Microsoft (NASDAQ: MSFT) revealed its results and they were not only below expectations, but they also reported historic losses in earnings. However, I still like it, and below are the reasons why.
Firstly, the loss was related to the integration of Nokia and restructuring of the business, and this is supposed to be a one-time-only event. This is why each and every time a company is being acquired, shares of the one that is making the purchase will tend to dive as market participants expecting greater integration costs. This is definitely the case with Microsoft now but again, is a one-time-only thing.
Secondly, the Windows license revenues were disappointing as part of the big restructure, and its cloud business posted strong earnings, as this will now be a large part of the future strategy for MSFT.
Thirdly, the effect of the strong dollar is most likely to dissipate in the time as the Fed is now presumed to hike rates in September, and not in July. However, if we were to see a couple of NFP misses I would say the strong dollar is not going to be a theme and a drag on corporate America anymore.
Speaking of the Fed and the US dollar, Mrs. Yellen, the Chairwoman of the Federal Reserve of the United States mentioned a couple of times now that a strong dollar is hurting the economy and exports and this represents food for thought on any tightening cycle one may think it comes out of the US.
Last but not least, the technical picture of MSFT looks bullish, as after a strong trend to the upside into the $50/share mark, we’re seeing a correction that looks like a flat pattern, namely a common flat. Such a pattern should break the previous lows and this is why I am favoring call options on the pair but only after the market is stretching below the $43/share mark, or after it breaks the $50/share mark.
In the first instance, it is said to buy the dip and the expiration date should be an end of the month, while in the second instance it is said to buy strength and the expiration date should be one month.
Moving forward, I would say the path for corporate America is in Feds’ hands, rather than in the results that companies are posting. This is because monetary policy strongly influences valuations. We can see this if you only just take a look at the QE (Quantitative Easing) programs around the world for evidence: QE translates mostly in central banks buying assets, and equities are the favorite asset (besides bonds of course).
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