This oil thing sure has legs. Even if we aren't in a "peak oil" situation (and even the Saudis can't agree about that), we've gotten to a price point where consumer behavior is going to change significantly over the next few years. Over the long term, that's a good thing. The world economy is addicted to oil, largely because it's been so cheap for so long. But it's not cheap anymore and given the pace at which the rest of the world is developing these days, it's not going to be cheap ever again. Unless we find another source of energy that is a lot cheaper than oil and I am not aware of any developments that will get us there soon.

This has bigtime ramifications for slowing growth and rising prices (inflation). And these impacts will not be limited to the US economy. They will be felt worldwide. The hypergrowth economies of China, India, Brazil, Russia, and other developing economies may not be impacted as much as the more mature economies like Japan, Europe, and most of all the US. Russia, in particular, stands to benefit greatly from the spike in oil prices.

Slower growth and rising prices (inflation) cannot be good for equities. Rising rates, which is what will have to come, will not be good for any kind of financial assets.

Which, of course, leads me to venture capital. The value of your equity in a startup company is a financial asset. It may not be publicly traded but like all other financial assets it is ultimately worth the present value of future cash flows discounted at an interest rate that takes into account market rates of interest plus a risk premium.

We've been operating in a world where real interest rates have been hovering around zero (at least in the US). And that has propped up the value of equities and venture capital assets have been part of that prop-up.

All we have to do is look at the 70s to see the effect of low growth and high inflation (stagflation). Here is a chart of the Dow Jones Industrial Average during the 1970s.

Yes, that's right, the Dow Jones Industrial Average ended the 1970s right about where it started.

I wasn't in the venture capital business in the 1970s. I was a teenager that decade. I remember Vietnam, Watergate, the oil shocks, the gas lines, Gerald Ford, whip inflation now, Jimmy Carter, the Iran hostage crisis, and Paul Volcker and Ronald Reagan.

The first venture capital firm I worked for, Euclid Partners, was formed in 1971. The two founding partners, Milton and Bliss, raised about $4.5mm in 1971. They didn't raise another fund until 1983. They strugggled mightily during the 1970s with their portfolio and ultimately made it work when the technology market took off in the early 80s. I heard a bunch of stories from them about that time and it was not an easy time to be an entrepreneur or a VC.

Surely the next 10 years won't be identical to the 1970s. A lot has changed, particularly the global economic environment. But it's also clear that the economy we are in (and maybe have been in for the past 18 months) is going to be tougher for owners of financial assets than the past 20 years have been. And I don't think the startup economy and venture capital is immune to this new reality.

So what should we do about it? Well first, we need to be careful with valuations. If financial assets are going to be subject to downward pressure then inflated valuations will not be sustainable. We need to be careful with the amount of money we invest and burn. Companies that are capital efficient and cash flow positive will fare better in this environment. And we need to be prepared to wait a long time for liquidity.

It's ironic that the title of the CIBC report is "Heading For The Exit Lane" because I think the exit lane will take longer to find and possibly be less rewarding in the coming years.

A Final Thought: This may mostly be good news for cleantech investors. As oil gets more expensive, cleantech and alt energy technologies can become commercially viable more quickly. But it takes a lot of money, biotech-like capital investments, to get most cleantech investments to profitability. So if the capital markets are going to be more difficult, it's not all good news for cleantech. And the web clearly has a role to play in all of this too. More on that later.

Here's my comment to Mike's post:

Mike add me to that list of Jerry, Sue, and Tim [O'Reilly]

I’ve been rooting for this outcome since Microsoft first started their effort to acquire Yahoo! It’s worth noting that at today’s closing price, Yahoo! stock is trading about where it was a year ago and above where it was at the start of the year.

The Microsoft hostile move backfired on Microsoft and pushed Yahoo! closer to Google. Yahoo! finally woke up and did what they should have done years ago, cede search monetization to Google who simply does it better and will always do this era of search better than anyone else.

Now Yahoo! will do what it needs to do. Clean house, get lean, get out of businesses it shouldn’t be in. Focus on what it’s good at. And start making money and growing again.

They may need new leadership to do that. But selling this asset to Microsoft just because they had the wrong leadership and probably still have the wrong leadership is a mistake.

Imagine what the right CEO could do with Yahoo!

Related Stocks:  YHOO

  Headed to the semi annual meeting of a hedge fund of funds. Expect to get some insights and will twitter them

  Observation: great hedge fund managers have come out of goldman, tiger, and michael price's firm

  Has the financial system crisis run its course? Most likely yes if banks and the fed keep doing what they are doing

  Has housing in the US bottomed? Maybe not, but the bottom is nearing. Watch for change in expectations, not prices

  What about the US economy? A tale of two cities. Not like past recessions.

  Inflation? Watch out, its here and more is on its way driven by massive global liquidity of capital

  Regional banks: look for a wave of regional bank failures. Fed won't bail them out

  To clarify that string of tweets and what follows: these are opinions I am hearing at a hedge fund event

Systemic risk is largely gone from the markets but economy risk remains. Market knows how to price the latter but not the former

  @tweetipFH oil (and food) prices are creating big problems in parts of the economy

Hedge fund manager singing the praises of aapl. He's right of course. But his framework is based on the world as it exists right now

  Had to leave the hedge fund event. I hope you enjoyed the twitters

Related Stocks:  AAPL

The wisdom of the crowd is the closing price today will be $22. I took the percent of vote at each price level and then multiplied them out to get that expected value. Here's the distribution of votes:

The look of this chart tells me that I should have let people vote for some lower prices and that $16 vote was chosen by a number of people who would have voted for lower prices. That would have brought down the expected price, but not by much.

So if my poll is correct, YHOO will be down almost 25% today and I suspect the biggest drop will be in the morning. That's $8bn of market cap lost.

As most of you know, I think Yahoo! made the right choice by walking away from Microsoft's bid. I think it was a wakeup call and they can and will deal with much of what ails them.

Yahoo! had about $2bn of EBITDA in 2007 before you add stock based comp charges. At $32bn ($22/share), Yahoo! will trade at 16x EBITDA and that's not including the impact of their cash, their Yahoo! Japan stake, and their Alibaba stake which together add up to $14bn of value or $10/share. If you back that out, Yahoo!'s a bargain at $22/share.

So if it gets there today, I'll be buying some. I still think it ends the day at $26/share, which was my vote that kicked off the poll.

Related Stocks:  YHOO

I voted already and voted for $26/share. I think Microsoft has shown how much value Yahoo has and the market will reflect that once it thinks this through.

And please feel free to embed this poll in your blog. It's all one big poll so the more embeds the more votes we'll get.

Related Stocks:  YHOO

Related Stocks:  MS, MSFT, YHOO

I read the twin articles on the mess on the front page of the NY Times today, but honestly, I am finding way better stuff in the blogs.

Here's Roger Ehrenberg on why Bear is toast and who's likely to end up picking up the pieces. That's good stuff. I am going to surf around the financial blogs this weekend and I'll post again with other interesting views that turn up. Please feel free to leave links on the comments.

My question is who else is too big to fail but would fail without a similar bailout? How many more of these are coming our way?

Ugh

My favorite twitter bot so far is the mytrade stock quote bot that launched late last week.

Here's how do do it (you need to be a registered twitter user to do this):

First, go to mytrade's twitter page and follow them.

Then, wait a minute or two for mytrade to follow you back (no need to do anything for that to happen)

Then, send a message via your phone or any other twitter client device that says:

d mytrade AAPL

and get an Apple stock quote back.  Of course you can replace AAPL with anything else you'd like.  And you can separate ticker symbols with a space to get a bunch of quotes, like this

d mytrade AAPL GOOG AMZN

to pick three tech companies I am long right now

I hope you like it as much as I do.

Related Stocks:  AAPL, AMZN, GOOG

It all started almost a year ago, when we parked a significant amount of cash in tax free municipal bonds. The cash is intended to be used to fund a purchase we plan to make later this year. We wanted the money to be totally safe, very liquid, and produce income that we didn't need to deal with the hassle of calculating and paying estimated taxes on. So with the advice of some experts on tax free bonds, we purchased three auction rate tax free municipal bonds.

For those who don't know what an auction rate security is, here's a short explanation. If you want a longer one, click on the link in that last sentence and wikipedia will do its magic for you. Auction rates are generally long term bonds (corporate or muni) that have their interest rate reset every week via an auction. This does two things. First, it allows the borrower (the corporation or municipal government) to pay short term rates on a long term security. And that can be very beneficial to the borrower. It also allows the purchaser of the bond to have much higher liquidity because the auction rate security is re-auctioned every week. So every week, you have the opportunity to say that you want out and you get out. At least in theory.

We've owned auction rate munis on and off for almost 10 years so it's not like we were new to this market. But the amount we parked in auction rates last spring was significantly more than we'd had in auction rates in the past. I understood how they worked, but honestly never paid much attention to the specifics.

One specific provision of auction rates that is really important, but I honestly knew very little about until the past couple months, is the penalty rate (or maximum rate). If a bond auction does not generate enough demand at any time in the life of the bond, it's reverts to a long term bond and pays a maximum rate of interest.

Until the recent problems in the fixed income market, brought on by the subprime mess, the auctions of these securities didn't generally fail. There were a ton of buyers in the market and there was plenty of liquidity. But several things happened that have changed the auction rate market, at least temporarily.

First, and most importantly, the issuers of auction rate securities generally get the bonds insured against default in order to improve the credit quality and rating of the bonds. These bond insurers have gotten into trouble in the subprime mess and they are in various stages of financial distress. Without the security blanket of the bond insurer, many of these auction rate municipal bonds look a bit riskier and so the demand for them has gone down.

In addition, there is a general de-risking going on across all of the capital markets with investors opting in favor of really safe investments right now. So that further dampened the demand for the weekly auctions.

Starting late last year, auctions starting failing. And they have continued to fail for most of the first two months of this year. Investors who were sold a "safe and liquid" bond are waking up to find out that they now have a "pretty safe and illiquid" bond. They are also finding that the interest rates they are now getting have gone up.

So when I got a call from the person who manages our bond portfolio about a month ago telling me that "your bonds have not yet failed an auction but you should know that the risk of it happening has gone up", I started paying attention. I did my homework and got a list of the three bonds we owned and drilled down into the details of what they were. I focused on the borrower, the borrower's credit, the rating, the insurer, and most importantly the penalty rate. All of our three bonds were issued by government managed utilities in NYC (like water and sewer). All were AA rated borrowers and AAA rated by virtue of bond insurance. All were insured by insurers who were in the news. But most importantly, all had penalty rates above 12%, with one at 15%.

We thought long and hard about what to do. We went for a week or two where we watched to see if the bonds would pass the auctions. In every case they did. As we noodled it over, we came to realize that the auction rates we held were really solid securities because of the penalty rate. Even though we needed the money to be liquid later this year, there were investors who would love to own the securities at a maximum/penalty rate of 12-15%. So there were investors coming into this market almost hoping for an auction to fail. That provided the necessary liquidity to the auctions of these specific bonds.

But even though the bonds were solid, the rates they were paying had gone from 3% in the fall of 2007 to over 7% in February. That's how messed up the auction rate muni market had gotten. We were getting paid over 7% tax free for bonds that were solid. And the borrower, in our case the local government utilities, just saw their interest expenses go way up.

Ultimately, we decided to bail out of the market and now our cash is sitting in a money market fund paying a fraction of what we were getting in the auction rate market. But we decided that we should not be taking advantage of a messed up market with cash that we have committed to spend later this year. And so, along with a lot of other "safety first" money, we left the auction rate muni market last week.

The most interesting class I took at Wharton where I got my MBA was called "speculative markets" and in that class I learned that markets include different classes of investors. There is the safe money, the hedgers, and the speculators. For example, when a company (like YHOO) get a takeover bid and the stock soars, the safe money generally leaves the stock, takes its gain, and the stock trades into the hands of speculators who are now taking the risk that the deal will in fact go through. They are a different kind of investor who is getting paid to take those kinds of risks.

The same thing has happened to the auction rate security market, at least temporarily. The safe money, at least our safe money and I am sure many others' safe money, is gone from that market. And in its place are speculators who are willing to take the risk of illiquidity and even default (which is very low in the muni market) in return for getting tax free interest rates of 7% to 15% (which are the equivalent of 10-20% taxable).

What was my big takeaway from this whole affair? When risk is appropriately priced, there is a market for something. And in the case of auction rates, the risk is illiquidity and so you must focus on the penalty rates. When they are priced appropriately, the market works. When they are not, the market doesn't work. Thankfully the people who helped us construct our auction rate portfolio understood this. Now we do.

Related Stocks:  AA, DE, YHOO

Their conclusion is:

While we do not claim that these concerns are unwarranted, we believe a careful analysis of our search data does not lend them direct support. More specifically, the evidence suggests that the softness in Google’s paid click metrics is primarily a result of Google’s own quality initiatives that result in a reduction in the number of paid listings and, therefore, the opportunity for paid clicks to occur.

Related Stocks:  GOOG

Conviction and discipline are two sides of the same coin. I think you need to start with conviction. When Brad and I started Union Square Ventures back in 2003, we spent six months outlining an investment thesis. We asked ourselves and others a bunch of fundamental questions. Did VC make sense in the new world of IT where commodity infrastructure and open source software made starting web apps and services very cheap? Did intellectual property still play a role in defensibility of technology? What would the architecture of business on the web look like in a world of interconnected web services? We must have written down twenty or thirty questions like this. And we spent months going through them, working out in our minds what was going to work and what was not. And at the end of that process, we wrote an offering memorandum and went out and raised our first fund.

The benefit of that process of building an investment thesis is that when we closed the fund and started investing we had conviction. We knew exactly what we were going to invest in and what we were not going to invest in. We've evolved our investment thesis over the past five years, mostly tightening it up and narrowing it even further to be honest. But the basis tenets of it have not changed much. We've blogged quite a bit about our thesis on the Union Square Ventures weblog and here are a series of posts by Brad on this topic.

But conviction isn't worth anything if you don't pair it with discipline. Once you have a thesis, you need to stick to it. There are all kinds of temptations that come along to invest outside of the core investment thesis. You have to resist them. Discipline is about sticking to what you know and what you believe in totally and completely.

It helps to have partners, not many, but a few, to impose the discipline. I know that at my heart I am a deal doer. I like to make investments. I like to find and work with new companies. Left to my own devices, I could pull the trigger on a new investment every month, maybe even more frequently than that. But my partners remind me all the time that we have to pick our shots carefully. They make sure we run each and every investment opportunity through the lens of our investment thesis and evaluate them in that way.

The result of our conviction about what we want to do and our discipline in doing exactly that and not anything else has resulted in the creation of a portfolio that I am very proud of. We will be announcing several new investments shortly which I am equally proud of. Is this the best portfolio out there? No, of course not. But it is certainly the best portfolio we could construct given our view of the world we are operating in and that's exactly what we want to be doing.

Related Stocks:  COIN

I was busy yesterday and not paying attention to techmeme, the stock market, or my portfolio (always a bad idea), and saw this twitter post by Christopher Finke.

          Being glad that I didn't buy GOOG like @fredwilson did.  Down 36 points so far today.

Down 36 day one, ugh. Typical trade for me. The way to make money in the stock market is to sell to me or buy from me. I am not kidding.

So last night, while watching the debate, I spent some time on techmeme making sense of the google news. Turns out comscore, a company I am on the board of, released some numbers on google's paid click growth, or lack thereof. Comscore data shows that the number of paid clicks on google's network was flat december to january. For a company that has been growing like a weed for years, a flat month is never good news.

So am I concerned? DId I just buy a stock that is going to be cut in half in the coming months as someone suggested (I can't remember who or I'd link to them)?

Who knows? The market is going to do what it's going to do. But I stick by my covestor post. I like to think of stocks as proxies for buying companies. If someone was willing to hand you all of Google in return for paying them the next 10 years of it's cash flow, would you do that? I would, for sure. [that's a theoretical exercise of course, not many people can just show up with $150bn]

I did a back of the envelope calculation that says if Google grows its operating cash flow at 15% per year for the next 10 years, then at today's price, you can own the company for the next 10 years of cash flow.

Well what if paid search doesn't grow any more? First, I don't think paid search has suddenly stopped growing. It's growth is slowing for sure, driven by multiple factors. I don't think a slowing economy is one of them because in a tough economy marketers move marketing dollars to high ROI channels like paid search. I do think many keywords have been bid up to a price that it's hard to get an ROI on them. And I do think google is cracking down on click fraud which is showing up in the total number of paid clicks. And that's a very good thing in the long run.

But the bigger story on Google is that it has been a one trick pony for years. Everything that Google does is paid for by its paid search business. In the fourth quarter, Google generated $2.9bn of gross profit (gross margin) and $1.7bn of operating cash flow. That means it spent $1.2bn on operating expenses. I bet that only $200-300mm of those operating expenses had anything to do with paid search. So if that's true, and it's a wild eyed guess, then Google is spending close to a billion dollars a quarter on stuff that is not producing revenue right now.

Do you think that stuff will never produce revenue for Google? Maps and other local services are going to be a huge revenue stream at some point for Google. Same with Google Apps which is slowly but surely becoming a better alternative to Microsoft Office, a franchise that spits out billions of dollars of cash flow to Microsoft right now. I could name a bunch more lines of business at Google that today are total cost centers but will not always be.

It's hard to figure out how to value these opportunities so wall street doesn't. But that doesn't mean we shouldn't. If Google drops in half from today's prices, I'll be buying it all the way down.

Related Stocks:  AAPL, GOOG

I think GOOG can increase its cash flow for the next 5-10 years by at least 10-15% annually.  If that is true, then in 10 years, you will have earned back in cash flow most of the $150bn market cap that it is trading at today.

That's good value in my book given what an amazing franchise GOOG owns and operates.

Related Stocks:  GOOG

They've been building some interesting consumer/SMB facing services and recently launched a very different kind of ad network - the premium content ad network - which I blogged about last month.

Now they are looking for a business development person to help build the network. It's a very interesting job for someone looking to invent a new kind of ad network in the world of stock blogging and financial media. Details are here.

I thought of Bliss and his cliche this morning when I saw this news from FGIC

Financial Guaranty Insurance Co., a major bond insurer, has notified the New York State Insurance Department that it will request to be split into two companies, according to a person familiar with the matter.

One of the firms would likely retain much of the business of insuring structured finance bonds such as those backed by mortgages, which have come under severe pressure due to the housing market slowdown, according to the person.

The other company would likely retain most of the municipal bond insurance business, which is stronger, the person said.

This certainly seems like a good idea and puts a firewall between the problems in the mortgage business and the muni bond business which has historically had very low default rates and has traditionally been a safe haven.

Anyway, one of the many things I've learned the hard way is that irrational valuations can come back to haunt you. It feels so good when someone says a business you own a big piece of is worth some huge number. But unless you cash out at that price, it's not much more than a tease. And it can come back to hurt you in many ways. The thing you must know about financial markets is they are irrational at times, but they are rational in the end.

Microsoft may have inadvertently set off some serious asset inflation that may now come back to haunt them. As most everyone knows, they paid a $15bn valuation for a small minority investment in Facebook last year that included a business deal to rep a significant amount of Facebook's advertising inventory. Silicon Alley Insider and Kara Swisher report that Facebook's financials look like this.

2007 Revenue:    $150 million
2008 Revenue:     $300-$350 million
2008 EBITDA:      $50 million

So Microsoft valued one of the two leading social networking companies at 50x revenues and 300x EBITDA.

What message do you think that sent to Rupert Murdoch and News Corp? I'll answer my own question. It told Rupert/News Corp that myspace (the other leading social net) was worth north of $15bn. I don't know what myspace's financial numbers are (if you do, please leave them in the comments). But here's a guess.

2007 Revenue:   $500-600 million (considering google pays $300mm/year)
2008 Revenue:   $625-750 million (25% growth)
2008 EBITDA:     $50-100 million

If you apply the Microsoft/Facebook multiples to myspace, you get a business worth between $15bn and $30bn.

Now many think that myspace is not worth as much as Facebook and that Rupert/News Corp is trying to sell it at the high. I am not nearly as down on myspace as most people are right now. They have an audience that is different than Facebook's. They have a very active music thing going on. They are about to launch a third party app platform that every major Facebook app developer is going to be on. That may very well supercharge myspace's growth in 2008 the way Facebook apps drove Facebook's growth in 2007.

I am not saying that myspace is worth between $15bn and $30bn . But I am saying that if you overvalue Facebook, you are also overvaluing myspace. And when the company you want to buy uses a myspace overpay to make itself less interesting to you, then you are the one who gets screwed.

What goes around comes around.

So go here or subscribe to this feed if you want to follow my thoughts from money/tech today and tomorrow.

This is a sector I've invested in since the very early days of the Internet and really enjoy thinking and learning about. I plan to bring my new macbook and blog and twitter as much of it as I can.

There are many reasons why I think that is going to happen. First and foremost, it's because Google does search better than any of its competitors. And we all know it. So we go to Google to search. I don't think people are going to stop going to Google to search and start using Microsoft and Yahoo! Google also does a better job of monetizing search better than Yahoo! and Microsoft so they have better results in the right rail and that is becoming increasingly more important in areas like travel and financial services where the organic results are getting spammed up.

It is possible that something really revolutionary will come along and replace search as the primary we find stuff on the Internet. It's possible that social search will be that thing. But Google is investing heavily in social search and there's a good chance that they'll get there on their own. And if they don't, I think they are more likely to identify and purchase the startup that gets to it than Microsoft or Yahoo!

There's another reason why I don't think a purchase of Yahoo! makes much sense for Microsoft. I suspect that many of Yahoo!'s best services will languish under Microsoft's ownership and that users will leave. It's happening already under Yahoo!'s ownership to services like Flickr and Delicious and MyBlogLog. It will be worse under Microsoft's ownership.

Web services don't get better under the ownership of big companies. They get worse.

Consolidation of ownership of web services is not a good thing for the Internet. If you think about the Internet, it's a huge distributed network of loosely connected services owned and operated by literally millions.

Google's open letter on the Yahoo!-Microsoft deal is what you'd expect. But at least Google gets the Internet. Here's the opening paragraph:

The openness of the Internet is what made Google -- and Yahoo! -- possible. A good idea that users find useful spreads quickly. Businesses can be created around the idea. Users benefit from constant innovation. It's what makes the Internet such an exciting place.

That's exactly right. We don't need or want consolidation of services on the Internet. And if we get it, we'll simply see the users leave to adopt more distributed services. The ones that are consolidated will die a slow death.

So here's my plan for Yahoo! to avoid the Microsoft "bear hug":

• outsource search to Google. That will provide at 25% boost to cash flow according to Citigroup analyst Mark Mahaney. I have heard that this is worth about $10/share in Yahoo!'s stock price.
• dividend out to shareholders the interests in Yahoo! Japan and Alibaba. They are worth $12/share according to this WSJ article.
• split up the remaining company into several businesses which can be independent public or private companies. I would put Yahoo! home page, search, MyYahoo, and email into one company and let that be new Yahoo! The other assets could be sold off or assembled into additional private or public companies.

Not only would this allow Yahoo! to remain independent, it would bring new focus and passion to the services under the Yahoo! umbrella. I've talked to a lot of people inside of Yahoo! who run various Yahoo! web services. They'd all love to be running them the way that the CEOs of our portfolio companies run their businesses. But they can't. They have to be part of the re-orgs that are constantly going on and they have to be attentive to the quarterly goals for revenues and earnings that the public markets expect.

So Jerry and the Board of Yahoo! should resist the bear hug and split up Yahoo! instead. It's the right thing to do for the company, it's the right thing to do for the shareholders, it's the right thing to do for the employees, its the right thing to do for the web services that Yahoo! owns, and most of all its the right thing to do for the users of those web services.

Google misses the quarter on soft revenues and blames it on the one area they don't have a dominant franchise - social networking.

Now Google's two biggest competitors look to be teaming up.

This could mean a big drop at the opening for Google. Investors like to dump first then analyze then decide what to do about it.

I think Google is so well positioned that I'd look to buy some more today. I may well do that myself.

A combined Microsoft/Yahoo will have 30% market share in search and maybe they can do something with that. Clearly there are big synergies in merging Yahoo! and Microsoft's online businesses. The merged entity will be dominant in email which is an important category that isn't going away.

Lot's to think about. I love this business. Just when you think you've got it figured out, everything changes.

But of course I never got around to buying the stock.

We all knew this was coming. Yahoo! was cheap. Too cheap. And a mess. Rats were leaving the sinking ship en masse. It was not sustainable. Something had to happen.

And so the most logical thing has now happened. Microsoft has swooped in with a $44.6bn offer to buy Yahoo! The news is posted on Marketwatch but there is no story yet. WSJ has a small story up now.

The price offered is an ~70% premium to the closing price last night. This deal will happen unless another strategic wants it (News Corp?). Because at that price, no financial buyer can make the deal work, particularly in this financing environment.

Related Stocks:  MSFT, YHOO

But of course I never got around to buying the stock.

We all knew this was coming. Yahoo! was cheap. Too cheap. And a mess. Rats were leaving the sinking ship en masse. It was not sustainable. Something had to happen.

And so the most logical thing has now happened. Microsoft has swooped in with a $44.6bn offer to buy Yahoo! The news is posted on Marketwatch but there is no story yet. WSJ has a small story up now. Danny Sullivan has a great post on Search Engine Land discussing the merits of the deal.

The price offered is an ~70% premium to the closing price last night. This deal will happen unless another strategic wants it (News Corp?). Because at that price, no financial buyer can make the deal work, particularly in this financing environment.

Related Stocks:  MSFT, YHOO

But of course I never got around to buying the stock.

We all knew this was coming. Yahoo! was cheap. Too cheap. And a mess. Rats were leaving the sinking ship en masse. It was not sustainable. Something had to happen.

And so the most logical thing has now happened. Microsoft has swooped in with a $44.6bn offer to buy Yahoo! The news is posted on Marketwatch but there is no story yet. WSJ has a small story up now.

The price offered is an ~70% premium to the closing price last night. This deal will happen unless another strategic wants it (News Corp?). Because at that price, no financial buyer can make the deal work, particularly in this financing environment.

Related Stocks:  MSFT, YHOO

In that letter, Ackman states:

"Our primary goal is to initiate what we call “Open Source Research” where all market participants can have equal access to the primary source data and construct their own views of losses without reliance on the analytical judgment of rating agencies or the bond insurance industry. By focusing the discussion on a fundamental, data-driven approach, we expect that the dissemination of the Open Source Model will enable market participants and regulators to accurately estimate probable losses by relying on rigorous fundamental analysis of specific credit exposures, a departure from relying on the opaque, faith-based pronouncements that the bond insurance industry has promulgated to the marketplace."

When I read that I recalled that I wrote a post proposing an open source model for research titled Open Source Research back in 2004. I am thrilled that it has become a theme that real market participants are embracing.

One thing Ackman can do to help open source research happen is publish his reports in HTML directly on the web instead of in pdf format. As I said in my post from four years ago,

We need tools for distribution, collaboration, rating, reputation, commerce (just because its open doesn't mean it has to be free), and communication to make this work.  And for the most part, they don't exist.

I've changed my thinking a bit since then on the "free" question as you can see in this video, but it sure looks like we still need better tools.

Mr. Ackman, who runs a New York hedge fund called Pershing Square and has bet against the insurers’ shares, issued a report late in the afternoon predicting that two of the companies, MBIA and the Ambac Financial Group, might lose $24 billion on complex mortgage investments they have guaranteed. Such a hole might threaten their survival and touch off a chain reaction of losses at some of Wall Street’s biggest banks, as well as raise borrowing costs for states and municipalities.

William Ackman is a well known hedge fund manager and he's been short these stocks, and has made a lot of money on those short positions. So his "report" on them is interesting to me. Why? Because he's got a lot at stake.

In the wake of Sarbanes Oxley and Reg FD we've gotten broker-based research that is so bland and uninformed that it's basically useless. The action has moved to the people who actually have positions.

Stock blogs are certainly a big part of this phenomenon and I read a bunch of them daily. But so are these "reports" that big hedge funds are putting out basically touting their positions.

How do I find Ackman's report? He doesn't have a blog, at least I couldn't find it with a Google search. I did a blog search and found a link to this CNBC story. It looks like Ackman's report was actually a letter sent to the SEC and insurance regulators.

I funded the startup of Multex 15 years ago and watched the internet and technology streamline the distribution of broker research. That is now a $200-500mm annual revenue business depending on how you measure it.

Is there an opportunity to go beyond the brokers and out into the internet to find the more relevant "research". I think so.

UPDATE: Here is Ackman's letter in pdf format.

Here's some stats:

Subs to my primary feed: 96,000
Subs to my tech/vc only feed: 3550
Subs to my music feed: 100

So these category feeds, which I have to create in typepad with some custom code that Joshua Schachter gave me three years ago, are not really that popular.

But today, I created another one. For all my posts on stocks and the stock market. The feed URL is here.

One of the main reasons I created this feed is so that I can import all my stock related posts into Covestor. Here's my blog page on Covestor which should now be showing all my stock related blog posts.

I am a big fan of "write once, read many". Meaning that if I post something to twitter, it appears on this blog and my tumblog. Or if I post something on this blog, it appears on my tumblog. Or if I write something about stocks here, it appears on my Covestor blog. That's what RSS/feeds do for the web. Thanks to Dave Winer and everyone else who made this possible.

The Alacra data is sold mostly to large corporations via subscription deals but in recent years Alacra has built a nice business selling the same data to individual investors and small businesses via The Alacra Store.

Today, Alacra is launching something pretty neat. They call it the Premium Content Ad Network (PCAN). Here’s how it works. You put a PCAN ad network on your blog or web page and when you write about a public company, Alacra serves an ad featuring premium content related to that company.

Here’s the elevator pitch, taken straight from the press release:

A reader researching Apple on an investment site will often be served an ad for iPods or Apple accessories. However, that reader is interested in information on Apple’s stock (AAPL) and financial performance – not in purchasing an iPod. As a result, the reader is more likely to ignore those ads, resulting in less advertising revenue for the publisher. With PCAN, that reader would be served ads for relevant equity, credit and financial research concerning Apple, Inc.

Currently PCAN only supports public company related content. In a few weeks Alacra will add private company research to PCAN and I’ll add the PCAN ad unit to this blog. Currently I don’t write about enough public companies to make it worth it to you or me.

But if you are stock blogger (Trader Mike, Howard, etc), this should be great for you and your readers.

Related Stocks:  AAPL

There's not a ton of insight in that chart, but it got me thinking if I could learn anything about the various media categories from watching my teenage children. Here's what I've observed over the past year.

1) When they walk into a DVD store, they rarely walk out with a movie. It’s almost always the first season of a TV show they’ve heard is good. They’ll go see a movie in the theater but don’t really enjoy watching movies at home or on their computers. They feel that TV shows are better written and more interesting.  And the entertainment value is certainly more compelling. For roughly $40US, they got something like 25 episodes of Brothers and Sisters. That's almost 17 hours of entertainment for $40. That's hard to beat. And they get the bonus of being able to stat watching the show on TV once they've caught up.

It makes me wonder where this is headed. I don’t know enough about the economics of TV shows versus fims, but it may be that digital technology is changing the way the younger generation will consume filmed entertainment in some important ways. Something to think about. And maybe why the writers are striking.

2) They will play games whenever given the opportunity. My oldest, Jessica, favors brick breaker on her blackberry and admits to be close to addicted. She claims to know kids who play it under the desk at school. My middle child Emily seems to have been pulled into gaming via her social network. She likes to compete with her friends for the high score on a simple but engaging Facebook game called Jetman. And my son Josh will play games on everything from his phone to his computer to my computer to his xbox. It doesn’t matter what game it is and what device its on. He likes TV, movies, and games and seems to move effortlessly between all these forms of entertainment as if they were all the same.

3) When we were without broadband internet for three days in the barrier reef, they were a little antsy but were able to stay on top of Facebook messages via my blackberry. When we got back to a broadband internet connection, they spent the afternoon happily entertained by the Internet for hours. Emily had a huge smile on her face so I asked her what she’d do without the Internet. She said, “dad, the Internet is my primary form of entertainment”. She’ll happily turn off Facebook and AIM and watch TV with her siblings at night, but she’d happily stay online too.

4) The only time they listen to radio is when we have it on in the car for short rides. If it’s a long ride, we almost always plug in the iPod and they’ll take turns DJ’ing. Jessica is an amazing DJ if I may say so myself. She has mastered the art of gracefully moving from The Beatles, to the Arctic Monkeys, to some obscure new band I’ve never heard of and not miss a beat. In my generation, she’d have been working the high school or college radio station. Now she’s more likely to start an mp3 blog.

Speaking of mp3 blogs, they find all of their music on the Internet via myspace, last.fm, hype machine, mp3 blogs, and social networking with their friends. And when they find a cool new band, they friend them on Facebook and get an invite to their next gig. Nothing’s really changed about music other than the way kids connect to it. They still use music to make friends, qualify someone’s coolness (or lack thereof), kickstart parties, and make doing homework a bit more tolerable.

5) They still read books the way we did as kids. That doesn’t seem to have changed a bit. They read them for school, they read them for entertainment, and they read them lying in bed waiting to be tired enough to turn off the lights. My son Josh read four 600 page Harry Potter books on our two week trip and he’s not a super fast or voracious reader. But he likes reading. All my kids do. Might books be the only medium that remains unaffected by the Internet (except the ease of finding and buying them)?

6) They love magazines and read all the fashion, cooking, and gossip magazines they can get their hands on. They read about the same topics online and on TV (particularly food), but they show no signs of moving away from the magazine. In fact, I detect a growing obsession with magazines among my family. They literally fight over a new issue the day it arrives.

7) They don’t seem particularly interested in newspapers. They get most of their news on the Internet. Josh will read the sports pages over breakfast and the girls will glance at the front page. Important current events and politics will sometimes generate enough interest that they’ll read the front page portion of a story and then launch into a discussion over breakfast. But I don’t see a commitment to newspapers like we have in my generation and my parents generation.

So what does that tell me about the Goldman chart and these various categories?

- video games and Internet should be enjoying the highest multiples but there's no surprise there. the market has that figured out.

- newspapers and radio should be suffering from the lowest multiples and again the market has that figured out.

- there are sectors of the entertainment business that are better than others. if my kids are a good sample (and i have no idea if they are), then TV is a better category to be in than films.

- the music business is still a good business, kids are still listening to music the way we did. they are finding it differently and paying for it differently, but they still consume it as passionately as we did. it tells me that those who figure out the new model in music are going to do well. it won't be the major labels though.

- mass market magazines might be undervalued. the goldman chart doesn't show those multiples. and i don't know if there are any good public market pure plays in the magazine business, but they might be a good contrarian play if there are.

- books may be the one category of media and entertainment that aren't disrupted by digital technology. or maybe we just haven't seen the technology that will do it. i honestly don't know. and i don't know how the book business is faring versus five or ten years ago. but at least in my family, books are still a growth sector.

Of course, my sample of three kids who live together, were raised by the same parents, and have access to most of what they want may not be and probably isn't representative. which is why i posted this. i'd love to hear other thoughts on these categories and maybe there's something we can learn and profit from.

Related Stocks:  RIG