Aug 082012

Things on my mind as I prepare for my every-third-week appearance on KUOW‘s Weekday program Aug. 8:

1. Knight Capital Group (KCG). All investors ought to be concerned that a highly regarded Wall Street firm either didn’t have or (more likely) failed to hit the “kill switch” on an “algo” (algorithm, or computer program) for high-frequency trading (HFT) that fired off thousands of errant orders when stock markets opened for trading Aug. 1.

When the dust settled later in the day, Knight in the space of a mere 30 minutes had lost $440 million, virtually all of its capital.

Most trading in both stocks and bonds these days is done by computers. They need adult supervision.

Knight has been rescued at heavy financial cost to existing shareholders. But this is another instance — one of several since the “flash crash” in May 2010, including the botched Facebook IPO — where technology failed badly in capital markets. I’m not sure what the answer is. You can’t put the technology toothpaste back in the tube. I doubt we are going back to typewriters. But l’affaire Knight is another reason why the little guy/gal should be highly skeptical of almost everything on offer from Wall Street these days.

Ordinary investors have been fleeing the stock market. And no wonder. Although stocks have roughly doubled since the low reached during the Great Recession, average prices are scarcely higher than they were a decade ago.

And, as Andrew Ross Sorkin pointed out in the New York Times yesterday, “Individuals are worried that it’s hard to make the right bet and worried that the market is rigged against them. Much of this is an outgrowth of woes of Wall Street’s own making, like insider trading cases or market manipulation scandals. Those situations are partly why individual investors don’t believe they stand a chance against the professionals.”

Knight sidelight: The government, for once, did the right thing. Knight Capital appealed to the SEC’s Mary Shapiro to “break” or unwind millions of dollars worth of trades unleashed by the errant software, and thus to wipe out the resulting Knight Capital losses. She said “No,” or, in effect, “You break it, you own it.” That’s my kind of regulation!

2.  (AMZN) keeps making news — for its hiring, its planned new buildings in downtown Seattle, for putting “lockers” in retail stores where urban consumers can pick up their purchases without worrying about theft.

One wrinkle that doesn’t get much ink locally: Can grow into its stock price? SmartMoney points out that fifteen years after its stock-market debut, sells at 200 times earnings vs. 14 for the S&P 500. That’s a bubble valuation. Yet on operations earns only just over a penny on each sales dollar vs. five cents for WalMart (WMT, selling at 16 times trailing earnings) and 35 cents for Apple (AAPL, 15 times).

SmartMoney’s article, headlined “Time to Sell Amazon Stock,” points out that sells at 50 times the consensus estimate of 2014 earnings. The writer, Jack Hough, speculates that might lose some of its pricing edge as more states force it to collect sales tax. His conclusion: At today’s price levels, bargain-hunters are better off ordering stuff from than owning its stock.

I’m not in the business of giving investment advice, never have been, and I’m well aware of that old saw that says markets can remain irrational far longer than you can remain solvent, but I agree with the SmartMoney analysis.

3. Microsoft (MSFT). With a couple of exceptions, the stock has been range-bound for a decade (between $20 and $30), so much so that some critics think CEO Steve Balmer should long ago have been shown the door. Microsoft missed the boat in smart phones (Apple, Samsung), has spent millions in search (Bing) yet remains far behind Google, and is almost invisible in social networking.

Its music player (Zune) is a joke’s punchline. Google’s on-line productivity apps are eating away at its lead in the programs most office workers live in (Word, Excel, PowerPoint).

Yet here’s the Wall Street Journal‘s market-agenda-setting column (Heard on the Street) suggesting this week that Microsoft is finally getting its act together.

For starters, it has updated its web mail, rechristened as The new program integrates Facebook (in which Microsoft holds a stake); Microsoft says it will eventually integrate Skype, which it owns outright. E-mail doesn’t produce much revenue, but, as the WSJ notes, it is a “sticky” application that will bolster Microsoft’s “ecosystem.”

Microsoft will roll out iPad competitors (Surface tablets) in the fall. They will include keyboards and thus be better suited to getting work done rather than just consuming media (the main iPad use). An updated Office suite is also due later this year, “better-tuned for the Web,” the WSJ reports, perhaps offsetting some of Google’s momentum in productivity apps.

Then there is Windows 8, the latest iteration of Microsoft’s operating system, due for release in the fall. There are lots of cynics and skeptics. John Dvorak, a veteran technology guru, complains bitterly that users will have to scale a steep learning curve. InfoWorld headline on the web this morning: “How to make Windows 8 less nauseating.”

But the new interface, optimized for touch screens, could prove to be a big hit. New phones featuring Windows 8 are also due in the fall. Though market share so far is tiny, phones using the latest version of Windows phone software have received glowing reviews. Wireless carriers are interested in new phones to compete with the Apple-Samsung duopoly.

In the fall Microsoft will also bring out a new version of its server software that may swipe market share from competitors.

The Journal’s conclusion: Microsoft can’t be given credit for products not yet shipped, but “after a decade in which it lost the battle in mobile, music, social networking and search, at least [Microsoft] is playing to its strengths.”

Can Microsoft stock become “cool” again. I’m skeptical, but stranger things have happened.

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