Great White North Prognostications

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.

Assuming it goes through this could be interesting. The only problem is that this is a major chunk to digest. Microsoft bought Hotmail many years ago and it took them quite some time to fully digest that one. The hotmail servers ran on Linux and I if my information is correct they finally run on windows server after many years. This might be a good thing as it no doubt forces MSFT to make their own technology work well enough to match what linux was doing.

Now while I don’t actually know what server / programming technology Yahoo uses I get a Linux / php / perl vibe. None of these are really all that welcome at MSFT. So it will be interesting to see what MSFT does with all this. It would be stupid not to try and convert it over to MS tech but at the same time that could be a huge amount of work.

Now I am disapointed to take such a large hit in my MSFT stock but I now wonder why I didn’t think about Yahoo. I never saw them as an acquisition target as in my mind they were always the one doing the acquiring. I was scared about their diminishing profits and layoffs. That can be a bad thing in the tech world. Thus I will have to think this one over for a while.

I will keep my MSFT as I believe that most people will realize that this will put MS more solidly on the web services end of things. Also the US should allow this deal to go through. Europe will try and extract some flesh out of MS to get the deal there. Some crap Eurosoft company will be handed some gem of Microsoft’s by the EU.

Will they buy salesforce.com next?