Related topics: Microsoft, Amazon, Research In Motion, gold, Bill Fleckenstein
I have spent a fair amount of time in this space writing about gold. And for the most part, when I do so, I am implicitly including silver, because my reasons for owning both are inextricably related.
While the investment cases for gold and silver may be two sides of the same coin, as it were, recent action in the silver market illustrates that the experience of owning them can be very different.
For those who don't follow this particular asset, the silver market went on tear recently, touching an all-time high price on April 25 -- then losing a big chunk soon after.
One reason silver screamed higher over the past few weeks is because it is a rather small market. In the case of both gold and silver, all the metal that has ever been produced largely still exists. The difference is that relatively more of the silver in circulation is held in the form of art and religious artifacts, which are not very liquid. And when compared with the vast quantities of paper money printed in the world, the amount of silver "above ground" and available is rather small.
Bill Fleckenstein
As a result, the silver market often behaves quite erratically and is capable of leaping higher with little effort.
Rule No. 1: Hang on
Conversely, when silver really corrects, it is usually an "air pocket" type of affair characterized by huge lurches lower with a seemingly low level of trading -- something we saw earlier this month. Hopefully, everyone who is reading this and owns silver was mentally prepared for that.
Yes, silver could double over the next couple of years, but it is quite possible for it to drop 20% in a short stretch along the way and have that be nothing but noise. With silver, even more so than gold, it pays to be ready for the inevitable volatility.
It is worth noting that during the ramp upward, speculation in silver has become white hot, with the volume in the iShares Silver Trust (SLV) exchange-traded fund surpassing that in the SPDR S&P 500 (SPY, news) ETF in a handful of sessions near the recent high. Perhaps, as the metals bull market unfolds, silver will be the go-to asset of choice for speculators the world over. If so, it could trade at any price, though there is liable to be a serious amount of indigestion along the way (as if there hasn't been already).
Silver is guaranteed to become even more volatile, especially given the fact that a lot of folks who are now involved probably would have a hard time reciting any fundamentals regarding the metal, let alone articulating why they own it, other than the fact that it is moving higher rapidly.
For some reason, I can't get the analogy out of my head that riding silver these days is somewhat akin to tow-in surfing. It looks spectacular from the beach, but actually doing it is extraordinarily difficult, and can be quite dangerous.
Follow the money
Turning to the earnings front, there are a number of companies I want to touch on. On April 26, Amazon.com (AMZN, news) demonstrated once again how the Federal Reserve's money-printing leads to misallocation of capital and bizarre action in the stock market. While Amazon again lost at beat-the-number, it was given a pass, because it is an Internet stock and we are potentially headed into Internet Madness 2.0 (featuring Facebook, LinkedIn, Groupon, etc.), fueled by Money-Printing 3.0 (not to be confused with the Fed's QE1 and QE2.) Accordingly, Amazon closed with an 8% gain the next day and has even added a bit to that since.
In addition to pushing up prices, money-printing also distorts capital markets. Thus, in the 1990s we found people forming companies whose business strategy was garnering "eyeballs," while in the mid-2000s, many homeowners believed they could take money out of their houses forever. Now we are back to an Internet-oriented mania at the same time we have raging inflation.
Thank you, Alan Greenspan, Ben Bernanke and all of the central bank counterparts who have followed your lead.
As for Microsoft (MSFT, news), its results released on April 28 were decent, with all divisions showing from 11% to 60% growth, apart from Windows, which was slightly soft due to soggy consumer PC sales. That should not have come as a surprise to anyone, as PC softness was well-known. In sum, I thought the quarter was fine, but the stock declined anyway. I cannot remember another example of a company selling at less than 10 times earnings with this kind of growth, yet unable to get any respect. (Microsoft publishes MSN Money.)
But as I pointed out a week ago in my column "Resist the madness of the crowd," psychology and the madness of crowds can go to really bizarre places. People are used to seeing that on the upside; it is just rarer to see it on the downside. Were Microsoft not as large as it is, the company would likely be the target of a leveraged buyout. Having said that, with the market cap for Oracle (ORCL, news) now similar to that of Microsoft, but its price-to-earnings ratio twice as high, I bet Larry Ellison would love to take over Microsoft, if just to spite Bill Gates.
The company you don't keep
What people seem to fear could be the case with Microsoft actually is true for Research In Motion (RIMM, news). By some measures, RIMM may look cheap; in fact, it is a classic example of a company that looks inexpensive but actually isn't. Its business is in the process of imploding, and management is not to be trusted for reasons I have pointed out over the years.
The fact that the BlackBerry maker stopped giving out certain individual bits of guidance a couple of quarters back was one signal it was in trouble. However, it was hard to short it because of money-printing (it is one of the potential shorts that has "worked," barely). The company's tablet computer won't save it, and, in my opinion, the stock is headed much lower. It is a closed-system commodity hardware maker; history is littered with such companies ending up on the trash heap.
In any case, Microsoft is not RIMM, but some variation of that seems to be what people are afraid of (even though RIMM itself has gotten the benefit of the doubt time after time). Thus, the former continues to be unable to get any traction. Most of big-cap tech is priced similarly; however -- as I have said many times -- I think Microsoft is much better positioned, and cheaper, too.
When psychology will change, I can't say. It is not possible to predict when or how such shifts will take place (though in the meantime there is probably not much risk). Sometimes you can get a hunch that it is under way and capitalize on that, and I will attempt to do so, as I did with Verizon Communications (VZ, news), which languished for a while. If I thought a successful prediction were possible, I would be tempted to take an outlandishly large position in Microsoft, but in the interim it is only sensible to have a standard-size allocation.
At the time of publication, Bill Fleckenstein owned gold and silver. He also owned shares of Microsoft.
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
