wampum kings, as represented by John Chambers, will certainly resist it, as will Craig Barrett at Intel. But over time, I suspect that these other companies will also be forced to expense options and probably will be forced to do something like Microsoft has done. In any case, I applaud the move, as it obviously aligns everyone's interests more closely.

The Mouse (News) That Roared, but Sentiment Ignored:

Returning to Logitech, the stock was hammered today for 25%. This is significant because the company is the largest supplier of PC peripherals to retail and OEMs. Logitech specifically cited weaker-than-expected demand in end markets. This jibes with the recent data from market-tracking service NPD Intellect, which has said that June had weakened from May. This, naturally, is consistent with what we've been hearing from other tech companies that have reported actual data, as opposed to engaging in the arm-waving so adored by Mr. Chambers.

It's also interesting that Logitech cited further pricing pressure. If things were really getting better in technology, or if there were even hints of improvement, companies like Logitech should be beating numbers, and companies like

Anixter International

(AXE) - Get Report

wouldn't be announcing bad news, as I noted recently. That should not be happening if things were percolating. But nothing is percolating. We are simply witnessing one of the biggest disconnects of all time, not only in technology but in the market at large.

Lastly, for the folks who requested a link to


magazine's interview with John Templeton that I discussed yesterday, I cannot provide one, since I was working from a scanned version that had been emailed to me.


magazine itself can be found at

William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for and RealMoney, including Mr. Fleckenstein, may, from time to time, write about securities in which they have a position. In such cases, appropriate disclosure is made. At time of publication, Fleckenstein Capital was long Cisco puts and long Intel puts, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Mr. Fleckenstein's columns are his own and not necessarily those of While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to