Great White North Prognostications

I am dumping Sun from my portfolio not only because it is a total dog but also because of what they are doing with MySQL. MySQL is a product that was poised to take on Oracle. It used the open source model and it was going gangbusters until Sun bought it. Sun made the usual takeover promises that they would not change a thing but now they are moving toward closing the parts of the source code. For you less technically minded this is breaking what makes products like MySQL great. This is missing the whole point of the product. This shows that Sun is still thinking like a giant company that it isn’t anymore. I had thought that they were going to be new and nimble but I now suspect that they are going to continue with their long tail slide into the dustbin of history.

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As an addition based on a comment that I received. MySQL is not going completely closed source that is the problem, it is that tiny pieces of it are. This is a tiny change. But it is a change in the wrong direction. MySQL is a great database with huge support from the Linux world along with others. But in the world of Open Source people can be fanatical about the source code being open. The moment you close even one part of the code the open source people will scream and run for other solutions. And there are other free open source databases lurking in the shadows ready to take MySQL’s place.

The key to the success of MySQL is not just that it works well but that it the linux community has adopted it wholesale. It is distributed along with most of the major distributions of linux and linux is what most of the real net is driven by. But many of the Linux distributions are black and white about opens source. If the source isn’t open then they won’t distribute it. This won’t happen overnight and it won’t even happen soon. But with the slightest hint of closed source and many in the linux world will start looking for alternatives to MySQL where they normally would not be looking at all. This would result in MySQL fading away and SUN having squandered 1 billion dollars.

Companies that buy successful things for 1 billion dollars and then change that which makes them successful by making them “better” are companies that get tossed off my portfolio.

This would be like buying a Chrysler right after they invented the minivan and removing the 3rd row of seating and putting in more trunk space. You could validly argue that people had been demanding more trunk space and this was just delivering to a proven market. Your competitors would love it and promptly make minivans that do have 3 rows of seating and kick your ass.

Over the past week I have finished making the switch from PC to Apple. I think that I have an interesting perspective because over the last 20 years I have nearly elusively used microsoft for my desktop operating system and for many of those years I used Microsoft as my server system.

For the most part the only other operating system that I have extensively used would be the Linux operating system but not as my desktop. My programming has usually been a combination of windows application programming mixed with server side programming. Microsoft served me well providing me with many tools that were the best available and during a period from about 1997 - 2003 were nearly all that I used for the server and desktop. Off and on from 96-01 I also used the Java programming language. But then I discovered the .net environment and from that moment on I was hooked. Many of the hard won coding victories that I had added to my library were mostly to be found in the world of .net with more being added all the time. My programming went quickly and smoothly in Microsoft’s .net programming environment. But then as time went by I started to find that Microsoft was not trying to help me program but was telling me how to program. Also I found myself using fewer and fewer microsoft tools and more and more opensource. Now I am not an opensource evangelist. The tools were just better. MySQL replaced Microsoft’s SQL server. Next PHP replaced .net along with eclipse replacing visual studio. Then linux replaced Microsoft’s server and now all I was basically left with was XP as my desktop.

Next I noticed geeks all around me using Macs. I noticed that the various hackers were also using Macs. Then I found out that the Mac OS is based upon an OS called BSD. BSD is for hard core hackers. But here was BSD hidden underneath the glossy Mac OS. So then I discover that the Mac OS is really a hard core server waiting for me to play with it. So I check to see if all my favorite apps are available for the mac which they were and then I made my move. I get the mac all up and running dual monitors and all. No problems. It sees my usb devices the apps all install and within hours I am up and running. Then for the next few days productivity drops while I get used to the new keys and where everything is hidden. The BSD lurking underneath is completely happy with my Linux / Solaris commands and I even remember my vi commands.

I would say that productivity is way up with the exception of some key slips where I use the windows key combos. The Mac aluminum keyboard is very nice. I am used to an ergonomic keyboard so my only wish is that they made an aluminum ergonomic keyboard. But all those little things are just better. Printing is better. Startup is quicker. The apps start is less time. Things are snappier. The upgrades are better. And the basic apps like iPhoto are kick ass simple. I have been wrestling with digital photos since the late 90s and nothing touches the ease of iPhoto.

I do have a few complaints about the Mac. Not everything is easier. Dragging applications to the applications folder to install them is just not intuitive. I get it but will a 60 year old first time user of computers get that? Memory. I have my computer loaded with 4 Gigs of RAM and I would not be able to function with less. Ram is cheap if you buy it separately from Apple but would most people be able to install it?  Applications. I am able to get by with the few missing apps that I need by using Darwine and VMWare Fusion but these are not for basic users. A better way to run windows apps is needed. I am fine but I would hate to have to show a basic user how to do all that.

So in summary. I am still producing applications for windows using VMWare fusion and Visual studio but now I port my C++ applications over to mac. My web application programming has improved as I am now working in an environment that more closely resembles the servers that the web applications will end up on.

So joyfully I have sidestepped the disaster known as Vista. But where will this lead. Some people are predicting that Apple will end up with huge percentages of the PC market share. Others predict that Microsoft will pump out a new OS and regain and losses they have to Apple. I suspect that the truth is that Apple will gain some good market share (around 15 to an absolute max of 20%) and then stop. They will stop both because Apple’s are just so damn expensive and also because hardware will get better so new machines will be able to drag the deadweight that is vista around a bit better. Linux is not a player in the desktop world and probably should stick to servers. The primary breakthrough that I see in the Apple market share will be IT people who make the swtich and then drag a small share of their company along. But the accountants will generally fight Apple corporate penetration as they would eat money.

So the real mac commercial should not show the dope smoking artist vs the bloated sack of crap but two businessmen. One with a pc and one with a mac. The Mac guy should then do things that are useful to the business world and do them faster. The Mac guy can then get into his Porsche and the PC guy can get into his Ford.

I think this comes down to what people use their device for. For typing text primarily for emails the various blackberry RIM devices win hands down.  Most people that I know who have a RIM device only use it for the two features of email and as a very oddly shaped phone; nothing else. I have only met one person who used the web feature which I suspect is the only other feature that a few people use on their blackberrys.

But the iPhone seems to be missing the keyboard which is simply the best way to enter text so that somewhat excludes the email responding crowd. But the key feature of the iPhone other than a repository of cool is its web browser. The screen is as big as is possible on a reasonably sized pocket device. Plus the browser basically works. I create websites that are quite demanding of the web browser and they basically work on the iPhone. No other portable web device that I have experienced can display the web usably. Most phone browsers mutilate most websites and most websites are not designed to work on phones. Technologies like WAP and such are mostly complete failures. But the iPhone truly brings the power of the internet to your hands in a portable way. But this power is limited to the informational part. The social and communications part is lacking. The RIM gets some of the communications part but not the informational and misses some of the social.

So where will this lead these two companies sales? I think that any head to head comparisons are meaningless for the most part at this time. If you are one of those people who is now effectively on call 24/7 because they are so reachable via their blackberry then the iPhone while probably good for your sanity just doesn’t have the email features that you need.  So at this time RIM need not worry about losing those legions of lawyers and MBAs with their crackberry monkeys. But where iPhone will do well is by getting those people who want more out of their phones and want the wonderful data features and the various gizmo features such as GPS, camera, watching movies, and so on. These are the people who bought the razr and thought that they were getting something newer and better. iPhone will cream off some of the top executives from RIM in that they will want something cooler than their worker drones. So with all this in mind it looks like RIM will continue to grow will little loss to iPhone but iPhone will be growing its market from people who either are looking for something new and better or just want to be the coolest kid on the block.

One twist is that the iPhone is both releasing a 3G version and expanding into Europe and Canada. This will make things like market share, units shipped and so on very hard to compare year to year.

Since there is no shortage of lawyers and MBAs being churned out by universities everywhere then RIM need not worry too much about market share. iPhone does need to worry about regular customers willingness to pay for rather expensive data plans.

With all this in mind RIM is safe and AAPL might be in for a wallstreet let down with the next iPhone.

I have finally figured out who apple is. They are BMW. That is everybody either wants a BMW or has a BMW or is in denial that they want a BMW. By BMW generically mean the higher end Germanic cars such as Audi, Porsche. Basically Apple’s cost more are considered cool and tend to have extra features and be of a generally higher quality. Whereas Dell and HP are like GM and Ford with the sony Vaio series perfectly matching the Japanese car manufactures. Using this interpretation it allows me to predict the future of Apple. Like BMW apple will never take over a majority of the car market but they will hold on to the high end high profit margin of the business. The HPs and Dells will continue to grab the bulk of the market with their basic econ boxes with the occasional profit grab using premium brands like alienware in the same way that American car manufactures use cars like their Corvettes and Vipers to grab a little extra profit from the fools who buy them.
So just like cars people will look at how much they can afford and otherwise justify spending on a computer and most will end up buying a PC for their surfing and emailing. But a few who’s time is worth too much for the hassles of Vista or just have the money to buy a better machine or just want to look cool will buy an Apple.
So sooner than later Apple will have all these consumers and their growth will stop. Apple’s present growth is due to their machines being more useful and Vista dropping the ball for the PC market. The only way for this to not play out in this fashion would be if Apple were to try and enter the lower end market. This would not work as they would damage the prestige of their brand and probably lose as many customers as they would gain. As how many doctors would buy BMWs if a nearly identical looking BMW model was available at say $15,000?

So in summary the present growth of Apple will continue for a little while but not for much longer. Microsoft will eliminate the worst of Vista and machines will continue to increase in power and compensate for Vista’s sluggishness. I will predict that Apple will make one last thrust into the high end corporate market in the same way that the bosses drive BMWs while the worker trolls drive fords then the growth will end. If I were researching this I would count the number of Apples in the executive boarding gates and when it levels out then sell of any Apple(AAPL) shares as they will be then overpriced based on the incorrect assumption of continued market share growth.

The key to oil prices is the classic of supply and demand but is supply down so much that prices should be so high. Well the demand for oil is not very flexible and thus if supply drops even a little below demand then prices can go out of whack. The best comparison is that of an airplane that is about to crash with 100 passengers. If that airplane had 100 parachutes for sale how much would they go for? Not much. But if there were only 99 parachutes I suspect that the prices would not be a bit higher but would potentially go into the stratosphere. People would pay their entire life savings for a single chute.

So my three questions for financial the financial future of oil are: Can a 100th parachute be created soon and if the pressure is high enough, as it appears to be, will a 101st chute or more be produced driving the price way down? Are their artificial pressures on the oil supply at work much like Enron with the rolling blackouts in California? And lastly if either of these first two questions turn out to be true when and how low will oil prices drop?

Lastly what impact does this have on my portfolio? I suspect that it will make it go up sharply if oil goes down.
So in summary; I don’t buy all this China and India growth crap. They source their oil from different places. I don’t really buy peak oil as that flag has been flown with every oil peak. The more that oil goes up then the faster it will fall when the 3 spare parachutes are found.

Oracle took a good hit today (~7%). This is one company that always confused me. There core database product is solid but there are other solid databases out there including MySQL. Oracle costs a fortune and most people who buy it just don’t need its power. The other day I had a table with 110 million rows in it and MySQL just wasn’t doing what I needed fast enough where I know that Oracle in the same scenario would be fine. Now I suspect that I could have tweaked MySQL into being fast enough but it does show where each is happiest. But the worst thing about Oracle is the sales people. I have met a few and they are the most arrogant dinks you have ever met. I am not alone. Over the years I have had various customers who commented on just how much of a twit this Oracle sales person or that was.  So my question has long been why does Oracle keep making any money? I have never been able to answer this question except to think that people like to buy their big databases from big companies. But now SUN has acquired MySQL so the only reason I can think of most people buying Oracle databases has gone away. Thus I would doubt the future of Oracle.

Counter-argument. Oracle sells more than databases. They sell an entire pile of products that companies need. Well my experience is that companies need databases. The other stuff is well… just other stuff.

My financial plans remain unchanged. I would not bet for or against on Oracle but with SUN in play I would pick against if I had to. But keep in mind that companies like Oracle rarely have any debt and many customers who aren’t about to change databases and thus will buy many more licenses into the distant future so Oracle has plenty of time to turn things around.

Where did AAPL come from? Only a short while ago I thought apples reeked of poo. But a few things have changed my mind:

• A few programmer friends who have switched or are switching
• Vista
• Leopard
• BSD
• Raw power of new machines
• VMWare
• They look cool
• Hard core hackers are using them.

The first is that other people with similar needs to me are happy with mac. This is pretty straight forward until you realize that some of those programmers are still programming for windows and will for the near or possibly distant future.

Next Vista blows chunks and probably always will. XP will soon not be sold and that blows. Basically after working well with windows for over a decade I just can’t do the Vista thing. XP works great but I doubt it will be able to hold out until Vista’s replacement assuming it works.

Leopard works. This is key as I found previous versions of OS X to be a bit jerky. This seems to be fixed now.

BSD. The mac OS is built on BSD. In summary it is a pretty Reader Rabbit interface on top of BSD. What, you might ask, is BSD. Well you have probably heard of Linux and probably know that it is for geeks. Well BSD is for really really hard core geeks. The take away message for BSD is that it is for hard core security and performance geeks. That is a good foundation to build an operating system on.

Power. Raw power. The newest processors coming out have power to spare while not eating batteries which have also got more power. Also some other improvements like LED back lighting translate to longer battery life. RAM is cheap as dirt as well. This all adds up to something that can compensate for some of the drawbacks of all the eye candy that apple uses. In the past it offended me that the OS would spend so much time flickering lights at a huge cost to my sanity that apple computers were out of the question. Well now a new Mac Book pro has power to spare and thus the eye candy comes will almost no real cost.

VMWare. One of my favorite undervalued companies. They are making the big bucks from the high end server people but they also sell a $79 product for apple people that will allow you to run windows. Now if you set this up correctly you can use an apple with the apple OS and still run those super critical windows apps that you might not be able to live without. A good example in the business world is Outlook. There is no real equivalent to many of the features and plugins that you will commonly find in a larger corporation. Thus using a mac would potentially cut you off from your work. But VMWare seamlessly integrates your windows apps so well you might not even remember that they are windows apps.

There is no denying that when you pay the bucks for an AAPL you get some sex appeal. (Both you and the laptop). Apple has always had the artist’s market and they want cool.

But lastly for me (a smaller market segment but a potentially very influential one) I am seeing the really hard core hackers all using apples. By hackers I mean those people who make computers do things that would frighten you and impress people like me. Why are they using apples and not windows machines. Well for nearly all of the above but the BSD part is very important to them. But people like hackers and people like me are the ones who influence buying for really big companies.

Where is this going? Well in the next while I will be doing this experiment on myself. I will switch all my development to a Mac environment. This will be costly but interesting. If the experiment fails my kids will get the coolest laptop in school. If it works I will probably never buy another windows based machine.

So what does this all mean financially? Well in short is means that AAPL will be a good buy over the next few years. Microsoft could be building the best operating system in the world but they won’t have it ready until 2010 or better which is eons in the computer world. What apple has now appears to be damn good. If they can sell me then they will sell more and more. This translates to Microsoft selling less and less far sooner than I ever thought they would. Microsoft is not the sort of company that can shrink well. Like many companies before it a small shrinkage caused near death. The stock stops going up and they start to bleed employees who were expecting stock awards. The remaining employees start various civil wars and it just gets worse. Lastly with a falling stock acquisitions that might save it will slip away. Apple on the other hand might not be able to take success. They have played the underdog while simultaneously being a bunch of arrogant bastards. Success might cause problems with AAPL too but for a while the stock should sing.

So my plan is to buy an apple and see how it goes. If it works then AAPL will get a big long term buy probably at the expense of MSFT. If not then MSFT will be held and AAPL ignored. I will report the results of this experiment.

Lesson learned. Basically when there is a market slide as is going on now with fundamentals going south then it is time to bail. But don’t buy into a low. Buy into a recovery. Maybe you miss out on some early profits but at least you don’t buy into a freefall.  This was a good lesson to learn for free.

So when to buy? Personally I think that a run is ready. So not now. With any luck soon but I suspect that some quasi healthy quarterly reports need to come out that shows who the survivors from this banking disaster will be.

2 Days ago I heard a rumour about UBS solvency but I didn’t really believe it. What I do believe is that rumours like that trigger bank runs. Thus when I hear rumours like that floating around I probably should have sold all banking stuff. The big Canadian banks have a zero percent chance of a run but if say Citi or someone has a run then I would lose well over 5-10% on my Canadian banks not to mention the Citi freefall. Plus even after recent banking losses the money could then be reploughed back into Canadian banks for a nice ride back up.

After one month the Euros have been dumped. Purchaced Jan28 for 148.39 and sold for 152.15. A 2.5% profit. I planned on holding out until 155 but I think the Euro people will push it down sooner than later.

Then bought $700,000 each of CM and RY as I think they are underpriced due to the general hatred of all things banking.  People will soon start looking for banks they can put money in. Also assuming that they have cleared the last of their skeletons out they will start announcing good news to drive up their shares.

Today will almost certainly see my Euro hedge sold.  If the Euro goes up today then pain will be too much for European manufacturers to bear. They will make their central bank do something, anything. Thus it will drop.

So around noon I will probably dump. Let’s see how this goes.

There are a few reasons not to dump though. The US might keep their dollar in freefall as that will eliminate a huge amount of debt. A single percentage in dollar fall knocks another percent off the debt. That is way easier than actually paying. Also it makes life easier for American manufacturers and exporters. Lastly the American economy is in a panic and thus probably will drop the fed again resulting in a relative rise in the Euro and thus justify my hedge. This being a Canadian thing all that happens to the American dollar sort of happens to the Canadian. If the USD drops then the CDN dollar usually drops for a variety of reasons along with it relative to the Euro.

There are two reasons for still proceeding with this sale. There is  profit to be taken and banks like RY demand to have more shares purchaced.

Everything is down but my Euro hedge. I set a target of 155 and it is now close at 152. Purchase price was around 148 so it is close to selling time. If it bumps up a bit more on Monday I will clear out the Euros. The Canadian banks all took a hit as I guessed that they all exposed themselves in various ways to subprime stuff but in Canadian fashion didn’t have to report it so quickly. The end result is that they are now taking their lumps but they are all sound whereas American banks might not all survive this summer. Thus Canadian banks should not be so down.

So the plan is to exit from Euros if they bump up (153+) and buy more of the safer three Canadian banks.

Lesson learned from earlier. When the Canadian banks bumped up over the last few weeks I should have sold and waited for the correction and rebought them now. But buy and hold will still pay off in the long term.

Stupid MSFT. That stock just seems to keep on sucking.  Why?

DHX is up 18% from where I bought it a month ago. This is a high amount of profit for a month. In theory I should take this and run. But I won’t for two reasons. One; it took a huge dive and I think that this is just a recovery of sorts. Secondly but most importantly the strategy with this one is to wait for a buyout. Thus shortly before any buyout there will be a rush of insiders who have information that they shouldn’t. Thus I suspect that this stock will drop a bit and this wonderful profit may be lost soon if it were to be the buyout I would miss the primary whole point of buying this stock. Lastly due to the low volume of this stock it would be hard to exit at this price anyway.
So my plan is to hold on and cry a bit when this price goes down a bit but laugh all the way to the bank when the stock tears it up some time in the next few years.

BMO looks like they might be cleaning out their Toxic Waste. When I bought them as my fourth Canadian Bank I knew that I didn’t like their smell. But Oh look there they go stinking. On average the Canadian banks are doing OK but I had higher hopes. They are long term so oh well. DHX is up a notch but to me that is random. VMW took a hit today but is still up.

But MSFT is my Toxic waste. I have heard some theories about the Yahoo takeover. One was that regardless of the outcome that MSFT would be able to poach some good employees from Yahoo. The other is that Yahoo is in the middle of a reorg and that the MSFT bid would stop that dead in its tracks while they deal with the takeover.

My conspiracy theory is that MSFT might be forcing everybody’s cards on the table. The Yahoo bid did bring MySpace out of a dark corner. Lastly Google might do a friendly takeover that also would tie up Google in knots as it digested Yahoo. Then MSFT backs away and recovers from the mess it made of my portfolio.

My super dark conspiracy MSFT theory is that key MSFT employees will be issued some options around right now and that they wanted the MSFT price down so that it will be up that much more when their options vests. The bidder always goes down and after the bid fails MSFT will have lost little so the price goes back up. Sounds daft. Well people walk into corner store waving guns for a $100 or so dollars. What would a narcissistic MBA do for a few million?

The US has been keeping their dollar low. This reduces the impact of their whopping debt. Would more devaluations be a good idea? What will President Obama do?

The present US debt has been used to fight a profitless war and to buy lots of cheap DVD players. This is not a very good investment in the infrastructure of the US economy.

Thus a useless debt must be eliminated as the debt didn’t increase the productivity of the US. Inflation might be another tool. This would be a very easy tool. You have the fed loosen the reigns and keep interest rates low while inflation gets a bit out of control. Say 14%. Well I don’t know where most of the T bills are priced but I suspect they can’t be over 5%. So every year of inflation that is 10% over your T-Bill interest rate basically drops your real debt by 10%. A year or two at that rate while avoiding issuing many notes when you do finally increase interest rates and thus increase yields. This could take a huge chunk out of the debt. But at the cost of some disruption to the economy. Also it kills the pension obligations for companies like Ford and GM thus freeing them up from a serious dead weight that is included in the price of car they sell. This might make a fed chairman look both bad and good. I suspect that this will be Obama’s first real test.

So what to do with this one. By holding equities any drop in the value of the US dollar will be compensated for by an increase in the value of the equity. The companies that will benefit the most will be old school manufactures and exporters. Car companies and maybe companies like Boeing (might be hurt by long term contracts priced in US dollars though)

So the real idea is to watch inflation and if it starts to approach 10% think about snatching up stock in companies like automakers.

The Canadian dollar is up which hurts my American holdings. I don’t even want to calculate the loss when translated into Canadian dollars. My real money also comes from American dollars and thus that really sucks. Canada’s dollar is riding two separate waves. One is that our good government in the recent past while as corrupt as can be did pay off a huge amount of Canada’s debt. The present government doesn’t seem to be racking up any new debt so our currency seems sound. The second wave is that Alberta has buckets of oil and doesn’t seem to care about making a mess while getting it out. This is eating every other resource that Canada has while piling the money mostly from the US directly back into Canada. Then due to various incentives people reinvest the money back into Canada.

So how does this affect me and my Virtual 10 mil? Well this boom just like every other boom will end. This boom blows every other boom clean out of the water so will the crash blow every other clean out of the water. I suspect that the crash will mostly blast Alberta leaving it with a huge mess, an expensive infrastructure to run and nothing to show for years of money. Norway has the same thing happening there except they are making sure that the money piling in doesn’t destroy the country and also secures their future. Not here. When this money ends the party is over. So what does that do to the economy? I don’t really know. This is a question that will be interesting. Personally I live at nearly the opposite end of the country from Alberta so I don’t get a great read on this. I suspect that one must look to history and see what happens when such a huge boom industry goes bust in other countries.

The US had a recent bust but it is combined with a US debt that is stunning.

This must be researched. Where best to put the virtual money when Alberta tanks? Europe? Asia? US?

Slightly above even. MSFT sucks, Citi sucks. DHX is up but that is not very liquid so no dumping that plus that is long term, Euro slightly sucks but it’s a hedge, Sun(JAVA) is good, the Canadian banks rock a bit but VMWare rocks. I thought that VMW was a good one as it was over punished after letting wall street down.

Why is MSFT sucking so badly? Well the Yahoo deal sucks so far. I suspect that the various Yahoo execs don’t get much with the present offer. Somebody mentioned 40 as a better price. That sounds to me like the highest that MS will go. I thought they might have to sweeten the pot at to get things moving and I should have bailed the day after I took the hit for the first offer. Well I think that there are three directions that this can go with the first two being the most likely. The first is that they sweeten the pot. This will result in MSFT dropping another buck or so but I suspect that if they make an offer that it will be an offer that is negotiated and thus will be accepted. After it is accepted the stock price will twitch about for a moment and then trend up as people realize the possibilities. The second possibility is that they will drop their takeover and their stock will recover a buck or so. Lastly, and least likely, is that they will make an offer and it will be rejected. This will hurt their stock and any recovery will be an uptrend but a slow one as people will lose some confidence in MSFT.

So what do I do? I think that MSFT is presently undervalued and will go up before the end of the month unless a higher offer holds it down. This will still end up with some recovery before the end of March. Thus I think up is what will happen.

What I should have done; The Yahoo deal wasn’t going to happen with the last offer. I sort of saw this so I should have dumped after taking the initial hit. Then I should have waited until the initial deal failed and the stock started hitting lows then bought. Thus buying around now would have been good.

OK why are my stocks way down? Obvious answer is the whole market is down. But after a great week last week what signs were there that this week was going to tank? Is it better to ride this out or would it have been better to bail last week if I had been so smart as to know that it was worth bailing?

This must be researched. This is the whole purpose of this site.

Interesting. Needless to say Microsoft being the buyer causes my stock to drop. Basically 3 bucks per share. But If I didn’t own it before now I would be buying it. But there is a catch. The Yahoo yahoos are balking. But there ship was sinking somewhat so I am not sure exactly what they are complaining about. I could be wrong but I suspect that they are holding out for some more dough. The key piece of knowledge would be to know where the strike price for any options held by the key people at Yahoo stands and how this strike price compares to the MS offer. If MS has to sweeten the pot with an extra few gold pieces per share then my little MS investment will drop. If Yahoo about faces and cooperates then my investment will rise. The board of directors might make a play. I have no idea what kind of board Yahoo has.

But more importantly is Google’s take on this. There share price directly reflects why they are protesting this merger. Right now there is only one game in town and that is adsense and it is Google’s primary game. Yahoo ads and whatever it is that MS offers have not held up to the powerhouse that is Google Adsense. But now investor types have realized that MS might have a chance to eat some of Google’s pie. Thus the plummet of Google’s share price.

But having an identical Yahoo ads running head to head against Google Adsense does not make complete sense for either company. There are two reasons for this.  The ad programs are an auction format. Basically the highest bid for an ad slot wins. There are two major factors that drive this price and the total revenue. The number of bidders drives the peak prices up as well as creating a volume of revenue. But the number of sites displaying the ads also drives the interest of the advertisers as this wonderful directed ad model will generate revenue for the advertiser.

But to have two companies neck and neck doing the same thing will reduce the peak amount bid for any given ad space. I suspect that this peak amount is much lower than having a single provider as is now the case. But also it weakens the effectiveness of the ad system itself. Thus making the ads less targeted and so on. But there is a third factor. The hosting sites for these ads. These sites will chose the system that provides the most bucks. So what happens in this situation you end up with one of these two companies building a more liquid market where any advertiser will find a medium to display their ad and the media hosts will find advertisers that want to advertise. Once you have a critical threshold of this liquidity you have won and the other has lost.

An example of this liquidity effect would be ebay.com. You could build the best damn auction site in the world tomorrow but you are missing the key ingredient that would interest anyone who might use your new awesome site to sell their junk. Bidders. And thus the bidders are not interested as you have nothing for sale. Thus your best damn auction site will probably sit gathering dust in some corner of the internet.

But far worse than this diluting of revenue and profits you also get the problem of two companies each of whom has more cash than most humans can truly understand. These two companies if so motivated to go to war have cash reserves that will seem inexhaustible. But actually they are exhaustible. It would be easy to do all kinds of financial shenanigans to win customers. But in this case MS is the better equipped to win this war. Any money that Google spends on this war will end up hurting their bottom line in an obvious way. But MS has other major products to draw from such as Windows and Office. The accounting of any war would not necessarily look as bad for MS and thus their share price would hold up longer both due to MS’s ability to conceal the war using accounting tricks plus investors would know that even if MS loses this war they can retreat to what they presently do. If Google were to lose this war they could be in very serious trouble.

But even MS could end up damaging itself in other ways. Win or not they would end up focusing on this whole Yahoo thing which could distract them from three core problems they have now. One is they need a replacement for Vista and they need it now. WinMin (their cool new idea) looks good but is years out. Office 2007 is a sitting duck and needs some serious spice if it is to hold out against OpenOffice. And thirdly MS has to keep innovating with radical new ideas such as this virtual machine business along with very hard stuff like parallel processing. If they don’t focus on these three issues the long term health of the company is in jeopardy.  Plus Google is not the only issue nagging at MS. Linux is eating their server business. MySQL with SUN will do more damage to their SQL server and there is always the risk that Linux could come up with a desktop that actually works.

There are three possibilities to consider with my MS investment.

• The Yahoo deal falls apart. The stock will take a minor hit but will get back on track.
• MS has to sweeten the deal to win and my stock takes another hit but quickly recovers.
• MS and Google start a war that will get going quickly and this will only hurt both companies but mostly Google share prices as they have no real upside to this war except to avoid death. If MS wins OK if they lose not as OK.

Thus the smart thing might be toss my MS stock overboard and wait until they either conclude the Yahoo deal or shortly after it dies and they repurchase the shares. But I think I will be stupid here and hold on to them as I would be losing $100,000 and that sucks. The other lesson here is that Google shares are going to be very iffy for a while. If MS gives up then Google shares might take a nice happy jump of 15-20% so a quick in and out might be called for if the writing is on the wall for MS to drop this takeover.

Basically the whole thing hinges on who at Yahoo can benefit from what share price. Find this out and the future becomes crystal clear.