Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
With the Syrian situation still up in the air, U.S. stocks suffered small losses today, with the S&P 500 (SNPINDEX:^GSPC) down 0.3%, while the narrower, price-weighted Dow Jones Industrial Average (DJINDICES:^DJI) rose 0.2%. Today capped stocks' third losing week out of the last four, and put the S&P 500 down 3.1% for August -- its worst monthly performance since May 2012.
However, while the month's poor performance was achieved with low realized volatility, its causes are already reflected in the outlook for volatility in September, embedded in today's CBOE Volatility Index's (VOLATILITYINDICES:^VIX) closing value of 17.01. (The VIX, Wall Street's "fear index," is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days.)
We came into August with the VIX at 13.45, a low value by historical standards, but the index fell further, bottoming out at 11.84 on Aug. 5. Looking back on the month now, realized volatility in the S&P 500 in August was lower yet than that, at 10.43%. However, combine the escalation over Syria with the prospect of a potential September Fed "taper" of its bond purchases -- and that of political squabbling over the federal deficit/debt -- and you've got more than enough reason for investors to push the VIX up 21% this week alone.
There can only be one: Microsoft
The Dow recorded a 4.4% loss in August, with only a single Dow component having a winning month. That stock was Microsoft (NASDAQ:MSFT), which gained 4.9% this month. Just a week ago, the company announced that CEO Steve Ballmer would step down within the next 12 months, and that the search for his replacement had begun. That news was good for a 7.3% pop in the stock.
However, that was not to be the last August surprise from the company. Today, Microsoft announced another fundamental governance change -- nay, improvement -- with the signing of a "cooperation agreement" with activist investor ValueAct Capital, which owns approximately 0.8% of the shares outstanding. The following paragraph from the press release highlights the crux of the agreement:
The cooperation agreement provides for regular meetings between Mason Morfit, president of ValueAct Capital, and selected Microsoft directors and management to discuss a range of significant business issues. The agreement also gives ValueAct Capital the option of having Morfit join the Microsoft board of directors beginning at the first quarterly board meeting after the 2013 annual shareholders meeting.
For shareholders, this is an excellent development. While it may be technically true that only independent directors make up Microsoft's four board committees, these same directors have done a poor job of holding Mr. Ballmer accountable for Microsoft's flagrant missteps in adapting to the rapidly changing technology landscape. Adding a director with a substantial economic interest in Microsoft to the mix will do no harm... quite the contrary!
Moreover, ValueAct's presence as a shareholder appears to already have had a broader effect. As Nomura Securities' Director of Technology Research Rick Sherlund said this week, before the latest announcement, "I do think there's a tidal shift in the corporate governance of Microsoft." The pieces are falling into place -- the next one being the critical hiring of a new chief executive.