Microsoft-Yahoo! Deal Finalized

On Thursday, the long-discussed Microsoft (MSFT: 28.77 -0.199 -0.69%)-Yahoo (YHOO: 15.58 +0.04 +0.26%) deal was finally cleared by both European and U.S. regulators.
 
Microsoft shares jumped 1.33% in response to the news, but lost 1.1% after-hours. Yahoo shareholders appear to be viewing the news negatively, with shares rising just 0.65% during the day and losing 1.22% after-hours. Google Inc. (GOOG: 540.763 -2.457 -0.45%) shares also followed the same pattern, but registered a net increase. The Nasdaq was up 0.69% yesterday and the S&P 500, up 0.66%.
 
The U.S. search market is dominated by Google, which had a 65.4% market share in January 2010, with Yahoo! a distant second at 17.0% and Microsoft third at 11.3% (comScore estimates). According to StatCounter, Google’s global market share at the end of 2009 was 90%. Google has gained significantly in China too, with a 2009-end market share of 43%, compared to Yahoo and Microsoft’s combined share of 1.18%.

The growth in China is very significant in the global context, since it is one of the fastest-growing international search markets. Google’s gains in the country have come largely at the expense of local company, Baidu, Inc. (BIDU: 500.15 +2.546 +0.51%).
 
Given the above statistics, the approval was not surprising, since Yahoo! and Microsoft’s combined share is well below Google’s, so a combination could only increase competition and not reduce it.
 
Moreover, the clearance by Australian and Canadian authorities in November last year further strengthened our view that the deal would go through.
 
The ten-year agreement, first proposed in July last year, allows Microsoft to power, control and process search-related information. Yahoo gets to collect advertisements and keep 88% of the revenue.
 
Microsoft will now be in a position to collect user information in larger volumes, through which it can more correctly determine user preferences and thus attract more users. This in turn will attract more advertisers and thereby generate more revenue.
 
Yahoo! will save around $200 million in search expenses and increase $500 million in search advertising revenue once the deal closes. While the terms are subject to revision a few years down the line, it is obvious that the company has created a cash cow.
 
For the next ten years, Yahoo will be able to build strategy and focus resources on other areas, including banner advertisements on its portal and email pages. It will also be in a position to strengthen relationships with advertisers, the source of all revenue and profits.
 
We currently have a Neutral recommendation on both Yahoo! and Google, but are more optimistic about Microsoft.

Forex Trading: EURUSD Back Above 1.3483 Level. 1.3531/38 Next Upside Resistance

The EURUSD moved below the target at the 1.3483 level which was the 61.8% of the move up from the 2009 low to the 2009 high.  The price is moving toward the 1.3531/38 level which was the lows from February 12 and yesterday prior to the move lower.  This will be the next resistance level for the pair this morning.  Above the level the pair has room to head up toward the 1.3575-85 where the 38.2% of the move down and the floor lows going back to February 5th.

ETFs That Could Potentially Be Affected By The Fed’s Discount Rate Hike

The Federal Reserve hiked the interest rate it charges banks for emergency loans after the market closed Thursday. What does it mean, and which exchange traded funds (ETFs) could be affected by the move?

The Federal Reserve changed the interest rate it charges banks for emergency loans, making the first interest rate move since December 2008. The hike in the discount rate - from 0.50% to 0.75% - will not affect consumer or company loans, reports Reuters. The Fed insists this move isn’t akin to tightening monetary policy.

The Fed made the move after it cited improvements in the financial markets. The rate is effective Friday.

ETFs that could potentially be affected - positively or negatively - by the move include:

• PowerShares DB U.S. Dollar Bullish (UUP: 23.72 +0.07 +0.30%): The dollar tends to strengthen as interest rates rise

• iShares Barclays 1-3 Year Treasury Bond (SHY: 83.43 -0.03 -0.04%): Short-term bonds tend to come in favor as interest rates rise and hit long-term bond prices

• Financial Select Sector SPDR (XLF: 14.46 +0.08 +0.56%): Banks big and small are bound to feel the impact of a rate increase

 

Dell Revenue Up, EPS Exceeds

Dell Inc. (DELL: 13.47 -0.959 -6.65%) reported fourth quarter 2010 EPS of 28 cents, exceeding the Zacks Consensus Estimate of 27 cents.

Revenue

Revenue for the quarter was $14.9 billion, up 11.0% from $13.4 billion reported in the year-ago quarter and up 16.0% from $12.9 billion reported in the previous quarter. The company’s fourth quarter revenue growth can be attributed to an improvement in revenue in all business segments, especially due to growth in the commercial business, fueled by growth in Enterprise Technology and also due to increase in product shipments, as the company reported its first consolidated results after the Perot acquisition.

Revenue by Segment

Large Enterprise posted revenue of $4.2 billion, an increase of 23.0% sequentially and 8.0% year-over-year. In the fourth quarter, the company witnessed a very strong pickup in demand, with large enterprise units improving 14% versus the third quarter.

Public revenue for the quarter was $3.8 billion, up 16.0% from the year-ago quarter. Under this segment, Services revenue more than doubled, derived from efficient solutions provided by Perot Systems to the company’s government and healthcare customers.

Small and Medium Business revenue for the quarter was $3.3 billion, up 10.0% from the year-ago quarter. Shipments increased 9% sequentially. This can be attributed to stronger sales of mobile computing products and servers, which increased 18.0%.

Revenues for Consumer Business grew 11.0% year-over-year to $3.5 billion, with shipments growing 29% year over year and 23.0% sequentially. Under this segment, revenue from consumer mobility products was up 26.0%.

In fiscal year 2010, the company expanded its consumer product portfolio and worldwide customer reach through different channels, which resulted in a 2 million unit increase in product shipments compared to the previous year.

Total sales from BRIC countries (Brazil, Russia, India and China) increased strongly, as revenue was up 72.0% to 81.0% in China, driven by increases in SMB and Large Enterprise businesses.

Operating Results

Gross margin for the quarter was 16.6%, below the 17.3% reported in the third quarter of 2009. The decline in gross margin was the result of strength in demand for low-margin consumer products. In addition, operating expenses increased 6.0% from the year-ago quarter, as a result of increase in both SG&A and R&D expenses. This translated into an operating margin of 3.4%, flat compared to the year-ago quarter.

Earnings per share during the quarter were $0.17, down from $0.18 reported in the year-ago quarter and flat compared to $0.17 reported in the previous quarter. Excluding special items like amortization of intangibles, severance cost, acquisition related cost, stock compensation expenses and adjustment of income taxes, the EPS for the quarter was $0.28, down from $0.29 reported in the year-ago quarter and up from $0.23 in the previous quarter.

Balance Sheet & Cash Flow

Dell’s cash conversion cycle remained same as the previous quarter at a negative 36 days. Cash flow from operations declined to $1.26 billion from $801.0 million reported in the previous quarter. The company ended the quarter with $11.0 billion in cash and short-term investments versus $13.1 billion in the previous quarter. Long-term debt stood at $3.42 billion at the end of the quarter versus $3.44 billion in the previous quarter.

Guidance

Dell did not provide any guidance for the first quarter, but is cautiously optimistic about improved demand in the commercial business in 2011. However, Public sector demand may be lower. The company is optimistic that it can generate growth in revenue, operating income margin and cash flow going forward.

 

Why Gold Is Still Bullish Despite Pundits Talking It Down

A few weeks ago on February 4th, I penned an article for Kitco forecasting the gold correction trends and the likely outcomes. My opinion was that gold was pulling back to work off excessive optimism from the early December 09 highs. This type of pullback was orderly and there was a gap at 102.50 on the SPDR Gold Shares (GLD: 109.47 -0.51 -0.46%) ETF that I believed would fill. The following day, that gap filled and gold hit a bottom at 1042 and has rallied much higher since. I opined that the rally in the US dollar was merely cosmetic against other world currencies, and that Gold was still the preferred asset to accumulate and would begin to move regardless of the dollar moves.

The recent technical move up in Gold only confirms that we are in the final five year window in my opinion where the investing public becomes “aware” that gold is real money.  In my August article last year, I discussed my thirteen year bull theory for the Gold market. The first five years from 2001-2006 was the “stealth bull” in Gold and Gold stocks.  The average Gold Fund ran up 30% a year for five years compounded.  By the time investors figure this out, they all pile in right near a five year peak.  The market then chops for three years sideways in an up and down fashion, getting nowhere.  Investors get bored, and then we move into the final five year stage where awareness takes hold and the bull cycle really takes off.

It is maybe the second inning of this five year stage, so the recent pullback in Gold to 1040 is normal, and the next advance is likely to be larger than the August to December advance. As this awareness grows, the bears get upset and try to explain how gold bulls are foolish. The investing public sometimes does not get enough credit for being correct, and in this case, those investing in Gold have been proven correct over and over again for the past nine years. They will be proven correct for the next few years as well as Gold continues to climb and  befuddle the gold bears of the world. You will know that Gold’s bull market has topped when all of the bears are completely silent and every Gold bull is running around screaming buy at the top of their lungs. Every time I have seen Gold pull back in the past nine years I have chuckled at how fast the erstwhile Gold bulls start getting nervous and the Gold bears pile on hard.

As long as I continue to see these behavoral patterns, and the technical and Elliott Wave patterns stay bullish, I will remain a Gold bull while trading around the important pivot highs and lows. As long as the pundits keep trying to talk Gold down, it will keep on rallying and fooling them until they are all believers. This is how the 13 year Tech Stock Bull unfolded from 1986-1999, and it’s how this Gold Bull is unfolding before your eyes.

It is interesting that Gold bottomed a few times and bounced off the 1070 areas, and then made what appears to be a final bottom around 1042 on February 5th and has rallied hard since then. In my opinion, Gold rallying past the 1040 and 1070 fibonacci pullback windows and now over 1,100 is indicative of a new wave of bullish advance taking us to $1325-$1350 at the next pivot top in Gold. It is as if Gold just cleared two important psychological hurdles at 1040 and 1070, and yet we see articles talking Gold down.

What many market pundits do not understand about Gold and its ascent since 2001 is that Gold is real money. Since most world currencies are nothing more than “burning matches” in a debt ridden world, Gold rises to the top of the asset class charts.  If you look at the Dow Jones average relative to Gold prices in the past ten years, you can see what real money is doing. The Dow is flat over ten years now while gold is up nearly 400% in the same period of time. Measure the Dow or the SP 500 index against Gold as your money indicator, and we are still in a major 10 year plus bear market. Folks, the Kondratiev winter is still here and the weather is about to get a lot colder.

In the winter cycle, all debt gets washed out of the system and this creates all kinds of carnage. Gold becomes favored “money” in this type of cycle.  Once this cycle completes, the “spring” comes and we start anew.  In the interim, look for Gold to continue ever higher and look for continuing trash talk by the pundits who don’t  get it.