Image: Microsoft
Executive Summary
1. What Microsoft has to teach to other tech leaders. Several big tech firms have been jostling for position as the largest U.S. company over the past year, and now it is Microsoft’s [
2. Market summary. The U.S. Federal Reserve cut the benchmark fed funds rate by 0.25% on Wednesday, as expected, and also ended the runoff of its portfolio of bonds a month early. Fed Chair Powell said, “The outlook for the U.S. economy remains favorable and this action is designed to support that outlook.” He noted “weak global growth, trade policy uncertainty, and muted inflation” as well as a recent decline in manufacturing output and businesses’ fixed investment, reporting that anecdotes from business contacts suggested cautious capital spending. In our view, the current slowdown does not differ greatly from other slowdowns during economic expansions, and we do not see signs of an imminent recession. The U.S. stock market is somewhat overbought, and the proportion of S&P 500 companies trading above their 20- and 50-day moving averages has stagnated, which suggests that the market is already correcting internally. A mild correction after the year’s strong performance thus far would not be unexpected, but in our view is not a cause for concern, and would represent an opportunity. The U.S. market leadership continues to be focused in technology, as we have written for several months. The Capital One breach reminded everyone of the enduring importance of cybersecurity, a theme investors should not neglect.
Gold ran up in anticipation of the Fed’s rate cut, and pulled back, with market participants perhaps disappointed by the cut and hoping for a bigger one, or for a signal that the Fed was anticipating a series of cuts. Our bullishness on gold and silver is not predicated on near-term Fed decisions, but on what seems to be a growing sense among investors and commentators that significant changes in the economic and investment landscape are growing closer, as we noted last week. We believe the time is right for investors to evaluate their gold holdings, and to begin to add to their allocation, particularly on weakness.
What Microsoft Has To Teach The Other Tech Leaders
Over the past year, three U.S. tech giants have been jostling for position atop the list of largest companies by market capitalization: Amazon [
The true outlier among this triumvirate is MSFT. (Non-investors could almost be forgiven if they forgot that MSFT even existed, given the extent to which AAPL, AMZN, and Alphabet [
MSFT is a study in how new leadership can transform a company. Satya Nadella had been a MSFT employee for two decades at the time he was tapped to take over from Bill Gates’ right-hand man Steve Ballmer in 2014. Many observers had expected an external candidate to take the top spot — a heavy hitter from the upper echelons of corporate America. Instead, MSFT opted for a mild-mannered engineer. It turned out to be the right choice, as became apparent almost immediately. Nadella’s first appearance as MSFT CEO was a low-key event announcing the release of Microsoft Office for iPad.
This event effectively symbolized the basic shift that Nadella was inaugurating: from combative exclusivity, towards cooperation and openness. MSFT’s approach to competitors throughout the Gates and Ballmer years had been infamously aggressive, courting both public controversy and regulatory interventions that led to a near-death antitrust experience. In 2011, engineer and cartoonist Manu Cornet published a viral cartoon on his blog, depicting satirical “org charts” for tech companies. MSFT’s combative culture did not just extend to regulators and outside competitors, hindering the company from embracing the cooperative, networked open-source ethos of the internet age. It also operated within the company itself, with internal departments behaving like warring gangs.
Source: Wikipedia
This was what Nadella set out to change. At the core, he needed to change a culture of rigidity. That rigidity had caused MSFT to miss out on the internet, on mobile technology, on search, and on social media because of its inflexible focus on the dominance of the Windows operating system. Rigidity led MSFT to view competitors as enemies, rather than as participants in building networks that would allow many participants to expand together and thrive. Rigidity led to hubris towards regulators who were seen to be thwarting the company’s goals.
Nadella is a wide reader whose video blog entries for MSFT employees often discuss his current reading (which includes many non-tech related books; Nadella is a reader of poetry who has quoted T.S. Eliot in corporate presentations). The book he credits most for his turnaround of MSFT was Carol Dweck’s Mindset: The New Psychology of Success. At the core of Dweck’s thesis is the idea that it is not some set of fixed traits that matters most for success (such as IQ or educational accomplishments), but the ability and willingness to learn. Above all, what Nadella did was to inculcate a culture at MSFT where existing gospel could be challenged, where new ideas were welcome, and where employees felt that their curiosity and questioning were valued. One manifestation is MSFT’s annual “One Week” gathering, in which the company’s Washington campus is filled with tents occupied by employees from different parts of the organization cooperating on projects outside their workaday responsibilities. Nadella walks around the project spaces like a tourist in a bazaar, with evident delight.
This shift has allowed MSFT to shift from its rigid focus on Windows, to being a cloud leader welcoming the open-source Linux operating system that Nadella’s predecessor excoriated as “intellectual property cancer.” That shift has, arguably, saved the company. MSFT is also noticeably absent from the fracas of public displeasure and regulatory wrath that shrouds AMZN, GOOGL and Facebook [
The other big tech leaders would do well to emulate this approach. Thus far, most have not. Their public relations efforts — for example, in the face of privacy issues or censorship concerns — often still come across as paternalistic and dismissive, rather than humble and genuinely engaging. In their interactions with regulators, there is still an almost archetypal Silicon Valley hubris, barely deigning to address a group of politicians whom they obviously believe to be incapable of understanding the real issues or the excellence of tech’s solutions to all the world’s problems. And their determination to dominate or eliminate their rivals, rather than work together to create tech ecosystems in which many companies can thrive, is frequently evident. Sometimes they seem driven almost solely by their founders’ ambitions; we have often noted a similarity in style between FB’s Mark Zuckerberg and the unreformed Bill Gates of MSFT’s pugnacious past. If the other tech giants want to find themselves in the U.S. top ten when 2030 rolls around, they would do well to study Satya Nadella’s stewardship of MSFT.
Investment implications: Under current market conditions, we continue to like the big U.S. tech leaders; they are focuses of investor attention due to rising earnings and perceived long-term growth tailwinds. They are likely to continue to outperform. In the long run, we would be more favorable to companies that follow MSFT’s lead in taking a less combative attitude towards competitors, regulators, and the public. We feel that of the others, AAPL and GOOG have done the best job so far in this area, and that AMZN and FB are lagging. This is an example of how attentive investors must be to leadership changes at companies they own — doing their due diligence to learn about the background, track record, plans, and style of new management.
Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. Currently, Guild’s clients own AAPL, AMZN, FB, GOOG, and MSFT. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.
Market Summary
The U.S.
As expected, the U.S. Federal Reserve cut the benchmark fed funds rate by 0.25% on Wednesday, and also ended the runoff of its portfolio of bonds a month early. Fed Chair Powell said, “The outlook for the U.S. economy remains favorable and this action is designed to support that outlook.” He noted “weak global growth, trade policy uncertainty, and muted inflation” as well as a recent decline in manufacturing output and businesses’ fixed investment, reporting that anecdotes from business contacts suggested cautious capital spending.
Markets gyrated on the news but we expect such volatility to be transient; market participants were perhaps disappointed that Chair Powell did not suggest a cycle of rate cuts was in the offing, but that the present move had more the character of an adjustment within a tightening cycle. (Still, he did not rule out future cuts.)
In our view, the current slowdown does not differ greatly from other slowdowns during economic expansions, and we do not see signs of an imminent recession. The U.S. stock market is somewhat overbought, and the proportion of S&P 500 companies trading above their 20- and 50-day moving averages has stagnated, which suggests that the market is already correcting internally. A mild correction after the year’s strong performance thus far would not be unexpected, but in our view is not a cause for concern, and would represent an opportunity. The U.S. market leadership continues to be focused in technology, as we have written for several months. All of our areas of interest within technology remain the same: artificial intelligence, data analytics, the cloud, cybersecurity, networking, defense electronics, and financial technology.
Cybersecurity came to the fore once again with the revelation of a major data breach compromising Capital One customers and credit card applicants, executed by a former employee of Amazon Web Services. This exploit has resulted in a new level of concern about security for the public cloud. We simply note that cybersecurity will remain central and the need will grow exponentially for the foreseeable future. When the biggest U.S. corporates write blank checks to their cybersecurity departments, you know you’re looking at a durable theme.
The U.K., Europe, and Emerging Markets
British Conservatives, as expected, chose Boris Johnson to replace Theresa May as Prime Minister, and he wasted no time filling his cabinet with pro-Brexit allies and supporters. He also readied a communications blitz with the British public with a refreshingly optimistic tone, and gave a hardball message to European negotiators about the UK’s willingness to embrace a “no-deal” Brexit if changes were not made to the deal negotiated by his predecessor. So far, there is no sign that Europe is willing to revisit that agreement, so markets are nervously pricing in a disruptive Brexit on Halloween, with no deal in place; the pound has dropped to multi-year lows. We continue to believe that in the event of a real Brexit that does not shackle the UK but allows it to chart a genuinely independent global course, the UK economy and stock market will ultimately benefit. A tumultuous Brexit might prove to be a good buying opportunity.
We continue to find Europe and emerging markets uninteresting for reasons we have expressed for some time. Growth is lacking in Europe, and emerging markets are weighed down by poor sentiment surrounding global trade and negotiations between China and the U.S.
Gold and Cryptocurrencies
Gold ran up in anticipation of the Fed’s rate cut, and pulled back, with market participants perhaps disappointed by the cut and hoping for a bigger one, or for a signal that the Fed was anticipating a series of cuts. Still, our bullishness on gold and silver is not predicated on near-term Fed decisions, but on what seems to be a growing sense among investors and commentators that significant changes in the economic and investment landscape are growing closer, as we noted last week. We believe the time is right for investors to evaluate their gold holdings, and to begin to add to their allocation, particularly on weakness.
No major news came this week on the cryptocurrency front. Bitcoin has declined from the peak it reached when Facebook announced its Libra initiative, especially as regulatory skepticism of that initiative became clearer. Still, Bitcoin’s appreciation in 2019 has led to more interest; we can report anecdotally more inquiries from clients and prospective clients about buying crypto assets. Our advice remains the same: do your due diligence, buy only from reputable, regulated, U.S. based exchanges, and recognize that you are making a highly speculative and volatile investment.
Equities Contributor: Guild Investment Management
Source: Equities News
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