Sunday, February 26, 2012

Options – cash generator or money loser? Roll Over Baby!

If the price of the stock underlying a call option is on the rise then the premium of the option (i.e. the price of the option) increases. If the share price is below the strike price the premium comprises two components:

1.       The time value of the option – payment for the risk to hold onto the underlying shares and the interest you could have earned on the cash you invested to own the underlying stock.

2.       The extrinsic value of the option: a) the more volatile the stock price, the better the chance for that price to exceed the strike price; thus the writer (seller) requires a higher premium for more volatile stocks. b) The closer the stock or share price is to the strike price; the more likely it is for the stock price to exceed strike. Thus, proximity of the share price to the strike causes the premium to rise as well. These factors combined determine the extrinsic value of an option.

When time runs out for an option (i.e. your approach the expiry date of the option) and the underlying share price stays below or at strike price, the option loses value; possibly loses all value. When time runs out but with the price stock rising, chances are that the premium rises in spite of the option’s decreasing share value and contrary to the speculation by the seller (writer). If the underlying share price exceeds the strike price, intrinsic value is added and the option may become truly expensive. The seller’s losses, especially if he/she sold the options without owning the underlying stock may become significant.  Let’s first explain ‘intrinsic value’.

If the share price exceeds the strike price, a call option allows the owner to buy (call) a share for the strike price (e.g. $56) from the option writer. Next the investor turns to the stock market and sells it at market price, e.g. $57, and pockets the difference (1.00) per share.  So basically, regardless of time and extrinsic value, upon exercising the option buyer would earn a guaranteed $1.00. The difference between market price and strike price is called the intrinsic value of an option.

The total option price or premium would be time value plus extrinsic value plus intrinsic value. For the writer, the loss from selling a naked option could be unlimited. He has three ways out:

1.       Let the option expire and take the loss (buy the shares at the market price at expiry and sell them to the option buyer for the strike price plus… assignment and share purchase commissions).

2.       Buy the underlying shares now rather than at expiry when the share price may be even higher plus assignment and share purchase commissions.

3.       Buy the call option at current market price and take the loss but don’t incur the commissions for assignment and share purchase.

4.       To make up for the loss under point 3, sell some other options with a higher strike price and/or expiry farther into the future.

Basically, points 3 and 4 combined is called a ‘roll over’, because in principle the call writer extends or renews the old call option. He/she rolls the old option over into a new one hoping for a reduced loss now and a chance to make up with the new option later.

By now, you probably realize that what looked initially like a simple transaction (‘selling a call option) can become a convoluted trail of transactions with various outcomes regarding profits and losses. To make matters worse, you not only can not only buy and sell ‘Call options’ but you can do the same with ‘Put options’ or combine both call and put option transactions. We’ll be discussing ‘put options’ next.

Friday, February 24, 2012

A Quicky on oil

We have the West Texas Oil price posted at the top of this blog for a reason. These days oil prices have a larger impact on economic growth than interest rates.  In an earlier post we estimated that the oil price ceiling lies around $125 per barrel; when prices exceed that level the economy is likely to tank.

With the Iran tensions running high, oil prices have recently sky rocketed. This being an election year, Barrack Obama is likely desperate to keep oil prices lower - that may be one of the reasons he has been stalling on his Keystone decision. But if the oil glut in Cushing is not enough to keep oil prices down in the U.S. he has one other card; the release of some of the U.S.'s oil strategic oil reserves.

Overall, in spite of the higher oil prices, this year's economic and stockmarket performance support Obama's re-election. This is my first prediction of the year - who wants to bet on the number of revisions I will have to make?

Saturday, February 18, 2012

Options – cash generator or money loser? The downside to call options

What about risk?

When buying a call option such as RY C 21APR 56.00 there is certainly risk. The underlying stock (in our example: Royal Bank) may fall rather than rise in value. Once expired and below its strike price, the option will not be exercised and the $47.00 premium (see previous post) is lost, i.e. a 100% loss. The Royal Bank may rise in value but never exceed the strike price and again the options expire worthless. Statistically, 75% of call options expire worthless. This risk is greatest in a declining market, in particular a bear market and much less so in a rising market. When the underlying shares trade below the strike price, the call option is said to trade ‘out of the money’ (OTM), when it trades equal to the strike price it is ‘at the money’ (ATM) not to be confused with a cash spewing apparatus at your local bank. Only when the option is above strike does it become truly profitable and that is called… ‘in the money’ (ITM).
Click on image to enlarge
 For the call option writer, there is risk as well, sometimes very high risk. When expiring, the $47 premium belongs to the call writer. Well, that is minus commission charged by the broker. At full service brokers, the commission may be as high as several hundred dollars and thus you would never make a profit. That is why ‘writing options’ is a discount broker game. TD Greenline charges $9.90 plus $1.25 for every contract. For 5 contracts the commission is 9.99+6.25= $16.24. Thus, when selling 5 contracts the real call option proceeds are 5 x $47.00 -$16.24= $218.76.
The lowest risk form of writing call options is when you also own the underlying stock, in our example 500 shares of the Royal Bank. If you buy the shares when you sell the option, risk is lowest. Say you bought when the RY shares were $53.60. That is you invested 500x $53.60 plus 9.99 (commission) = $26809.99. The options expire above strike and are called or assigned by the broker. You will receive 500 x $56.00 (strike price) - $42.50 (assignment commission) = $27957.5 or a profit of $1147.51 plus the option premium for a total return of $1366.27.  Of course, you could have made more profits (which you forewent in return of the option premium). Those missed profits are equal to 500 x (Actual Share Price – Strike Price). For example, if the share price upon option exercise was $60.00 then you missed out of 500 x $60-56 = $2000 in profits in return for $218.76 in premium proceeds. Hmmmm – painful?
However, if you bought the RY shares at a price above the strike price some months ago then things may become even more painful. Upon exercising the option, you will experience a capital loss (your acquisition costs minus $56.00) per share! You could buy the shares back from the market right away using the share sale proceeds and other cash reserves. But then this capital loss is ignored by the tax man – no tax deduction). When the call option expires and it is exercised, the broker will charge you another commission for the stock assignment to the buyer of the call option. Not for the customary $9.99 commission but at $42.50 (commissions vary depending on the size of portfolio and type of client). Your option premium proceeds have been further reduced from $218.76 - $42.50=$176.26.
What if the price at the time of exercise is above strike? What if it was $57? If you buy back immediately you lose your capital gains loss (tax deduction) AND you have to pay an extra $1 per share, i.e. you lost out on 500 x $1 of profits. That is $500 that you would have made if you had not written the option. Now your option has really delivered a loss of $176.26 minus $500 = -$323.74. Oops!
If you had written a naked call, i.e. you did not own the underlying RY shares then you would have made of loss a -$323.74 plus another $9.99. The $9.99 is the commission you owe because you would have to buy the RY shares upon expiry and assignment (at market price, i.e. $57and sell at $56). So your loss is -333.73 on an initial investment of $0. If you had borrowed the money to buy the underlying shares then you should also ad interest to your losses (but you would also have received any dividends that were paid out during the term of the option). 

And… every $1.00 per share that the RY share price is above the strike price adds another 500 x $1 or $500 to your losses. Thus if RY expired at $58.00 rather than $57.00 the loss would have been -$323.74 minus $500 = -$823.74.  If you just experienced a strong stock market rally and the RY shares had increased to $60.00 then your losses would have been -$1823.74. Ouch! And… there is no limit to how high your losses could go.
With the covered call, you would not have lost that much money, but you would have lost out on making profits. Imagine you held your RY shares patiently for several years and went through ups and downs with almost no appreciation or even with a paper loss. Next you write your option and you lose your shares for a measly $176.26 instead of making a profit of $500 x $60-56 = $2000 in profits. Wow, how would you feel about that?

So before writing call options, you have to know what the chances are that the share prices will take off on you. Ironically, this depends on the company stock, i.e. not every company behaves the same in the option world. There may be a large difference in risk between selling call options on the Royal Bank and on Johnson & Johnson. Even worse, overtime company stock behavior may change. Do you still feel that investing in (covered) call options is safe?
In the next post on options, we’ll discuss how to 'roll-over' your options, which is an alternative to being forced to sell the shares that underlies the option.

Wednesday, February 15, 2012

Options – cash generator or money loser? Call Options

Before talking in more detail about ‘put options’, lets investigate the ‘call’ option with symbol RY C 21APR12 56.00.  The option premium lies somewhere between the bid and ask price (between $0.37 and $0.43 per option). With the continuous stream of incoming bids and asks in the option market, it often doesn’t take long that a bidder (buyer) and asker (seller) want the same price and the deal or trade will be executed.
Click on image to enlarge.
The bids and asks depends on the value of the option as perceived by the market participants. At the moment the above screen was valid, the value of the underlying shares of the Royal Bank traded at $53.60 per share. So the buyer of the above option would not want to exercise this option right away. After all, why would the buyer want to pay $56.00 for a share that currently can be bought in the stock market for $53.60. But chances are that within the next month or two, before April 21, 2012 the Royal Bank’s shares will trade at $56 or even higher. The buyer of the option speculates on the potential future stock price. Suppose the share price is trading on April 1, 2012 at $58.00, the option buyer then has the right to demand that the option writer sells the buyer a royal bank share for $56.00. As soon as the buyer receives the share, he sells this share for $58.00 and pockets the $2.00 price difference.

Let’s do the math. The call option buyer bought the option for say $0.47. He did not buy one option; he bought one contract for 100 shares. So the purchase price was 100x $0.47= $47 (we’re leaving commissions out for now). Next on April 2, he exercised the option and called his right to buy 100 royal bank shares for $56.00 each or a total price of $5,600. He then sells the shares immediately for $58.00 per share and makes a profit of $2 x 100 = $200 as return on his initial investment of $47.00 The option buyer made $200-47=$163 profit on $47.00 or 347% in less than 2 months; on an annualized basis his ROI is 2082%. Wow that is some profit!

Now you may say, oh that poor option writer, he made only $47 dollars and he missed out on $200.  Booooohooooo!! Eh, wait a minute that is not entirely true. Remember that when the call option was sold, Royal Bank shares were priced at $53.60. So if the writer of the call at that day had also bought 100 shares of the Royal Bank, he would have paid $5360 minus the $47 he made or $5313. When his option was called some 2 months later, he received $56.00 per share or $5,600. Not only that. Since he owned the shares over those two months, the call option writer also received a dividend which currently is $2.16 per share per year or 0.54 cents per quarter or $54.00 for 100 shares. Thus the call option writer received $5654 for his shares which he bought for $5360 or $341 on an investment of $5360 in two months. That is a respectable ROI of 6.4% in two months or… 38.5% on an annual basis.
Now, let’s go one step further and use leverage! Our option writer borrowed the money to buy his Royal Bank shares at an annual interest rate of 7%. So he has to pay interest over 2 months: 7% x $5313 x 6/12 = $61.99. So the total investment was… $61.99 and the profit was $341.00 minus $61.99 = $279.02 or a 2 months ROI of $279.02 on an investment of… eh… zero? Yes on zero money invested. His ROI is infinite!

What? Are there no losers here? Is there no risk?  Why doesn’t everyone do this? Well there is a real down side which we’ll discuss in the next post.

Monday, February 13, 2012

Golden Opportunity

Sometimes there are investment ideas galore. I subscribe to some free investment letters in the U.S. They may be a bit harsh and right-wing according to Canadian standards but some of the stuff presented are diamonds in the rough. So, I endure the right-wing rants and pick up some good ideas. This chart from one of those letters is quite instructive about the underperformance of gold stocks compared to the gold price. Since the chart was derived from another source than the newsletter and since this source is shown on the chart, I won’t mention the investment letter.

Normally Gold and Gold stocks are tracking each other quite well, but since April, 2011 this trend has changed. I guess, right now many investors consider gold safe and gold management something to be proven. The risk of starting up new mines; the potential escalation of production costs; land acquisition and financing risk is currently considered too high compared to its potential rewards. Most of the time, investors are less concerned about these risk issues, but last year during the height of the U.S. Debt Ceiling debacle, the European debt crises, the upcoming U.S. presidential election and a potential hard landing in emerging economies including China, risk tolerance was nil. We saw the same in the oil and gas industry.
Click on picture to enlarge

The result is, in my opinion, a temporary disconnect between Gold and Gold stocks as well as between Oil and Oil stocks. Gold companies now trade at a nearly 40% discount to the gold price. If you are a believer in stable or rising gold prices, here is an opportunity. I have pointed this issue out before and so have a number of investment advisers. My way of benefiting of this issue is buying an ETF of the TSX materials index (iShares S&P/TSX Capped Materials Index Fund, symbol XMA) which also includes agricultural commodity stocks such as Potash and Agrium. These latter stocks are also representing good value right now.

Sunday, February 12, 2012

Welcome new blog readers

When seeing this blog, you may feel that some of the stuff discussed here is beyond your current investment level. So how can I claim that Canadian Diversified Investor is written for you the novice investor? How can you use the postings on this blog in the most rewarding way?

Well, the answer, my friend, is blowing in the wind. Now how is that for an answer? To be honest, reading and participating in this blog requires a certain amount of patience and empathizing with my demented sense of humor. But if you can see past that, I hope this blog is truly worthwhile for you. Providing your own ideas and comments is also appreciated, as long as it does not become a personal grudge match. I will win that every day because I have the power of… the delete button.

The collection of postings on this blog dates now back close to 2 years and when you start at the beginning you will start with the basics. Mixed in are comments on time sensitive events, including my blunders. Oh, by the way, don’t ever take my forecasts or foreshadowing serious. Successful forecasters are those who forecast often and (if I may be so bold) who change… eh… update their forecasts as often. Really, nobody has proven to be able to predict the future consistently, accurately and correctly. So, I don’t even bother other than by trying to be conventional and self-deluding. At best, I project trends I see extend into the future, until I change my mind.

But when you start reading at the oldest postings, you will notice that the ideas evolve from simple definitions or descriptions of various investment types to discussions on how to invest in e.g. real estate; analysis of buy-and-hold strategies, book reviews and even the occasional mentioning of the merits or negatives of some of my investments.  These are NOT ‘buy & sell’ recommendations, they are offered as ideas about how to or how not to invest. Here definitely comes to mind the expression: 'Do as I say, not as I do'. No, that’s too harsh. I should rephrase that: Do as I am trying to do, not as how I actually do… eh, if that gets too contorted then you get my drift.

So start at the beginning or scan through the postings from start to end and pick what interests you. Don’t ever believe me. Just see it as ideas and thoughts that merit further thinking and trying on your side. And… yeah, just in case I haven’t mentioned that yet… Do drop a comment from time to time… please… please…. 

BTW, did you notice that I like ‘…’ a lot?  My grammar checker tells me that I can only use three dots in a row, but sometimes I become really rebellious and protest against the establishment and then I type ‘…………………………………………………………………………………’

Anyway, I hope you will enjoy this blog and that it may help you prosper.

Options – cash generator or money loser? Introduction

I have been trading options on and off over the years with mixed results. There is a lot of jargon such as spreads, straddles or intrinsic and extrinsic values. I bought a book… by Michael C. Thomset, a veteran option trader, titled ‘The option trading’s body of knowledge’ which was a disappointing affair of generalities combined with rudimentary explanations of various trading strategies. There are errors in the book’s arithmetic; it swings from the extreme basics of stock market investing to a vague valuation of the options themselves. Priced at $41.99 Canadian plus GST, this was definitely ‘out of the money‘?  Get the pun? No? Well I hope you appreciate this outlandish humor once you have read this posting series.

BTW, the spell checker just informed me that I don’t know how to spell arithmetic – How is that for an encouraging start! Johnny says, “Would you like to buy my car for $4000?” Bob replies, “Yes, but I don’t have the money right now. But you know what?  I’ll pay you $10 if you give me the right to buy it three months from now when my pay cheque is coming in. In the meantime, I will check out your car and if the price proves to be right, I may buy it.” Johnny:O.K. but… whether you buy or not, the $10 is mine”.

Ah, there you have it. Our first option trade! An option is the right to buy a thing for a specific price (strike price) within a certain time span starting now (term). Would that be worth something? Eh yeah! What do you think that the right to buy something for a fixed price is worth, eh? $10? Hmmm, that is the option ‘premium’ or price. 

So, I sell you the right (but not the obligation) to buy my car for $4000  (strike price) between now and three months from now for $10 (premium). If you find a buyer for my car who would be willing to pay $5000 for the car within that time period, then you made $1000 profit on a $10 investment.  If the option buyer does not find someone the buy the car, he/she has 3 choices: let the option expire and lose $10; buy the car for $4000 for his/her own use and/or sell it later on; or the option buyer 'rolls over' or extends the option - for additional premium of course.

The option buyer MAY buy the car; the option seller of the car MUST sell for $4000 unless the option term (e.g. 3 months) has passed. In the latter case he puts the $10 option premium in his pocket and sells or better ‘writes’ another option for another term. He might even use the opportunity to ask a higher premium for the car option, i.e. increase the sale price of the option. Of course, the option seller may also decide to change the car’s asking price or better the option’s strike price from $4000 to $4500 or $10,000. All kinds of possibilities and of course based on the seller’s choice of option features the premium offered by potential option buyers changes as well.

 You can do the same with stocks. You, the seller or option writer, can offer a call option to buy royal bank shares over the next few months, say until the 21st of April in 2012 for $56.00. You do not sell one such an option at a time, but you sell a contract for 100 shares and the option buyer may offer you $1.50 for each option in the contract. Thus the buyer’s bid price for the contract is 100x$1.50 = $150 plus a commission that goes to the option’s trading facilitators (typically the stock broker). The option writer receives $150 minus a commission; the broker(s) for this contract receives the buyer’s and seller’s commissions. An option to buy a share is referred to as a ‘call’. You can do the opposite and write an option that gives the right to sell at a pre-set price (strike price); this is called a ‘put’.

The symbol for the call option described above is RY C 21APR12 56.00 CA. Spelled out: Royal Bank Call option that expires on April 21, 2012 with a strike price of $56.00 per share traded on a Canadian stock market. This option is sold by the option writer and bought by the option buyer. The price is set by auction: the price offered by buyers is the bid and price acceptable to the sellers is the ask. When the ‘bid’ and ‘ask’ are the same, then the option is traded. Here is a screen shot from TD Greenline showing the option quotes:
Click on image to enlarge
This is ‘real time’ data, i.e. the prices for the latest bid and ask are shown for a single option in the option contract (a package of 100 shares) as well as the last price per option at which a contract was actually traded. The last traded contract sold for 100 x 0.43 or $43.00. Now, watch out here. The last trade may have occurred many hours ago and since that time the market may have changed dramatically and that ‘last’ price is often not really representative of the current market.

Only the highest bid (in this case $0.37 per option) is shown as well as the total number of contracts that are available at that price (Bid Size) is shown. Also shown is the lowest asking price ($0.43 per option) as well as the number of option contracts (10) offered for sale (Ask Size) at that price is shown.

 As said earlier, options are sold by the contract and each contract comprises 100 options (i.e. the right to buy or sell one share). Thus if the bid price of an option is $0.37, then the buyer wants to buy the contract for 100 x 0.37 = $37.00 (plus commissions).  Got it? 

There are often a lot more option offers (bids and asks) outstanding than those at the current highest Bid and lowest Ask price. The total number of outstanding options is called ‘Open Interest’ which counts in our example 4,925 contracts. The rest of the quote screen is straight forward and I guess does not really require further explanation (I assume).

We have now introduced the concept of an option in further posts we’ll dig deeper.

Thursday, February 9, 2012

Lease that fancy car from yourself NOT from the dealer II

I bought that sporty bright blue car with a frog like exterior and four-wheel drive. It responds like a filly and it hugs the pavement in the curves. Perfect for this blogger in mid-life crisis! Very affordable and I am ready to lease from myself. Today’s cars are more fuel efficient than those from four years ago, interest rates are lower. When looking around to replace my trusty Rav4 for which the lease expired, I realized that I can trade the Rav4 in and get some extra mula for down payment on the next lease.

That was when it hit me. When leasing from a third party, I have to pay administration fees, pay back based on their choice of depreciation, and my car use is typically limited to 24,000km per year. Yes, at the end of the lease I can leave the car on the dealer’s lot and pick out a new one with another lease; but I would leave $1000 or $2000 on the table in trade-in value for my old car. If you exceeded allowed car mileage, you will be dinged for that too. Furthermore, the leasing company tells you what insurance you must have and how to maintain the car. Not all of this is bad; it is just that you don’t have any choice. To top it off, they charge interest rates that depend on the car model (believe it or not) and it is often not the best rate. Finally, when you terminate the lease before its term is complete chances are you get hit with a penalty.
So, lease from yourself as I wrote a couple of posts ago. Well, I walked into a dealership, not Toyota’s and they bought my Rav4 for more than the residual value. Since there is today not much room to negotiate on the purchase price of the car that you want to buy, use your trade-in price to negotiate the price of your overall package down. And, with a dealer having the chance to take you away from the competition, they are going to give you a decent price on that trade-in. Where dealers do make money in addition to a new car’s modest mark-up is in the car’s subsequent maintenance and the resale of your trade-in.

So, how do you lease from yourself? Easy as pie! You use a line of credit secured by the equity in your house (LOC or HELOC) or by an investment property you own). Guess what? Now you can borrow money significantly cheaper than the quoted interest rate from the dealership. Neither do you have to buy a car based of their lease terms, because now you set the terms regardless of make and model. Another small saving is that you can also chose a higher deductible on your insurance and thus lower the premium.

So, by ‘leasing from myself’ I get a better rate and terms. But there is more! I also can skip a payment or speed-up the repayment schedule whenever I want and save even more in interest that way. If there is extra cash, just pay down the LOC balance faster and thus lower you total interest costs. You can save a tiny bit of money by paying interest based on the monthly outstanding balance (see left side of table below) or pay fixed monthly amounts (right side).

My new car was about $5,000 cheaper than my Rav4, that combined with the refund from the trade-in and the lower interest rates lowered my monthly payments by $152.00 compared to my old lease. Now that my kids are grown up I don’t need a SUV. The improved mileage of a newer model plus a lighter car saves me another $45 per month. So that is a total saving of $199 per month and  for a 48 month lease that equals $9552 not counting all those other benefits I mentioned before.
Click on the table to enlarge.
If you would like a copy of the real spreadsheet above, just e-mail me. I do not guarantee that it is bug free and you use it at your own risk. Yet, it will give you a tool to better control the terms of your lease and compare the cars rather than the financial terms offered by various dealers.
So, I sat down gloating about my savings and then I got this other bright idea. Making the interest rate tax deductible! That in turn led me to an even better idea. Just continue reading below.
‘Why does a person lease a car?’ I asked myself? Well, when you lease, rather than paying the full sum of the car purchase at once, you pay the lessee only small amounts of cash. That way, you can keep most of the cash for the car purchase in your pocket and use it to invest instead. Hmmm…  That made sense when you could make 10% or more per year in the stock market or 6 to 7% when invested in fixed income. But in today’s market returns on cash are minimal, the bank does not even pay 1% on your money and then you pay nearly half of that interest to the tax man and you lose another 2 or 3% to inflation;heck you actually lose money. So why are you paying interest on your lease or 3% on your LOC balance?

In the meantime, most investors have portfolios that are 10, 15 or even 30% in cash not making anything and losing purchasing power in the process! Use that cash first! And if your ‘portfolio cash’ is used up by your new car purchase and an investment opportunity comes along THEN use the LOC for the investment! Doesn’t that make a lot more sense?  Guess what! If you paid your car with cash out of your portfolio and then borrowed money to invest, the interest becomes… tax deductible. Right on!

It makes sense to lease a car if you can make a high return on investments and cash is expensive. Today, cash is cheap and returns on it are meagre if not negative. So spend your cash on your consumer purchases and use your LOC to finance your investments. BE CAREFUL and DON’T OVERDO IT. Using leverage for investments has its risks! But if you have to choose between borrowing for an investment and borrowing for consumption (your cute little car) then choose to borrow investment money. Is it not strange how over time things change so profoundly that once it made sense to borrow for your car purchase and use your cash to invest while today it is better to buy your car cash and borrow to invest?

Wednesday, February 1, 2012

Why I still like Microsoft

I own Microsoft and not Apple. Why? Because Apple is a gadget company like RIM and Nokia. Apple will face increasing competition. They’re losing smart phone market share versus Android phones. Not necessarily because of design and technology but because of price. The tablet market is also ogled by many competitors including RIM with QNX and of course Android.

So where does Microsoft fit in? It is working on innovation in the background. It is in charge of gaming with the X-box system combined with Kinetics. Expanding Kinetics to other technologies will be a ‘game changer’ (pun intended). In the meantime, corporate services that worked so well for other tech companies such as IBM, is also a major profit sources for Microsoft. So now add to this potent mix Windows 8 that will revolutionize the integration between your lap top, desk top, smart phone, tablet and… smart car and fridge. The beauty is that Microsoft does not have to build these gadgets it only provides the software – the most profitable part. And… imagine Office working seamlessly on the cloud and with all your other stuff (computer, tablet, cell phone). Yes, that probably would mean that the tablet will take over the role of the laptop. Will the desktop fall off the earth? Maybe, but being a tablet and laptop user, the desktop is still my workhorse – I still prefer a keyboard over a touchscreen, but how that will play out when combined with voice commands and Kinetics remains to be seen.
The final touch that makes me bet on Microsoft is the huge software community behind it. Aps are cute but they are not coming close to the power of full fletched applications such as Quicken or PowerPoint or QuickBooks, etc. So, when all the gadgets are integrated, I think Windows is the main platform that remains standing and that lets you integrate your stuff at work with your personal tasks at home with your phone and tablet on the road. Linux could not defeat Windows and neither will the weak tablet operating systems (Android being a spin-off from Linux). So get ready for Windows 8 this summer and for later versions that probably become increasingly all-encompassing.

This will all add to Microsoft’s survival, prosperity and bottom line.  It is not Microsoft that has to play catch-up, but the small gadget makers that now may lead in fancy phones and tablets, but who are behind in offering a totally integrated software system. Yes, over time Microsoft will have to re-invent itself. I see it to be similar to GE, the giant industrial founded by Thomas Edison. Microsoft will likely survive the century.  Do you expect RIM or Nokia or even Apple to be around by then?