Here’s What’s so Crazy about this Stock Market

Microsoft shows the way.

The story went like this:

Wall Street gained on Wednesday and the S&P 500 and Dow industrials set fresh records, as Microsoft’s strong results boosted the indexes and marked the latest sign that U.S. corporate earnings season may be less dour than feared.

Microsoft shares surged 5.3% after the software giant posted sharp growth in its cloud computing business. The stock gave by far the biggest lift to the major indexes and the tech sector.

That’s how Reuters summarized the action on Wednesday afternoon to explain why the S&P 500 rose 0.4% to another record high, the NASDAQ 1.1%, and the Dow 0.2%. Many stories about this propitious event had a similar twist.

Microsoft, one of the aging tech elephants out there big enough to move the needle, had beaten analysts’ estimates, and markets were ecstatic.

Tuesday evening, CNBC raved that Microsoft reported quarterly earnings and revenue “that easily topped analysts’ expectations, as its key cloud product, Azure, saw revenue grow 102%.”

On Yahoo Finance, we read, “Microsoft crushes on earnings and revenue, stock pops.” And there’s some detail about the part that performed miracles in the quarter:

Earnings of $0.69 per share on an adjusted basis” – here we go again, adjusted, the mark of great American fiction – “up from $0.60 a year ago. Analysts were expecting $0.58.

Revenue of $22.6 billion, up from $22.18 billion a year ago. Analysts were expecting $22.14 billion.

Alas, that revenue figure ($22.6 billion) is factually wrong. Honest typo? We’ve certainly made plenty of them in the heat of the battle. But then the math of revenue growth is wrong too. The total revenue Microsoft actually reported under GAAP is $20.6 billion.

By going to the Microsoft press release, we find out that Yahoo cited a non-GAAP measure Microsoft had offered as a supplement, but Yahoo failed to disclose that it was non-GAAP. That smells of reader deception. The Yahoo report fabricated revenue growth out of a revenue decline. The GAAP figure Microsoft reported was a drop of 7.1%.

And worse, cost of revenue rose 6.8%.

So gross margin plunged 14.1% from $14.7 billion to $12.6 billion.

There were also impairment charges of $1.1 billion, but that was down from $8.4 billion a year ago. This is Microsoft’s way of confessing to the magnitude of the madness of its disastrous acquisition of Nokia [read… After Losing $11 Billion on $9.4-Billion Nokia Buy & Axing 27,650 Jobs, Microsoft Dumps Consumer Smartphones

Operating income without those write-offs plunged 34%, from $6.38 billion to $4.19 billion.

For fiscal 2016, revenues dropped 8.8% year-over-year. Gross margin fell 13.2%. And without the write-offs, operating income plummeted 24% from $28.2 billion to $21.3 billion.

In both years combined, Microsoft’s write-offs totaled $11.1 billion. Not exactly petty cash.

In fiscal 2014, net income was $22.1 billion. In fiscal 2015, net income plummeted by 45% to $12.2 billion. Thanks to lower write-offs in fiscal 2016 (ended June 30), net income was $16.8 billion. That’s down 24% from two years ago!!

So what kind of tech-dud is this? Well, according to its P/E ratio, it is one HOT dude, with a sky-high P/E ratio of 43. In saner times, a P/E ratio this high is reserved for demigod-like companies that can double revenues and earnings at the flick of a wrist.

But Microsoft is going downhill. It’s suffering from a top-line revenue decline. It has botched its entry into mobile and spent a fortune doing so. Its flagship PC business is withering. It is not able to make up for these holes with its cloud business, though it’s holding out the hope that it can. Falling revenues meet rising costs….

So in anticipation of declining sales, shrinking margins, and blistering write-offs, the market might have pushed down MSFT for the past year or so, beating it down at every new revelation of a lowered outlook and other mishaps. And then, when results are “better than feared,” there would be a reason for a little perk.

But that’s not what happened. Despite lowering expectations and predicting crappy results and huge write-offs, Microsoft and Wall Street have managed to push up the stock into the range of $50 to $55 a share late last year and so far this year, with that entire range being a multiyear high not seen since the dotcom bubble.

Instead of punishing the shares of a company with declining sales and profits, huge write-offs, and a sky-high P/E ratio, markets simply continue to drive the stock higher, no matter what. Other stocks experience the same thing.

Microsoft isn’t the only company with these sorts of results. In aggregate, the companies in the S&P 500 are in their sixth quarter in a row of revenue declines. And aggregate earnings, based on “adjusted” ex-bad items earnings that companies have already reported so far this quarter or are expected to report are down 5.5% year-over-year, the fourth quarter in a row of declines. Under GAAP, earnings are even lousier.

Yet this market continues to rise, and it does so on low volume, as worldwide central-bank created liquidity is searching for a place to go, and as investors are hoping that central banks determine stock prices and will continue to inflate them, regardless of what these companies report. And so they chase after them, even after Microsoft with its dizzying share price, while earnings season, more than ever, is turning into the Theater of the Absurd.

But many companies are struggling with their debt, and quietly, the noose tightens one by one. Read…  US Credit Conditions Drop to Worst Level since Q3 2009, Markets Soar

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  58 comments for “Here’s What’s so Crazy about this Stock Market

  1. Shawn says:

    Well there is a four letter word that explains a lot of tech companies in Silicon Valley that are in the same boat as Microsoft. They bought LinkedIn, what does that say about the darling of the social media bs sector.

  2. John S says:

    The only thing that is certain about Microsoft is that they are going to miss the next tech trend, spend a lot of money trying to get into the game, fail and finally write of billions. Usually squandering away dominant market position or at least a major advantage.

    Few of the trends that Microsoft has missed out on:
    – web search: Google
    – web browsers: Google
    – server virtualization: VMware
    – game consoles: Sony, titanic battle between two inept companies
    – online game storefront: Valve
    – smarthphones: Apple and Google
    – cloud computing and storage: Amazon
    – music store: Apple

    Microsoft could have been the first trillion dollar company if they hit just half of these opportunities. It takes special talent to loose dominant market position repeatedly to a much smaller competitor.

    • marty says:

      Not surprising. Smaller, more nimble competitors out innovating a lumber giant is a common story, isn’t it?

      Besides, msft has always been a MARKETING company, not a quality technology company. The evil Gates stole dos to begin with, then defended his theft savagely with copyright protection, which NEVER should have been allowed, and perversion of contract law. I’ve suffered through their crap products from the very beginning, desperately trying to avoid upgrading because of their infuriatingly buggy releases. They have always sucked the big one and held back computing with the obsolete dos for too many years. Bought a computer two weeks ago with Ubuntu and hope to never look back.

      • wkevinw says:

        Basically correct. He used his family’s legal connections as much as technical talent. They did have technical talent at one point, but without the legal shenanigans MSFT would be nothing.

        I have a friend who has sat in a room with Gates years ago on a copyright infringement issue; for the competing company. MSFT won.

        My friend thought that Gates could be described as autistic, and from what I have seen, I could agree.

      • Paul Easton says:

        One clever innovation that they came up with was to set up subsidiaries that sell software to clean up the mess that their operating systems leave behind (eg “registry issues”). Since I haven’t faced this for a while I guess Bitdefender is dealing with it.

      • Chip Javert says:

        How did Gates steal DOS?

        He bought it from Seattle Computer Products for $75,000 in about 1980. How is that stealing? Because Gates saw more value in DOS than the previous owners?

        You have a strange definition of stealing.

        ps: in 1980, $75,000 was a lot of money to both Gates and Seattle Computer Products.

        • Petunia says:

          He definitely stole Windows from Apple.

        • Sound of the Suburbs says:

          Both Apple and Sun had windows based operating systems when Microsoft was still using command line DOS.

          I remember Microsoft’s first Internet Explorer dreadful, I stayed using Netscape for a long time.

          Microsoft were never innovative, just good at business and marketing.

          Bill Gates was always looking for the next big thing to copy.

        • wkevinw says:

          Stole Windows from Apple.
          The original idea that formed MSFT in New Mexico was involved with legal problems. I Googled and it’s hard to find info. A lot of these cases were settled, or people backed down because of MSFT’s legal power.
          Stole Windows NT (networking) from Novell.
          Probably didn’t exactly steal DOS, but that might be the only significant product they didn’t steal.

        • gaz says:

          ignore the haters, chip.

          Bill has had them for over thirty years because they didn’t get a phat slice of his change.

          to call him a thief is so tired and old.

          my favourite gates story is when he apparently tracked down *every* individual who had a copy of the NT4.0 kernel, which was briefly disseminated for reasons unbeknownst at the time.

          haters gonna hate man.

      • JerryBear says:

        It takes a while to get used to a new computing ecosystem but you will soon see why Linux users are so loyal. Don’t be afraid to ask for help and learn some basic shell commands and learn to use the command line on a terminal. In Ubuntu I especially recommend you learn how to use “apt-get” effectively.

        • Sound of the Suburbs says:

          I have only used Unix on Sun Solaris machines and it wasn’t user friendly.

          I don’t know if Ubuntu has improved things.

          I would put the choice of operating system down to how good you are on computers.

          Apple (whatever) – an idiot could use it
          Windows – pretty easy
          Unix – hard, but powerful when you know what to do

    • illumined says:

      What’s baffling about this is MS could have been a major player in a lot of those areas, although they were once upon a time in web browsers with Internet Explorer. They invented the first ebook readers in the mid 90’s and by the late 90’s they had a Windows Mobile platform that was used in the first tablets and smartphones (like the iPaq).

      • Look back a few more years at Xerox. Developed Ethernet, had the 820-II computer, PARC developed the mouse and WYSIWYG display/Star computer, and they still couldn’t/wouldn’t become the PC industry leader, apparently because in their mind they were a copier company, not a computer company.

        Microsoft seems to be well on its way toward going down the tubes in that they continue to churn out buggy operating systems with no continuity from version to version, e. g. Windows 10, where programs stop working (and must be replaced) and device drivers are not available rendering existing peripherals such as printers and scanners useless, resulting in considerable use out of pocket expenses, even when the upgrade is “free.”

        • JerryBear says:

          I think Microsoft is an example of what happens when a big corporation gets taken over by a “good old boy” network from hell and and an imperial CEO with a first class god complex (I mean Balmer, not Gates).

    • Toddy says:

      Why don’t you run a multi billion corporation and show us how it’s done. Hindsight is 20/20.

      When Google was 400 employees, most everyone in the Valley thought they might not get past Inktomi’s tech. Myself included.

      Secondly: scaling a business is far more complex than even the most able founders anticipate. Look at the Kickstarters that really knock it out of the park. 2 years later, they struggle with consistency, with marketing, with fulfillment, etc…

      Even if you get it right, even if you are first to market, even if you’re Oculus and have $2bn and Facebook behind you, it’s a crapshot.

      Nobody knows the next big hit until it’s there.

      Pokemon Go was supposed to be an experiment. If anyone had had a clue what it’s gonna be, you can bet your a$$(ets), they would have released a more polished app.

    • Intosh says:

      One thing the new CEO does right so far is embrace competitor’s platform because they finally realize that their own are either not taking off at all or stagnating. So they double-down on producing software for other platforms, contribute to open source, etc.

      On the consumer front, they realize it’s pretty much a losing cause with its old business model — they failed on smartphone and tablets and are losing on the gaming console front. So in a desperate move, they offer their OS for free, extremely worried that even their almighty Windows falls into irrelevance in the consumers market (Macs in the quality front and Chromebooks in the affordable front are a one-two punch).

      They still have a stranglehold on the enterprise because of the slow moving tech-challenged monolithic nature of that market. The enterprise is stuck in the MS ecosystem and don’t know better. MS will force down their throat its cloud-based solution (e.g. from packaged Office apps to semi-cloud-based apps, and eventually fully cloud-based apps). So employee data and business data reside on MS servers rendering these enterprise customers even more at the mercy of MS. It’s already happening at the company I work for. To change some settings on Outlook, we are now redirected to a web app running at MS.

      At the dev front, MS realized that open source is an unstoppable force that can make or break a platform because cutting edge developers love open source. Open source accelerates adoption and innovation. So we saw Apple open-sourced Swift and MS open-sourced .NET.

      MS also seems pretty active in AI and blockchain. That’s another change with the new CEO: quick to be involved in emerging tech trends and make sure people are aware they are present in the spaces.

      All in all, MS is moving in the right direction. But whether that will ultimately improve their bottom-line and produce growth is hard to say — Windows and packaged Office apps are big shoes to fill.

    • Sound of the Suburbs says:

      I think tech. is always like that, no one knows what the big thing will be until it appears and even then only when it is big do people realise.

      You can’t plan for it because no one knows what it is.

      This is why it is usually a new company that emerges with the next big thing.

      Bad news for intel, Microsoft, Apple they have expanded their existing ideas about as far as they will go.

      When you are on a development and upgrade path it’s easy when you reach the end of the road its hard.

      Apple have done well being one of the first entrants into the downloadable music market.

      They developed iTunes to supply the music and the iPod to play it.

      The iPod was developed up to the iPod touch and now could be used for Apps.

      The iPod touch was made bigger and called an iPad.

      The iPod touch was combined with a mobile phone and called an iPhone.

      The attempt to make it smaller and wearable, the iWatch, didn’t really provide a sufficient screen size for the product.

      What comes next?

      The original innovations have been taken to their limit and only minor improvements seem to be coming online now.

  3. VegasBob says:

    Of course, MSFT has begun the long drawn out process of circling the drain, just like IBM and a bunch of other aging tech giants with nothing new or exciting in their product pipelines.

    The stock prices of these turkeys are levitating into the stratosphere only because they pay dividends.

    By historical standards, the dividends look paltry, but in the context of central bankers’ zero interest rate insanity, those dividends look pretty good compared to bond yields – IBM is at 3.47% for example, MSFT is at 2.58% and AAPL is at 2.28%.

    What Wall Street forgets is that when times get really tough, those dividends can go the way of the dodo bird. Boards of directors can simply zero out those dividends to conserve corporate cash. Then what are all those overpriced turkeys going to be worth?

  4. OutLookingIn says:

    Two business accounting parameters;

    1/ GAAP

    One is truth and honesty, the other lies and fraud.

    Those that generate non-GAAP reports, are as a virgin exclaiming they are just a little bit pregnant!

  5. BoyfromTottenham says:

    Hi from Oz, Wolf.

    Wasn’t the other point of your article that Yahoo (somehow) incorrectly reported MSFT earnings by $2 bn, and that (maybe) caused the market to lift MSFT by 5.3%? And if so, how did this happen – an accident, or something more dubious?

    • Wolf Richter says:

      I don’t think – and I didn’t mean to say – that this error caused the jump in MSFT stock price. Not that many people read this Yahoo article. I assume hedge funds and algorithms read the original MS release.

      It fits into the theme that the press has an upward bias, and if it makes errors, it’s likely in that direction.

      • che says:

        it’s not a mistake. 22.6bn figure is and adjustment from 20.6 by adding w10 deferrals. not saying this is not b.s., but it’s not yahoo being “wrong”.

        • Wolf Richter says:

          What Yahoo has done is cite a non-GAAP measure without disclosing that it was non-GAAP. Never once did the article mention “GAAP” or “non-GAAP.” That’s worse than an honest error.

        • Chip Javert says:


          Yea, it’s wrong. Dead wrong.

          I can see a stock analyst revising GAAP revenue for a one-off analysis, but for a “media” company to adjust GAAP earnings of a public company without any explanation is wrong (doesn’t matter if the arithmetic was correct).

          But what the heck do I know, I’m just a retired Fortune 500 CFO.

  6. MC says:

    Just how many times have we seen this?

    VAG hit by US authorities with a monster fine and found to have goosed production data in China? No problem: stocks stand where they stood last November.
    The oil slump not only continues but is getting a whole lot worse? The natural gas glut goes on with no end in sight? Exxon-Mobil is at a one year high.

    But on the other side, not all stock indexes were created equal.
    The Nikkei 225 is down over 20% year on year despite Kuroda’s kamikaze tactics.

    The Nikkei teaches us an important lesson.
    It surged over the past weeks, driven by Nintendo due to popularity of the Pokemon GO app. A product that will surely make them a nice bundle, but hardly a groundbreaking new technology.
    At the same time SoftBank, which despite the name is a multimedia corporation, announced it’s buying ARM Holdings, whose processors can be found in everything from car ABS systems to Google TV.
    Following the announcement, SoftBank stocks plunged.

    Modern “investors” seem to value a game far more than the hardware which makes it possible: ARM processors are used in about 50% of the smartphones sold worldwide, including all top of the line Samsung models.
    Sure, Nintendo will make money damn right now while SoftBank’s investment will take years to pay off, but if their investment in Chinese titan Alibaba is anything to go by, the company may know a thing or two about investments.

    • JerryBear says:

      Yeah Wolf, It is like a news report using the “World Weekly News” as a source but not warning their readers of the fact. But then again, maybe Bat Boy really is the son of Elvis and a space alien……

  7. Sound of the Suburbs says:

    Rising markets and all is well.

    Favours the status quo and Hillary.

    Falling markets and things are going wrong.

    The status quo is failing we need something new, Trump.

    We must keep the markets up.

    • Sound of the Suburbs says:

      What have the markets got to do with the economy?

      Where have you been for the last few years?

    • bead says:

      This is a horrible strategy. So Hillary wins and the reality becomes obvious; what good was it to get elected? When the bubble bursts she’ll get the credit (blame).

  8. Fred says:

    Tine for Yellen to stop protecting Obama and raise rates.

  9. B Kowal says:

    I do think that depreciation and amortization should be ignored in reporting “adjusted earnings”, as they are non-cash charges and reflect expenditures in the past. On the other hand, I do believe that Goodwill should be valued at the market in a footnote, just to be fair. In other words, we shouldn’t burden current operating results with the amortization of good will, which is an accounting convention. But at the same time if the acquisition was a disaster, such as Nokia, then that Goodwill should be marked-to-market and disclosed in a foot note.

    • David in Texas says:

      It depends on the industry, of course, but people seem to forget that depreciation and amortization are real expenses, even though they are technically “non-cash.” The point is that eventually, the asset being depreciated will have to be replaced, which will require real cash dollars. The most accurate way to measure it is subject to debate, as is the timing, but the expense is never zero!

      • Petunia says:

        I never liked depreciation for assets with short lives, 0-10 years. These are really expenses. A car could last 10 years or 10 months. It is too much work to expense it every year until it is gone. I consider this a real inefficiency in the accounting system. It also clouds the real useful life cycle of the item when you are deciding in advance how long it will last. If your employees are crashing the cars and throwing out the computers you really don’t see it right away.

    • Chip Javert says:

      B Kowal

      You need to take your head out of the sand (I’m being kind here).

      Your little scheme would have the income statement completely ignore capital expenditure (which is higher for some industries than others). REAL BAD IDEA.

      Your comments on goodwill are confusing, but again, you seem to want the cost of corporate acquisitions removed from the income statement.

      Corporate owners (aka shareholders) need to see these numbers to evaluate management performance. Example: YAHOO bought TUMBLIR(sp?) for over $1B (calling it a critical strategic acquisition) in 2013; 3 years later, it’s almost 100% written off – how good should shareholders feel about YAHOO management acquisition decisions?

      As imperfect as GAAP is (any one-size-fit-all will be…), it’s better than the complete ad-hoc hid-the-expense approach you advocate.

      You can believe in the Easter Bunny all you want; that doesn’t make it real.

  10. Uncle Frank says:

    Don’t bother the worker bees pouring their contributions into the high-fee mutual funds contained in their 401k plans. They see the market indexes rising each day and are happy. Even if there were a market crash they are told by the ‘experts’ to keep on investing for the long term. The game continues.

    • Petunia says:

      I read an interesting article on 401Ks and how they are helping companies save money. Most employees now cannot afford to contribute to the plans and the expected match is never paid. Employers are actually saving money because their employees can’t afford to save for retirement.

      If you are one of those employees you should just ask for a higher salary, they can afford the 5 or 6%, if they are not going to be matching your contribution. Personally, I would rather have the extra cash.

      • Chip Javert says:


        Interesting: can’t save for retirement, but can afford an expensive cell phone & data plan, $5 Starbucks coffee…

        What we have here is serious stupid. People who graduate with meaningless degrees and student debt really have not demonstrated the ability to successfully manage their financials.

        Anybody desiring 4-5% more income which then gets taxed, as opposed to 4-5% before tax in a 401K is just foolish.

        • Petunia says:


          I worked at a firm whose 401K plan was packed with the company stock. The company imploded costing the employees not only their jobs but 90% of the value of their retirement savings. I have told my son never ever never to put a dime into a 401K. I would advise every worker to take control of your earnings and put it where only you can control it. Pay the tax and take your money out of their control.

          I started saving for retirement in my 20’s with an IRA. I am now broke. Lost my income, my pension, my house, and my savings. There are many people in the same boat, the good job, the savings, doing the right things left them with nothing.

          I also have a two very desirable degrees CS and Economics which are now worthless due to age and immigration policies.

          Chip, you have only been luckier than me, not smarter. You just don’t know it.

    • william says:

      401K participants will soon learn, again, the phrase ‘escalator up, elevator down’.

      • Chip Javert says:


        Sadly, you are correct that most people cannot manage their own financials. They simply refuse to do the work to understand market fundamentals, and are at the mercy of the market.

        These are the same people who think they should be promoted to manage the financials of their employers.

  11. bead says:

    Low volume and no volatility; clearly some fix is in. That’s how you create Trump. Endless lies that a large plurality of the electorate sees through. The Fed would have done better to allow some real politics instead of foaming the runway with asset bubbles.

    • Petunia says:

      The fed is definitely greasing the wheels to get Wall St. a friend in DC. After November the wheels will fall off the truck no matter who wins.

  12. Mike R. says:

    Microsoft’s CEO made decision to force Windows 10 on perfectly fine earlier OS’s via the update process. I lost 2 hours one day and my wife’s PC was also down same amount a week later. I was furious with MS and still am.

    I see them as a mature, commoditized business which is true really of all the older techs.

    I still emphatically believe the larger majority of efficiency/productivity gains via tech are behinds us. Now what we see is unproductive products designed to distract and amuse.

    Name your company, Cisco, Dell, Oracle, IBM, etc. If it weren’t for the existing customers (including the Federal Government), their sales would be down even further. They are all maturing out and will have marginal growth ahead.

    Another great article Wolf. You are one of the few that really supplies the facts and insights about what is happening. Thanks.

  13. william says:

    A few years ago I read Microsoft’s Annual Report. The most important items in their annual report were rarely, or never, discussed in the business media. Even experts on SeekingAlpha were easily identified as being in the dark once I read MSFT annual report. Seriously, people thought the stock swung on items related to 0.001% of their business.

  14. Daxx says:

    Wolf… You are the man!!

    Really mean that, thanks for making this Microsoft earnings B.S. real.

    I take it your not in the Fourth Estate of journalism ?

    Thanks for carrying the torch and providing light.

  15. Chicken says:

    My windows machine barely works as I feel it should. Fortunately I don’t ask much of it other than the most simple of things, for sure it wouldn’t deliver.

    Upgrades have bricked all of my previous Windows machines.

    I’d say that’s a fair assessment of Microsoft.

    • George McDuffee says:

      One of the “free” versions of Linux such as Ubuntu, complete with “free” office suites (and a huge amount of other apps), is an alternative.

      • JerryBear says:

        Mint Linux is based on Ubuntu and even more user friendly. It has lots of features to help beginners learn the system.

    • Sound of the Suburbs says:

      Windows does slow down over time.

      One thing that slows it down is all the things that automatically start when you power up and every program you load tends to add something new, stopping as many as possible will make it faster.

      Upgrading to anew operating system is not a good idea as the new operating system is designed for newer hardware and won’t run well on your existing machine.

      Just clean up the version you have now and don’t upgrade the operating system.

      • Chicken says:

        Giving you the benefit of the doubt you’re not simply dense, I’m talking about the medicine Dr. Microsoft himself prescribes, I’m not so dumb as trying to make an old piece of hardware run something it wasn’t designed for, just trying to avoid upgrading ANYTHING b/c it always leads to a bricked computer. That’s what it’s all about, making people buy new stuff b/c the old stuff no longer works.

        I guess you must buy a new computer every few months b/c you like the fancy new cabinet? Blahhh…

        Get it?

        • Sound of the Suburbs says:

          Since I have never had that problem, I was thinking what you were doing wrong.

          Still happily upgrading (but not the operating system) without a problem.

          What are you doing?

  16. polecat says:

    Ha! …..


  17. polecat says:

    Windows 10………The F-35 of operating systems !

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