Double Journey

What is Yahoo thinking?  In an attempt to thwart or perhaps raise the Microsoft offer, Yahoo announced a possible merger with AOL.  How does this make any sense for Yahoo?

I look at this news with a raised eyebrow because, quite honestly, it seems a little desperate on Yahoo’s part.  I see Yahoo has the girl who can’t get the attention of the boy she likes, and is looking to be with the next guy who walks down the street in order to make the boy jealous.  I mean AOL?  Is AOL even in business any longer? How does AOL help Yahoo?  What assets does AOL bring to the table that Yahoo needs?

Microsoft has threatened to go hostile with its bid if Yahoo does not accept in the next three weeks.  My honest feeling is that while Microsoft really needs Yahoo, it doesn’t need it at the price that Yahoo is asking.  When the deal was announced, Yahoo’s stock rallied while Microsoft’s stock went down.  Clearly showed there were already concerns about the deal Microsoft was making.  Don’t see how offering more really makes any sense for Microsoft.

Let’s be real about what is going on here.  Google is #1 when it comes to the internet and it is distancing itself further.   The eats at Microsoft who just can’t stand to be #2 in anything, much less #3.  But by acquiring Yahoo, does anyone really think that Microsoft will close the gap and eventually take over Google?  Does a distant #2 and #3 amount to a #1?  In short, no.

I liken it to trading for a superstar in sports.  Often times, a superstar is traded for two lesser players.  Sometimes it works out for the team getting the lesser player, but it is normally to the advantage of the team getting the superstar?  Why?  Because there are just things that great players do that can’t be replicated no matter how many other players you get back.  There is only one Kobe Bryant.  And there is only one basketball on the court.  And there is only one person who take the last shot in the game.  Two mediocre players might each have a 35% shot at hitting that game winner. Kobe might have a 70% shot.  However, you can’t combine their chances and say they have an equal chance of hitting that shot.

Yahoo, be smart and take the deal.  I prefer you don’t, as a Microsoft shareholder, but if you have any sense in you, you do it.

Will you please stop with the rate cutting? You already made the mistake of cutting rates, and you are going to do it again?  You can’t save the economy now.  You can’t make housing prices go back up.  There is only so much the fed can actually do.  Cutting rates is not the panacea you are making it out to be.

For years, the Fed provided cheap money.  That cheap money caused the problems you are now seeing.  And the solution is to throw more cheap money at it.  It’s like paying off your credit card with more credit cards.  It just won’t work.  Let the economy feel some pain and lets move on.

Oil shot past $101 today in after-hours trading.

I love news like this actually. The picture is actually starting to look pretty bleak. Housing is bad, and in my opinion will get worse, no matter what the crooks, I mean real estate industry has to say. The US looks headed for a recession. The superstars of tomorrow are having problems. High energy prices mean that inflation is likely.

Inflation + Recession = Stagflation

which is the worse thing that could happen to our economy.  So despite all this doom and gloom, why would this type of thing make me smile? Because things are starting to get to a point where I might be interested in buying. Granted, I probably can’t double my money this year, but long term, there are starting to be some interesting plays. Best time to buy stocks is when nobody else wants to, and right now, a lot of people are fleeing stocks.

The market just loves to move up and down for no particular good reason. This has been especially true the last few weeks where the market has seen fit to gyrate up and down, mostly down, somewhat erratically. So today I go to Yahoo Finance to read the above as the top story.

Now really, this is a non story. But for some reason the so called “experts” are pointing to this as why the market has rallied. Is there really anyone out there who didn’t think Buffet would get in on this market? The entire sub-prime sector is in turmoil. People don’t know what is going on with these mortgages and there is wide spread panic. When people panic, Buffet makes a fortune. I for one have been one of the loudest voices for quite some time that the housing market has been over-inflated and that it would come bite us in the ass very soon. That being said, we have probably reached a point where most of the dust has settled and people are going to start looking around for bargains.

But these are the types of things that can infuriate novice investors. The markets can and will move seemingly randomly in the short term. I can’t tell you the number of stocks I’ve bought with solid reasoning only to lose my shirt because my stock was out of favor at the moment. The market determined what my stock was worth and it just didn’t agree with me. It wasn’t based on data, it was based on psychology.

Don’t be shocked if the market just dips on no news tomorrow, it went up today on very little.

I learned from Ben Bernanke. He was the head of the Economics department while I was at Princeton University. I in many ways should come to the same logical economic conclusion that he does. But for the life of me, I can’t understand what the heck he is doing these days.

Today, in case you missed it, the Fed cut the fed funds rate another 50 basis points. This along with the emergency 75 basis point cut they just did, means the rate has plummeted 125 basis points over the last week. Most of this is being done to avert a recession. Of course that implies we are not already in one.

The fed is being reactionary here. Plain and simple. They are seeing the turmoil in the stock market, and they are trying to do something about it. Why, is beyond me. This problem was created by too much easy money. The Fed dropped the fed funds rate to 1.0% several years ago. This caused a flood of cheap money to enter the market. This in turn made it very easy to get loans. This then lead to housing prices going through the roof because money was so easy to come by. Of course, the music stopped playing, and the chairs were pulled out.

To now fix this problem, the Fed proposes to do the same thing all over again? How is that going to help the situation? It isn’t. All it does is delay the inevitable. Debt must be repaid. You can continue to get more and more of it, but some day the bill comes due. It reminds me of people who use credit cards to pay off the other credit cards, compounding the problem, just trying to avoid the day they will eventually declare bankruptcy.

The Just One story is easy for me today. The Bush administration announced a plan which would essentially freeze interest rates in hopes of stemming the tide in an otherwise rising wave of home foreclosures.

It would essentially classify homeowners into a few different buckets. To make a very complicated story short, homeowners who have mortgages that have rates which will reset in the next two years and can not afford the reset, will get a reprieve from the rising interest rate they would have otherwise had to pay. Those who can afford it won’t get it (how this is determined is beyond me) and those who could have never afford even the lower rate won’t get it.

Another sticking point is to figure out a way to get investors who bought these securities to just bend over and take this. Imagine if someone promised to give you $10 a month for a year and then $30 a month every month after that. Then, when it comes time to start the $30 month payment they say, “Just kidding!”. Well that is what this plan is doing.

What about all those homeowners who complain they didn’t know what they were getting themselves into? Well I don’t feel a lot of pity for them. This was the biggest purchase they will ever have, and they didn’t try and understand what they were buying? People like me, who were careful with my money and didn’t buy when everyone else was going crazy now have to pay for this (yes we all pay for it). Doesn’t seem really fair to me. Further, the economist in me knows this plan will cause Moral Hazard going forward. Basically future homeowners will know that the government will bail them out, causing more people to take on riskier loans. Moreover, investors will suspect the same thing, and demand higher interest rates, thus making mortgages for all more expensive.

So how do you play this in the market? Still wouldn’t touch financials or stocks related to housing here. In fact, I would wait for them to bounce, and they will bounce, and then short into strength. Names like Toll Brothers were up 13% today, I think you let them go a little higher, and then short them. This mess isn’t anywhere close to over.

What do you think? Do you think this is a good plan that the government should support? If not, what would you let happen?

More Info:

Details of Plan

Pimco Manager criticizes plan.

Six Quick Thoughts

As often as I can, I’m going to try and talk about Just One current event and how I would play that event in the market.  I’m  going to try and be as concise and possible each time.  So if you want the one piece of news you need to know that day, this will be it.  More often than not, it will be a financial story, but sometimes I may just talk about something completely random.

Fannie Mae today announced that it will cut it’s dividend by 30% and also  sell stock to raise capital.  Fannie helps finance almost 20% of all homes in the United States.  They also announced a significant loss for the quarter and had a relatively bleak outlook for the housing market going forward, signaling we have not quite hit the bottom.

Why is this the story of the day?   I think it has tremendous impact on the rest of the financial sector.  First off, companies hate lowering their dividend.  Doing so means that Fannie Mae is very serious that it needs to raise capital and maintain liquidity.  As bad as the housing sector news has been, I think its going to get worse from here as the rest of the nation catches up with the slumps in Florida, California, Nevada and other hot housing markets.  Fannie is down after hours and I think it has more to go.  I do not think you buy in.  I do not think the financials are done bottoming (but it is coming soon).  I stay out for now, and wait for some further drops.