Apple's stock market capitalization (AAPL) has not yet quite surpassed Microsoft's (MSFT), but the value of its actual business is now higher.

Specifically, Apple's business is now worth $200 billion, while Microsoft's is only worth $197 billion--at least by one simple calculation of enterprise value.*

What's the difference between a company's stock market capitalization and the value of its actual business (which is referred to as "enterprise value")?

A company's stock market capitalization includes the net value of the cash and debt on the company's books.  To figure out the imputed value of the company's actual business, therefore, you have to adjust for the value of those other things.

As an example, consider a company with a market capitalization of $1 billion that has $500 million of cash and no debt.  If you were to buy all of the stock in this company, you would spend $1 billion.  When you bought the company, however, you would also acquire the $500 million of cash that came with it, so your net purchase price would only be $500 million.  So the company's actual business, in this case, would have been worth only $500 million.

If the same company had a $1 billion market capitalization, $500 million of cash, and $500 million of debt, meanwhile, the company's business ("enterprise value") would be $1 billion. You would get the $500 million of cash, but you'd also have to pay off the $500 million of debt, so the net cost to buy the company would be $1 billion.

As of yesterday's stock market close, Apple had a market capitalization of $223 billion.  Apple has $23 billion of cash and no debt*.  Apple's enterprise value, therefore, is $200 billion (per Yahoo Finance--see clarifying note below*).

Microsoft, meanwhile, had a market capitalization of $228 billion.  Microsoft has $37 billion of cash and $6 billion of debt (per Yahoo Finance).  Microsoft's enterprise value, therefore, is $197 billion.

So, it's official: Apple is now worth more than Microsoft.

(And if you don't consider this an absolutely remarkable turn of events, read this >.  It really puts the changing of the guard over the past decade in perspective.)

* As several sharp-eyed readers immediately noted (and we forgot), Apple has an unusual method of accounting for some of its cash on hand, which is that it classifies $18 billion of cash as a long-term investment.  (This is because the cash is invested in Treasuries with maturities of more than a year).  When this cash is included in the company's cash balance, Apple has $42 billion of cash, not $23 billion.  This reduces its enterprise value by $18 billion or so, which still puts it below Microsoft's, at least for a few more days.  Yahoo Finance's simple calculation of enterprise value is standard, but a more detailed analysis of Apple's liquid assets shows that the market still values Microsoft's business more highly than Apple's.  We apologize for jumping the gun!

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See Also:

• Okay, This Really Puts The Microsoft-Apple War In Perspective
• CHART OF THE DAY: Apple Market Cap Just $5 Billion Behind Microsoft
• CHART OF THE DAY: Microsoft Spends Eight Times As Much On R&D As Apple

[via NYT]

How many jobs are there where being wrongly optimistic for ages gets you promoted? I offer you ... equity analysts, who have, on average, overestimated S&P 500 earnings by 2x for a generation.

[via HBR/McKinsey]

ELLIE                 The fences are electrified, right?                                 MULDOON                 That's right. But they never attack the same place                 twice. They were testing the fences for weaknesses.                 Systematically. They remembered.

-- Jurassic Park (1993)

There are strange whooshy feelings in capital markets these days. I wrote last week about the run on the shadow liquidity system which, in part, led to the Big Whoosh: Thursday's "flash crash". Except the run hasn't really stopped.

What is going on? It's a testing process. Markets -- and traders -- are trying to figure out where the liquidity weaknesses are: How far down, in what stocks, and at what times, do things have to be bent/folded/spindled before they bust again? Where are the real liquidity replenishment and cut-over points? At what point will liquidity again disappear, in what stocks?

The market is, like raptors in Jurassic Park, testing the fences. It has discovered a major set of coupled, equity-related weaknesses in the shadow liquidity system, in the absence of a central market limit order book, in the best price national market system, in exchange-traded fund arbitrage, and in off-exchange trading networks. It will try to exploit those weaknesses again, which is the other side of why I hear non-stop from opportunistic sorts who have already positioned themselves accordingly in distant put/call land on the SP500.

Rather than thinking of the "flash crash" as an outlier event, think of it as a feasibility test. There are inflection points in the trading curve -- time, price, and action -- where the system breaks down, and they are systemic problems not easily resolved by new rules. In the interim, raptors will, like today, continue pinging the fences, systematically, looking for that same weakness.

Good graphic from new IMF report looking at trends in debt/GDP ratios in future, and specifically comparing the developed and developing economies. The inversion remains striking. Remind why we people "developed" economies call them developed economies again? Because they have developed a fully metastasized case of societally terminal debt?

Investors have been stocking up on gold in the face of sovereign debt issues in Greece and other countries. Combined exchange traded fund gold holdings reached a record 59.11 million ounces by 6 May, up 943,686 ounces in one week.

How much is that? A LOT.

Below is a chart detailing the eleven largest holders of gold; nine central banks, the International Monetary Fund and ETFs.

Absolutely wild considering the first Gold ETF was launched in 2003. And Business Week details that it isn't only private investors diving into the metal:

Central banks added the most gold to their reserves since 1964 last year amid the longest rally in bullion prices in at least nine decades, data compiled by the World Gold Council show.

Combined holdings rose 425.4 metric tons to 30,116.9 tons, an increase worth $13.3 billion at last year’s average price, according to the data. India, Russia and China said last year they added to reserves. The expansion was the first since 1988, the data from the London-based council show.

Central banks, holding about 18 percent of all gold ever mined, are expanding their holdings for the first time in a generation as investors in exchange-traded funds amass bullion as an alternative to currencies.

Source: IMF