Commentary: This is a tale of two investment portfolios -- Intel and Microsoft. Intel's investment income well has run dry amid a bunch of bad dot-coms in its portfolio. Microsoft's gains from investments are better, but the software giant's investment income is trending down. Falling investment income could hurt the companies' ability to deliver upside surprises. We'll start with Intel, since it's the most upfront about its portfolio. Although Intel's capital spending plans and fourth quarter results got the most attention, investors need to watch that investment income line. Intel, like Microsoft, has made a habit of making its numbers with the help of investment income. Aided by a surprise investment gain of about a penny a share, Intel just so happened to top estimates by a penny. Intel has been massaging its numbers with investment gains through most of 2000. Intel Capital is a massive unit that has a portfolio of more than 550 public and private companies. We're not going to begrudge Intel for being a savvy investor, but many critics have wondered out loud how the company's portfolio (and therefore Intel's upside surprises) would fare in a dicey market. We're about to find out. In Intel's fourth quarter, the company pocketed $799m from investments and interest. That gain was higher than the company's revised expectations for a gain of $675m and clearly helped Intel's bottom line. The difference between estimates and Intel's realised gains was attributed to a $117m gain from the transfer of Intel's Interactive Media Services division to Convera, a new publicly traded company formed with Excalibur. But Intel said its gravy train is derailing. Intel said investment and interest income would be $180m in the first quarter, lower than analysts had expected. Merrill Lynch analyst Joseph Osha had projected investment income of $400m ahead of Intel's earnings. The $180m target assumes "no net gains from the sale of equity investments", said Intel. Translation? Intel is not expecting much from the stock market. Indeed, Intel's massive investment portfolio has taken a hit amid the market correction. At the end of 30 December, Intel's portfolio was worth $3.74bn on paper, down from $5.85bn as of 30 September. Fred Hickey, editor of The High-Tech Strategist newsletter, recently reconstructed Intel's public portfolio via SEC filings. It's not hard to see why Intel Capital's value tanked. Intel held such gems as CMGI, Covad Communications and eToys. In the first three quarters of 2000, Intel used investment gains to beat estimates. "The portfolio's decline is far worse than the Nasdaq's, since Intel's positions are primarily second and third tier names," Hickey said in his 4 December newsletter. Hickey, who has been flagging Intel's investment income for a while now, has been largely ignored by Wall Street. But that may be changing. Following Intel's earnings report Tuesday night, even sell-side analysts, who have previously ignored the chipmaker's investment gains, wondered if the company can continue to deliver upside surprise sans capital gains. Charles F Boucher, an analyst with Bear Stearns, said he won't include capital gain-related income in his future earnings estimates. Given that fact, it's no wonder that Boucher cut his estimates for the company in 2001 -- Intel had more than $1bn in capital gains in 2000. SG Cowen analyst Drew Peck cited ten reasons why Intel is in trouble. Losing its investment cushion was ranked sixth, ahead of falling PC and chip prices, investment for new technologies, slowing consumer demand and a weak return from Intel's effort to move into communications components. That ranking says a lot. It also says that analysts were well aware that Intel's upside surprises had a lot to do with its portfolio. Microsoft isn't any different. Officials told analysts Thursday night to expect $800m in investment income for the next two quarters. However, you should watch Microsoft's investment income closely. In its second quarter, Microsoft took a bath on derivatives. Net recognised gains represented $233m of Microsoft's investment income in the second quarter, which included $446m of net losses attributable to derivatives. Microsoft's total second quarter investment income, which includes $518m of interest on its massive cash position, was $751m. If you back out Microsoft's interest income, the company's net gains are trending down. In its fiscal first quarter, Microsoft realised gains of about $600m, including $156m from the sale of Sidewalk. Add in interest and Microsoft raked in $1.13bn in investment income for the quarter. In its fourth quarter, Microsoft realized gains of about $650m. Throw in interest and Mr. Softie raked in $1.13bn in the fourth quarter alone. For fiscal 2000, investment income was $3.18bn, "due in part to the recognition of net realized gains and in part to the larger investment portfolio." And if those investment income gains die, the companies' track record of beating the Street dies with it. See ZDII for US tech investor news. See techTrader for more technology investment news, plus quotes and research. Have your say instantly, and see what others have said. Click on the TalkBack button and go to the ZDNet News forum. Let the editors know what you think in the Mailroom. And read what others have said.