Tag Archives: stocks

DOW 7000: It is almost over

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Update:  Monday’s brought the DOW near 6800.  Could I have been too optimistic?

Sure it’s presumptuous for me to think I can call the DOW low at 7000 even though I said so back in November, and sure you’d be foolish to believe me more than you believe anybody else or any other source. But you’d also be foolish to believe that *anybody* can call these shots. Even the market makers fail *routinely* to offer much insight into the process and the CNBC pundits and analysts have a very consistent pattern of performance = market averages.

Many people use a backtracking analysis or cherry picking to “prove” they or others have insights you can’t get otherwise, but this is meaningless, in some ways analogous to “predicting” I can toss a coin 10 heads in a row, then videotaping myself tossing the coin 1000 times during which I’ll have some 10 heads runs, and then showing people only the 10 heads segment. Although my prediction power in this case is *random* and can be duplicated by anybody, a gullible person would watch my videotape and think I’ve got insight I don’t have.

So, is it impossible to predict the future? Certainly we can predict many things with some accuracy. Bank accounts and certificate of deposit returns are predictable, solid, safe (and thus tend to be lower than riskier investments) and there are obviously “good deals” in real estate and business, esp. when you are looking at local circumstances with which you are familiar.

Yet like most people I flatter myself and think I as Joe Duck have better insights than that foolish old “Joe Sixpack”. However even if that is true those insights do not necessarily translate into stock or other profits, and as I become more experiences watching the world and watching markets I’m increasingly convinced that the best way to make money is to avoid individual stock picking or even stay away from the stock market altogether, choosing to invest in “close to home” projects such as local real estate and perhaps friends who you know and trust (unless of course the conversation goes along these lines: Bernie! How are you doing? What, you need me to loan you money and order you a plane ticket online?

Of course if I’m right that we are now pretty much at the lows for most of the three major indexes, and that the market is correctly assuming that the stimulus spending will be kicking in after a few months to stabilize the economy, then it’s probably a good time to take a stake in America with some form of index investing. A lot of folks seem to be advising this is a fine time to “get into” this market though of course these are the same folks who failed to call the huge declines. I wish I had time to create a “hall of shame” for any financial pundit who did not scream out “irrational exhuberance” at least a dozen times in the last decade. Oh, wait, that’s easy – put *every financial pundit in the USA* in the hall of shame.

How low can stocks go? DOW drops to 7997. Panic or just … Palindromic?

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Answer:  Very low, though I wildly speculate (putting me in the same expert category as any expert you can name) that DOW at 7000 and S&P at 700 will be the bottom of this megabear market, after which we’ll continue to see major trouble with the economy continue for at least 2 years during which many businesses will die, successful ones will consolidate and just keep in the game, and a handful of nimble and clever new businesses will thrive and lead the new “post recession” economy forward, probably based on impressive technological innovations now testing in a handful of big company R&D departments and literally *millions* of small business efforts around the globe.

Thanks to the internet, the rise of highly social media, and the plummeting cost of powerful computing I remain optimistic that technological innovation will pull us out of this crisis and remain for yet another century the key force behind most socioeconomic progress.

What’s pushing things down in stocks?    I think the main factor is simply that the market, which is predictive rather than reactive, overvalued how fast technology would trump other considerations and continue to lift mediocre companies ever higher.    It’s not as if many companies were doing profoundly brilliant stuff out there – on the contrary the auto companies were up to the same old stupid nonsene they’ve been doing for decades.   Financial companies were gambling with Credit Default Swaps and fueling the mortgage crisis with fundamentally irresponsible and misguided profiteering.   Even high tech companies, home to many of the globe’s best and brightest working for Yahoo, Intel, [Google?], and MSN found themselves in huge battles to protect market share and profitability while containing the onslaught of online spam.    Google may be something of an exception here as their profitability and advertising brilliance has – until recently – kept them squarely above much of the fray and on the path to more innovation.

About eight years ago this foolishness led to the bubble of 1990 where the internet company valuations were out of line with their potential for innovation.    The commercial internet revolution was an amazing thing in the 1990s and remains the most profound new development in history, but the companies were not all that inspired and most companies were destroyed by the very markets they had convinced to fund them in the first place.

So a far better question than “why are my stocks dropping?” is “Why were all these companies valued so highly in the first place?”     We needed a contraction to square the values with the prices, and now we are watching that happen.

Why 7000 DOW and 700 S&P?    At that point the markets will have dropped just over 50% from the highs of a few years ago.    I see that as a significant practical and psychological milestone.    “half off” is a very accessible notion as we know from retail, and we already know there’s a lot of money waiting on the sidelines to buy into a “market bottom”.     It’s reasonable to assume that at least some, and probably many of the companies hammered by this have been penalized irrationally by the broader market downturn.  As prices drop to 5 and 10 year lows some of these bargains will be irresistable to those with cash on hand, and this buying should  stabilize the market.

Will it rise quickly from 7000?    I say no – I think the globalized chickens have largely flown the coop and many of the unfair advantages we have enjoyed as Americans … will be no more.      I see no major depression looming and I see the USA as the economic “safe harbor” and leader for at least the next decade, but the days of easy prosperity are probably gone for some time so … buddy …. can you spare …. a dime?

Microsoft Yahoo: Is $32 now the magic number?

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Microsoft’s very well played game to win Yahoo at a bargain price is wrapping up even more favorably than Microsoft planned. Yahoo refused the Icahn MS offer today to buy just pieces of the company, though in typical fashion Yahoo did not outline many details of their decision making process, rather they simply asserted it was a bad idea.

Obviously this was a strategic rather than serious move by MS as noted by Henry Blodget, though he’s wrong to think this is just a small play to soften up the Yahoo board before the proxy fight in August.

In fact this is the end game of a very smart plan by Ballmer / MS to aquire everything for less than they have been planning to pay for over a year. Yahoo’s intransigence has simply delayed the process by a few months and saved MS a few dollars per share on what they would have paid.

Over at Silicon Valley Insider we have Henry basically begging for an offer over $31 and indicating support for less.

Yahoo board is now *begging* MS for the $33 they could have had easily a few months ago but may not see again. MS can get it all for less so I’m now guessing the meeting offer will be $31 or $32. That will make MS look generous for keeping to the original plan in the face of a weakening Yahoo, and it will be acceptable to shareholders fearful of YHOO at $18 or lower if this all collapses.

Although this is likely to be resolved at or soon after the upcoming Yahoo board meeting it doesn’t have to resolve to work in MS’s favor. Yahoo’s pretty much exhausted all their options to the extent that it’s either Yahoo in the 30 range with Microsoft or Yahoo under 20 without MS.

Disclosure: Long on YHOO

CNET SWOT Analysis

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CNET is back in the news as today brings layoffs and ominous internal memos so I thought I’d put out this CNET SWOT analysis I did over at the Techdirt Insight Community not so long ago:

CNET Mini SWOT

CNET Strengths:

Brand awareness and brand respect.   CNET has been one of technologies most recognizable and respected brands for many years, and continues to maintain the high respect of the technology community.

Writers.  CNETs technology writing and analysis is recognized as some of the best in technology.  Unbiased reviews and authoritative articles from seasoned technology journalists are the mainstay of CNETs content. 

Editorial staff.  CNETs reputation for editorial and quality control is unsurpassed in the industry.   

Dan Farber promotion.  Dan Farber is one of technologies most informed and seasoned professionals.   As a blogger who is extensively familiar with and actively participating in social media Dan was a great choice to help guide CNET into a more aggressive social networking posture.

Huge internet traffic.  CNET remains one of the most visited news sites on the internet.

High revenues with potential for high profitability.   CNET’s revenues are strong despite significant earnings declines in the past year. Zacks analysis suggests a modest profit downturn in the coming year, but CNET is still generating very substantial revenues and some profits.   Under a JANA acquisition scenario the aggressive management for profit could boost earnings significantly. 

CNET Weaknesses:

Labor intensive content production.  CNET’s quality writers and editors are her blessing and her curse.   Writers cost money and good writers, collectively, cost a lot of money.    Blogging and the social media revolution have led to an online environment that creates a tidal wave of quality tech-focused content every day at very low average cost per article.

News delays.   Although CNET remains very current, it simply cannot always compete with the 24/7/365 blogging community that is posting (and increasingly scooping) CNET and other media outlets when technology news breaks.  Again, the editorial standards force CNET to delay where bloggers and online journals will report first and ask questions later.  The practice is questionable from a journalism point of view, but usually it is just fine for advertisers and certainly helps with traffic generation as the early reports often garner the most page views. 

Earnings declines.   CNETs earnings are down significantly, placing huge pressure on the company to cut costs and increase monetization for content.    CNETs early success may have led them to incorrectly assume they would remain unchallenged in the tech news space where they are under pressure from both bigger players like Yahoo and smaller players like TechCrunch.

CNET Opportunities:   

Socialism!   CNET’s attempts to build an online CNET-centric community at the website have been modest and in many ways have failed.    With a sterling brand and reputation, CNET is in a great position to leverage the existing tech-centric user base into a number of community endeavors.   One small example would be to create more niche CNET communities online and then evangelize these communities via CNETs advertising as well as Facebook, Myspace, and other social media powerhouses.   Even more powerful would be to facilitate the creation of much more reader-driven content.   For example make registration for CNET simpler with just an email signup and encourage far more guest articles.   Digg style rankings for CNET articles would be another positive step in this direction.  

Be more like TechCrunch.  Mike Arrington has brilliantly leveraged the fast pace of internet journalism, modest journalism standards, advertisement flexibility, and most importantly the powers of social media.   Where TechCrunch initially produced content at a fraction of the cost of CNET using freelance writing and little office overhead, it also distributed and monetized this content in more powerful ways such as massive emailings and very aggressive social media participation and real socializing.   Once again however CNETs high journalistic standards provide some barriers here.   

JANA board coup:  If JANA succeeds in the fight to change the direction of CNET, and this appears likely, a new focus on monetization and innovation will lead to a stronger and more viable CNET.     Unfortunately profitability is probably going to call for a reduction in journalistic standards and quality coverage, but from a company health perspective CNET is likely to benefit from a leaner, faster, broader, but more superficial approach to tech news coverage.

CNET Threats: 

Diminished advertising revenues.   The coming recession may not hit online advertising as hard as some other sectors but online advertising spending growth is likely to slow in the coming year and possibly even go down.   Financial sectors, for example, were huge spenders last year and may be unable to continue spending at the same levels due to the housing crisis.  

Blogging and the social media revolution.   These represent a substantial threat to CNETs long term prospects and profitability.   Blogs and non-traditional media coverage are generating huge volumes of quality content every day, and technology focused content is especially abundant since blogging’s early adopters tended to be technology enthusiasts.  Bloggers are increasingly respected as quality journalists and analysts who in some cases have more expertise than the technology journalists that are covering the same story, product, or events.   Yet the average cost to produce a blogged story is effectively zero as many bloggers are writing simply for the fun of coverage and the internet soapbox.   Monetization of blogs is also becoming easier and more lucrative in the form of Google Adsense per click advertising as well as projects like Federated Media which match publishers to advertisers – a service for which advertisers are increasingly willing to pay a high premium.


A Google aquisition of CNET?

Despite the reasonable assumption that CNET has significant potential for a valuation far beyond current capitalization of approximately 1 billion,  I consider a Google aquisition *unlikely*.      Google’s actions and stated intention for many years have been to concentrate on content *monetization* and avoid content production.    Also, Google stresses the value of machine scalability which is not compatible with the labor intensive content and editorial style of CNET.   

That said, I think that CNET and Google cultures would be fairly compatible.  Not because they are similar but because they would have a high degree of mutual respect as leaders in their respective fields.  Where Google is relaxed, fast paced, and extremely innovative CNET culture appears to be more formal, professional, and along the lines of a traditional journalism environment with attention to detail, high journalistic standards, and an older workforce.    This is probably an acceptable recipe for a comfortable working relationship.

CNET Linkage:JANA Board Fight:
http://biz.yahoo.com/bw/080107/20080107005660.html?.v=1

Zacks YHOO summary:
http://biz.yahoo.com/zacks/080222/11619.html?.v=1

Facebook owes me $1.50 per year!

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Over at WebGuild I was doing some simple calculations about my value as an information slave to social networks like Facebook.    Using their 150MM revenues last year and dividing by approximately 100 million current users, we get a value of only $1.50 per year per average user.

The value of an average user in terms of the capitalization of these companies is obviously much greater.  Facebook is (over) valued by some measures at 15 billion based on Microsoft paying 240 million for a tiny share.   By that metric I am worth $150 to the company.    By traditional stock metrics this should jive  in logical ways with the revenue and profit potentials, but the internet economy has shattered many of the old sensibilities about company values, which these days are largely a function of hype, competitive takeover strategies, and other unusual metrics.

Yahoo + Microsoft? Heck yes says Legg Mason, with 6% of Yahoo

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Larry Dignan is reporting that major Yahoo Shareholder Legg Mason is insisting that Yahoo make a Microsoft deal, though they hope and may expect MS to up the offer past 31 and up to 40, which Fund manager Miller stated appears to have been MS’s highest previous offer over the past year of flirting with Yahoo about a merger.

Miller says about Legg Mason’s position:

 We think this deal is a strategic imperative for MSFT, and that YHOO is in a tough spot if it wishes to remain independent.

Strategic imperative or not, Yahoo can’t expect investors to sit back and wait for something to happen when this much money is on the table.   In fact I think investors are already upset that Yahoo is basically suggesting this is their course of action – waiting for prosperity to fall upon them but not in the form of Microsoft.

I should say that given the market’s horrible reaction to the aquisition I’m not at all clear this is good for *Microsoft*.  If they screw up managing Yahoo and/or Yahoo can’t revived it’s sagging profitability fast this could go down as a Time Warner AOL fiasco kind of move for Microsoft.  However, if they want Yahoo I think Microsoft’s strategy from this point on can be very simple:

1.  Offer $34 per share publicly and loudly.
2. Call Legg Mason and other big holders, and tell them this is *OFF* if Yahoo keeps waffling.
3. Bring in fat lady to sing       ….         it’s over.

 Disclosed:  Long on Yahoo. 

Hostilities erupt between Yahoo and Microsoft

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Hey, looks like now it’s an official *hostile takeover* attempt from Microsoft in the battle for the internet giant Yahoo.

Yahoo declined Microsoft’s offer of last week and in this press release Microsoft basically declares their intention to duke it out.    I’m surprised they have not upped the ante yet, but perhaps they are waiting for more drama and information before making a “final” offer to the Yahoo board before taking this directly to Yahoo shareholders.    Although I think most shareholders would take the MS offer it’s clear the *big* shareholders like Jerry Yang don’t want to, so perhaps Yahoo can win a proxy battle for the company.    I have a hunch however that the institutional investors, and the legions of small time folks like me, would jump at a 34+ offer and probably even take the current one unless Yahoo shows a lot more signs of life than screaming out the current rallying cry “We are fighting Microsoft!”

YaAOLhoo? Are you kidding?

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The Times of London is, I think, exaggerating a rumor that Yahoo and AOL might merge in an effort to find off the Microsoft takeover of Yahoo.      I don’t even think this is necessarily a bad idea if you made sure the management of both companies had the necessary shakeups to turn *both* companies around from what seem like desparate corporate positions.  However it just doesn’t ring likely to me at all, and begs the question of how the Yahoo board could make all this work *and* avoid the wrath of the market which probably will view the Microsoft offer as far more favorable than a pie in the sky possible AOL deal.    That said, I’m open to this possibility.    The main thing I’m *against* is more of the same from Yahoo.    Profits and share price matter more than any anti-Microsoft sensibilities, and the board should keep that top of mind at all times. 

Disclosure:  Long on Yahoo 

Microsoft v. Yahoo. They can’t seem to make an offer Yahoo can’t refuse.

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The big tech story remains the Microsoft offer to buy Yahoo, and on Wednesday a meeting at the Yahoo’s HQ in Sunnyvale, CA may seal the deal, though it’s more likely that negotiations will continue for some time after that meeting.

Microsoft may be wondering about the wisdom of the aquisition given how hard the market appears to have punished them for the offer.   Although other tech stocks were down last week, Microsoft’s 13% drop amounted to a loss in capitalization equal to almost the entire value of the Yahoo deal.   ie you could argue that even if Yahoo sold themselves to Microsoft for $1 on Wednesday, the boost in the merged company value would not make the two any more valuable than *Microsoft along* was worth before all this began.     That’s a lot of financial simplification but Microsoft must have at least somewhat more skepticism about all this than they did as they made this offer.

So, what are the likely strategies here?     It is clear Yahoo will reject the current Microsoft Offer which amounts to about $30 per share, and they are strongly rumored to be asking Microsoft for $40 per share.   I’ll eat my keyboard if Microsoft agrees to $40, but I do think they may immediately counter offer at about $34 per share.     Of course unless the inclinations of the Yahoo board change they’ll reject this as well.    I’m growing somewhat suspicous that the unreasonable $40 amount is not really an attempt to boost the sales price – it may be the best way for the Yahoo board to send negative signals, try to wait things out, and give Microsoft more chances to back out.   If Microsoft gets cold feet from the share price drops or Yahoo’s chilly reception of the merger idea, and then backs out of the deal, shareholder lawsuits against the Yahoo board are less likely and weaker.  The Yahoo board will simply say the $40 was a negotiating tactic that went wrong rather than a tactic to kill a good deal.

However I don’t think Microsoft is going to go softly into the night on this, and that will make all this very interesting.    They’ll offer more, and at even $34 per share Yahoo would be getting an amount approaching a 100% premium over their recent 52 week low of about $18 per share.  This is the price YHOO traded at following the bad guidance from the recent earnings call.  

It strains the credulity of this shareholder to see how the Yahoo board can argue that Yahoo has a realistic shot at being “twice as valuable” as they were last week in a reasonable time frame.   In short, we all know they can’t.    This may be a defect of market forces or employee attrition or lazy management or low morale or Google defections or whatever, but left to her own devices Yahoo is pretty much going nowhere fast.   I’ve been bullish on Yahoo for several years now and remain convinced that the company can eventually turn things around.  However I think this aquisition may be 1) part of that turnaround process and  2) presents an offer far too good to refuse without risking a share price meltdown.

So, looks to me that on Wednesday the Yahoo board will turn down the current offer, Microsoft will up the offer to about $34, and Yahoo board will turn that down too (probably the following week).  This will lead to nothing short of a Yahoo shareholder revolt as anxious investors watch a company throw away tens of billions of birds in the hand arguing they are seeking a few more birds in the internet bush.

Ha – even Mini Microsoft hates the deal.   An interesting salary debate over there along with the normal absurd whining from developers over their already very large salaries. 

Disclosure:  Long on Yahoo (but not for long!?)

Blodget: US Economy is Screwed

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Market watcher Henry Blodget is not optimistic about the US Economy.   He notes that advertising spending already appears to be threatened by the slowdown, and he seems to think this will hit everybody from mainstream media companies to technology/media stocks like Google.  As the subprime mortgage timebombs keep ticking away I think it makes sense that we are in for worse conditions before we see happy days again.   In fact I expect it will be at least 5 years before housing prices return to the highs of 1-2 years back.   It may be time to hunker down and settle in for a long and cold economic winter.