The bailout is on track to rack-up another $800 billion. That’s in addition to the original $700 billion, which is in addition to $25 billion here and there to rescue various financial service firms before the $700 billion and the roughly $135 billion of other funding that was attached to the $700 billion.

This brings the total amount to over $1.6 trillion dollars

And people are fussing over $25 billion to the auto industry?

Since the start of the talk of bailouts, I thought that $700 billion was low. The price tag will likely be around $3 trillion dollars. 

Several recent factors appear to lend credence towards that estimate.
1. The US Government appears to be moving towards taking direct stakes in banks;
2. Despite falling gas prices, the pain on US consumer may increase - if so, the government may decide to directly help the consumer and pick up a portion of the consumers mortgages/debt -much like Mexico did after the collapse of the peso in 1994.

Once the full cost of the bailout is known, their might be another short term buying opportunity in the market as retail investors re-evaluate the stability of the market and the US’s ability to pay. But I believe that most institutional investors have already factored in this size of a price tag and would be buyers at lower prices.

Altria (Philip Morris), Diageo, McDonalds and Microsoft.

A long time ago I used to work on Wall Street. For many years, I’ve thought stocks were way too expensive to be an interesting asset class.  For better or worse, they are starting to look attractive again and I can’t help but write about some of the stocks I think are worth keeping an eye on.    With the market down as far as it is,  stock prices are starting to reflect the reality of underlying fundamentals. But keep in mind that the downturn in the market may have a ways to go -driven by people being spooked or needing cash and therefore pulling money out of the market.  

I am not a registered or licensed stock broker. These are strictly the opinions of someone who enjoys the market as a hobby. I do not actively invest and have not, for years. My efforts are focused on growing our company, Vertabase (because I believe in the rewards of enterpreneurship and creating and selling products that add value).  That being said, I do own some individual stocks (outside of those in mutual funds). If I write about them I will tell you.

So, here is a short list of quality shares which could be bought on the cheap. They may yet get cheaper but they stand a good chance of making it out of the current bear market as being great investments. They are consumer staples that can generate cash.

Altria (Philip Morris) -MO
McDonalds -MCD
Microsoft -MSFT (I own Microsoft stock.)
Diageo -  DEO

Here are two strategies for approaching those stocks. 

1. For those who need to be in the market, I would recommend buying on the way down.
2. For those who can sit on the sidelines, keep an eye on these stocks. Put them on a watch list. Buy them when you feel you could sleep well even if, in the short term, they fell below where you bought them.

The affect of retail investors pulling money out of the market in general, cannot be overstated. It can continue to put downward pressure on stocks in general for a while.  If there’s interest, I could do an analysis on how much money is left that could be pulled out and how long the effect of declining retail investment in the market could last.  Just let me know in the comments.

Europe has been unable to put together a comprehensive, continent wide solution to their credit crisis.  Each country is acting in their national interests and standing behind their own banks.  This makes sense. That’s what those governments were elected to do. However, this could have several important, long ranging consequences -all of which should benefit the US Dollar and the US Economy.

1. Global flight to quality -people will move their money to the banks with the highest amount of credible quarantees on their deposits.  These guarantees come from the government. People will be voting with their feet as to which country they believe is most capable of standing behind the quarantees and actually paying out if it becomes necessary. 

2. Currency values will reflect people’s perceptions of a country’s ability to pay.  Since this is ultimately a measure of the productivity of an economy this should benefit the US Economy.  There is still no other country in the world that can match the US’s ability to innovate, create and produce. Nor one with the same track record of doing so over long periods of time and through the troughs and values of brutal economic cycles.

3. European unity and the viability of the Euro could suffer. A single currency makes commerce and travel convenient. But there are two facets to a currency. One is as method of exchange. The other is as a store of value. Not every country in the Union has the same resources to support its banks.  This will create tangible differences in the value of a Euro in a German bank versus in a Dutch bank.  This should further benefit the US dollar in the long term.

Wall Street really has evaporated and the commercial bank has won as the dominant business model.

While I wrote about it a few days ago, who knew it would’ve come so fast -with the government actually converting the last two remaining Wall Street investment banks into commercial banks.

This is great news for the American Economy.  On the one hand, it wipes out the extreme profits large investment banks have had to aim for since the deregulation of brokerage commissions in 1975.  On the other hand, it cuts off avenues for extreme risk taking in secondary markets.

This should translate into more funds being available for lending in the primary markets -directly to businesses -based on the strength of a business, rather than being based on the hope of being able to flip that obligation to a greater fool in the secondary market.

Every once in a while I feel compelled to put my economics degree to use.  This is one of those times.

There’s a tremendous amount of pain around the collapse of Lehman Brothers.  I don’t want to belittle or take attention away from that pain. I have been in two market collapses myself (Latin American stock markets in 1994 and the internet business in 2001) and it is not fun.

But there is a silver lining in the collapse of Lehman.  Lehman’s bankruptcy, along with Bank of America’s purchase of Merrill Lynch and Bear Sterns disappearance are the end a particular type of business: the large scale broker-dealer investment bank.  These banks made huge amounts of money in secondary markets for stocks, bonds and financial products derived from other underlying assets.  The money in these markets is primarily traded among participants in those markets.  It does not directly go to the companies, governments or people whose name might be on those assets. 

For example, when somebody buys a share of Coca-Cola, Coca-Cola itself does not get any money from that transaction. It is made between a buyer and seller of that share.  The seller gets the money. The buyer gets the share. Coca-Cola gets nothing. Similarly, when another bank buys your mortgage from the company that originally provided it to you, you don’t get any money.  It’s simply a transaction between two banks.

To be sure, the secondary market has a role in the ability of companies, governments or people to raise money.  A lender or initial buyer is more likely to give you the money to start with if they believe they can easily unload that loan/sell it to someone else at a good price. But ultimately, they are not giving you the money because they think it’s a good place to put money. They are giving you the money because they know they can easily flip it for a decent profit to someone else.  In economics, this is called the greater fool theory. There will always be a greater fool to buy it –until there isn’t.

And the broker-dealers became the greatest fools. There was no-one else to sell it to. They were the end of line. 

The why’s of what drove the broker-dealers into this kind of risky decision making lay in the deregulation of commissions on stock trades in 1975 and the repeal of a Depression era piece of legislation called the Glass-Stiegel act.  Those are for another blog post.

What’s important now is that with the demise of the big broker Wall Street business model, traditional banks can grow the amount of money they have on deposit.  And this is good for entrepreneurs and small business in America (the backbone of the US economy).  Unlike a broker-dealer, a traditional bank (like Bank of America) makes it money by keeping money for people or companies and lending a percentage of it directly to other companies or entrepreneurs with ideas for real businesses. There’s little room for a greater fool. A company or person’s assets are often directly on the line in these type of loans. It’s money that has to be paid back.  It is also a source of financing that is more accessible to a small business person, shop owner or parts manufacturer. That small business person, in turn, needs to put that money to work in something that will directly produce more money –not through flipping it but by turning into a product or service that people will pay for. America is a country full of energetic, creative, hard-working entrepreneurs and business people.  The increased availability of bank lending can help unleash their energy.

The stock market and the secondary market of bonds and mortgages have not disappeared and should not.  They are important parts of the Economy’s engine for growth.  What has changed is certain participants in these markets are no longer there.  These participants had a lot of money. But they also had incentives to make bad, unproductive decisions –decisions based on the finding a greater fool.

In the short term, the market for bank financing may tighten as the greater fool based money sources are weeded out of the system. The pain this will cause and how long it will take are going to be affected by the government bailout. Specifically, is $700 billion going to be enough? Will the new regulations protect smaller investors yet still let Wall Street pass away? But in the long term, the demise of Wall Street should be a good thing for bank lending and the investment of capital in truly productive assets which can sustain growth in the US Economy for years to come.

It seems like the privacy features in IE8 could pose a threat to Google’s ad revenue.  With the ability to hide where a user came from prior to arriving at a website will this impact Google’s ability to track click-throughs?  If users choose to keep this on, will it limit the usefulness of the data collected by Google’s web-analytic’s suite, Google Analytics or related tools used to optimize ad spending?

If so, the launch of Google Chrome might be more than a bid to take market share from Microsoft or offer a Google-based platform for the web as OS -it might be a first defense against protecting their main revenue generator -Adwords.

YouTube would be a bad move for Google.

It is bad for shareholders since it makes Google less competitive on search since it provides a disincentive to make any advances in search technology. It also may create additional legal exposure for Google in terms of click-fraud lawsuits.

It is also bad for advertisers since it dilutes the value of Google’s ad distribution network. Advertisers are the life-blood of Google’s revenue model.

Hurting Search.Search is ultimately the utility that has made Google popular and that has made Google the default start for most people on the internet. Search is still extremely important to the internet and has a ton of value left in it as a function.

There are plenty of competitors ready and waiting to eat Google’s lunch in search.

The more content that is covered by Google’s ad distribution network, the less incentive Google has to fine tune its search technology.This is discussed in previous posts.This is especially the case for the untargeted, un-controlled content of YouTube.

Legal Exposure. The YouTube acquisition also creates another arena for link farms and click fraud. Only, in this case, it would be video click fraud and Google would own the content distribution network.

Google already has a challenge protecting its advertisers from click-fraud and the integrity of its search results from link farms and the such without owning the content or the content distribution network. This has provided a clear line in the sand.

By acquiring YouTube, Google may be opening up a whole new set of boundaries it will have to define in court as to where its liability/responsibilities stop and where it becomes the content producer’s fault.

Bad for Advertisers. It is the kind of untargeted content of YouTube which is a negative to brand advertising. (Unless Google plans on taking a more network Television type approach to having input with the content creators on YouTube -which is highly unlikely and would likely squash YouTube’s popularity). Brand advertisers crave targeted, well defined channels. By aggregating more untargeted content in its network, Google is creating a larger market place for bidding on big umbrella keywords, like deodorant, without adding additional value to the advertisers.

By increasing the demand without providing more value-ad, the short term result maybe higher prices for the keywords (and more revenue for Google). The longer-term results may be the defection of advertisers of all sizes.

Brand advertisers are often cited as a large avenue for future online revenue as big brand companies move a larger portion of their advertising budgets to online advertising.

Microsoft in the late ’90’s? In some ways, the talk of Google and YouTube is reminiscent of Microsoft’s foray into content in the mid to late 1990’s. In hindsight, Microsoft’s acquisitions and investments in those areas now look like a distraction. And while Microsoft was distracted, it’s growth slowed and the door opened to a whole new wave of competitors -including Google.

Does Google’s very economic model cause it to violate its principle to “do no evil?”

In all fairness, the same question could be asked of all automated ad distribution networks, not just Google’s Adwords program.

Looking at how the ad networks work, it seems that the more content there is on a subject (that is, the more popular or broad a keyword is), the more competition there will be for producers of that content to get noticed.

Therefore, producers will bid-up the price of an ad on that keyword. Is this the most efficient way for searchers to find relevant results?

One thing, this potential inefficiency in search relevancy has created an entire industry of search engine optimization specialists. These are people paid to understand the functioning of search algorithms for clients. It has also created an industry of link farms and black-box tactitians who exploit the gaps in the search algorithms.

(Note, this does depend on the assumption that many of the content producers are also vendors or sellers of goods or services within that broad category.)

One would think that the more content there is, the more need there is for the search engine itself to do a better job at sorting the data.

But, if the end result of this inefficiency is more revenue per click for Google, Yahoo, MSN or the owners of other ad distribution networks, do they have any incentive to improve the quality of their search, to do a better job?

Or, are they incentived to hold-back innovation and profit off the status quo?

p.s. For those with a long memory, this reminds of an observation by Jeremy Allaire, founder of ColdFusion, years ago, on why the browser stopped going forward once Internet Explorer became dominant.

Bainbridge OMPG carries on an interesting exploration on the value of automated ad distribution networks to distribute ads across offline media.  That is, does it make sense for advertisers to hire companies like Google, Yahoo or MSN to do their non-online media buying?

(Which brings up another question on how much media convergence is really valuable for brand advertisers -but that’ll have to wait for a different day).

The Bainbridge post talks in terms of relevancy and targeting.

Another angle to bring into the discussion is the supply of online content and the ease with which it can be created. While television channels have proliferated in the last two decades, and video content is ever finding new places to be viewed, it pales in comparison to the amount of content available on the web.

It is really cheap and easy to create a web page (which is not the case with a TV show).And it doesn’t require a license from the FCC to broadcast it.

The overwhelming ease of supply has the potential to destroy the integrity of the search results and therefore erode the value of ad distribution bots. Since the barriers to entry are higher for creating and broadcasting or disseminating?offline content, advertisers and media buyers should continue to get a bigger bang for their buck with offline content. -At least until the search engine networks figure out some way to further fine tune their alogrithms.

Here’s an example of what I’m talking about. Take the keyword “deodorant.” There are nearly 9 million pages Google found that it thinks are relevant to the term deodorant.

There is a neat metric called the KEI (keyword effectiveness index) which compares the supply of webpages which are relevant to a term versus the demand for that term. It is a scale of 0 - 400, with 400 being the most effective keywords. The KEI for deodorant on Google is 0.00. That means that the supply of websites, the supply of content, outstrips demand by a near infinite amount.

An automated ad distribution bot doesn’t know which of those are most revelant to an advertiser. It will broadly distribute those ads. This is fine if the marginal cost of each ad is near zero.

The problem is that with such a large amount of competition, owners of those content sites will likely start to bid up the cost of that keyword to make sure their content or product gets seen. (Which, of course, doesn’t give the ad network much incentive to change since its collecting the money.)

A second problem with the ease of content creation and the volume of content is that it increases the opportunities for click-fraud, link farms, and other practices which further degrade the value of the ad network.

A third problem is that the content doesn’t cost the ad network anything. They are capitalizing on other people’s work and do not have an ownership or any accountability to the content owners. Therefore, they have very little incentive to protect the integrity of a particular ad.

Google, for example, does not have any practice in place to stop a rival advertiser for flat out stealing another advertisers ad.

A television network is dependent on advertisers for revenue. The network and media buyers protect the integrity of the ads and, to some degree, the content of the ad outlet (the content and programming).

In the world of Google and other automated ad distribution networks, it is the content providers and advertisers who are dependent on them. Its not a winning dynamic for a big brand advertiser.

Search engines may be stifling the success of software companies. How?  By assuming all searchers are the same.

In general, a software company writes for a target audience, its intended customer base. That audience may or may not be people who spend a lot of time on the internet or in the blogosphere. (For brevity, let’s call those who do spend a lot of time on the internet and blogosphere netizens.)

However, it seems that search engine rankings are determined, in large part, by the amount of presence a specific url has on the general internet and blogosphere. The more a particular software is talked about by netizens, on net-based outlets like blogs, websites and forums, the higher the likely ranking of that particular software on a search engine.

Due to their popularity, search engines are often the first place people turn-to when looking for new software. This is particularly true of non-netizens who don’t know the specialized websites or back corners of the internet where they can find insider information on software or technology.

So, the non-netizen goes to the search engine and searches for the type of software its looking for.  The results come back ranked by the amount of buzz by netizens.

The ranking may be a perfect set of choices for one particular user, say a netizen or those who are looking for the same thing netizens value. But the results might not be a good set of choices for the needs of the non-netizen.

The right software might be buried deep on some double digit page of the results.

The non-netizen may never find the right software. The software company misses out on the customer (and therefore the revenue). Both sides lose.

There is a potential paradox here. That those who most need the help of search engines to find the right product, are least likely to find the right fit in the search results.