Stocks Are on the Road to Nowhere, Fast

A tour through earnings season shows why the outlook for stocks is not compelling. Case in point: Microsoft's solid earnings and the market's ho-hum reaction.

With earnings season for all intents and purposes behind us, I thought I would use Microsoft's quarterly results -- and the market's reaction to them -- as something of a proxy for where we are now and what might lie ahead.

Why price/earnings multiples are key

Other income plunged for no good reason, indicating that the company might have been tucking away some reserves, and it took a write-off of at least $200 million related to the Kin cell phone. Thus, it's quite likely that Microsoft's earnings per share would have been even greater had it not chosen to be quite so conservative in its accounting. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=39716863-f4eb-d806-4364-58034b70f15f,5909527d-b06a-487d-ba7a-0fb4f231a5b5,a00e61aa-c9b5-4bf2-a294-32d621283e93,1c2a65d1-7f37-4f22-99cd-53de45a53946,ee4f839b-42ad-40fa-be80-4849a808b109,75fcb142-3d67-4cea-a5f5-34e9d5496de5,59a8f509-8caa-4052-8966-5d89e0376c81,5f340cd9-003a-42cc-92c1-4d757f2a2145,526d473a-4b30-4528-bf05-7ccec7f1a860,f71dd9b9-cf31-4e0b-bac8-3d922a822164,610df3ee-de34-4dc8-9c2e-ee0bc1bfd05b", "player.fr": "iv2_en-us_money_article_16x9-investing-contrarianchronicles"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=39716863-f4eb-d806-4364-58034b70f15f,5909527d-b06a-487d-ba7a-0fb4f231a5b5,a00e61aa-c9b5-4bf2-a294-32d621283e93,1c2a65d1-7f37-4f22-99cd-53de45a53946,ee4f839b-42ad-40fa-be80-4849a808b109,75fcb142-3d67-4cea-a5f5-34e9d5496de5,59a8f509-8caa-4052-8966-5d89e0376c81,5f340cd9-003a-42cc-92c1-4d757f2a2145,526d473a-4b30-4528-bf05-7ccec7f1a860,f71dd9b9-cf31-4e0b-bac8-3d922a822164,610df3ee-de34-4dc8-9c2e-ee0bc1bfd05b;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');Deferred income rose by $2.6 billion, which was a sequential change of almost 21%, indicating that future quarters already are off to a good start. In terms of cash flow per share, it was closer to 65 cents versus 51 cents in earnings.

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Company overdelivers, stock underperforms So not only is Microsoft on a roll, with new products that are crucial to running businesses being adopted quickly, but the stock is inexpensive to boot. Nominally, it trades at about 11 times earnings. But if you subtract cash on hand from the company's market value, then look at the resulting earnings multiple versus cash flow (which, in this case, could almost be considered earnings, given the nature of its business), it is trading at a low multiple of about 8.

Microsoft today is a bookend to the lunacy of the dot-com tech craze and the stock market bubble. The very same analysts who succumbed to paying up for "eyeballs" as well as other silliness, and who were willing to overlook any sort of financial shenanigans to rationalize an expensive stock, seem incapable of recognizing the real value at Microsoft. It just goes to show you what a huge component psychology is in the investment equation.

That is true not only for individual stocks, but also for the market as a whole. At the moment, the market seems mired in the summer doldrums, waiting for signs of the Federal Reserve's next move. In this sort of environment, the hope for more easy money in the short run can trump almost any news.The knock-on opportunity Of course, given the crosscurrents that exist between high-frequency traders and the plain old trend-following variety, as well as all the recent whipsaws in moving averages, even if I had known in advance what the Aug. 6 unemployment report (for example) was going to say, I still would have had no idea how the stock market (or any other market, for that matter) was going to react.

I think I know that the potential for more Fed stimulus tends to create buyers of stocks (and certain commodities). But as I have said often in the last year, except at a couple of extreme junctures, I find the stock market uninteresting.

Yes, there are companies that aren't too expensive, and others that are. Yet my view is that we are in a multiyear price-to-earnings ratio compression environment, and at the same time trapped in a large trading range, so stocks generically just aren't that appealing.

Turning back to Microsoft, despite everything it has going for it, including its recent strong earnings report, the stock can barely get out of its own way. In this sort of environment, that is all I need to tell me that unless you have a very compelling reason to own something, and you get a bit lucky to boot, for the most part you won't win with stocks in general.

As I have said for a while now, if you can't make money owning Microsoft, you are not likely to do any better in the market overall, and that clearly seems to be the case at the moment. The tricky part, however, is that Mr. Market continues to make it appear that you can.

As for me, I am much more comfortable and confident sticking with the beneficiaries of federal money-printing -- such as gold and closely related ideas -- for the bulk of my investments.

At the time of publication, Bill Fleckenstein was long Microsoft and long Microsoft calls, and owned gold. More from MSN Money

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Company overdelivers, stock underperforms So not only is Microsoft on a roll, with new products that are crucial to running businesses being adopted quickly, but the stock is inexpensive to boot. Nominally, it trades at about 11 times earnings. But if you subtract cash on hand from the company's market value, then look at the resulting earnings multiple versus cash flow (which, in this case, could almost be considered earnings, given the nature of its business), it is trading at a low multiple of about 8.

Microsoft today is a bookend to the lunacy of the dot-com tech craze and the stock market bubble. The very same analysts who succumbed to paying up for "eyeballs" as well as other silliness, and who were willing to overlook any sort of financial shenanigans to rationalize an expensive stock, seem incapable of recognizing the real value at Microsoft. It just goes to show you what a huge component psychology is in the investment equation.

That is true not only for individual stocks, but also for the market as a whole. At the moment, the market seems mired in the summer doldrums, waiting for signs of the Federal Reserve's next move. In this sort of environment, the hope for more easy money in the short run can trump almost any news.The knock-on opportunity Of course, given the crosscurrents that exist between high-frequency traders and the plain old trend-following variety, as well as all the recent whipsaws in moving averages, even if I had known in advance what the Aug. 6 unemployment report (for example) was going to say, I still would have had no idea how the stock market (or any other market, for that matter) was going to react.

I think I know that the potential for more Fed stimulus tends to create buyers of stocks (and certain commodities). But as I have said often in the last year, except at a couple of extreme junctures, I find the stock market uninteresting.

Yes, there are companies that aren't too expensive, and others that are. Yet my view is that we are in a multiyear price-to-earnings ratio compression environment, and at the same time trapped in a large trading range, so stocks generically just aren't that appealing.

Turning back to Microsoft, despite everything it has going for it, including its recent strong earnings report, the stock can barely get out of its own way. In this sort of environment, that is all I need to tell me that unless you have a very compelling reason to own something, and you get a bit lucky to boot, for the most part you won't win with stocks in general.

As for me, I am much more comfortable and confident sticking with the beneficiaries of federal money-printing -- such as gold and closely related ideas -- for the bulk of my investments.

At the time of publication, Bill Fleckenstein was long Microsoft and long Microsoft calls, and owned gold. More from MSN Money

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