The Business Insider: Henry Blodget

Kudos To AOL's Tim Armstrong... Here's To A New Beginning In 2010

Henry Blodget — Fri, 20 Nov 2009 12:11:00 -0500

AOL's Messy Holiday Season (4 min)

2,500 employees to quit or be fired before spin-off in December
Voluntary buyouts offered
Armstrong foregoes 2009 bonus
Here's to a new beginning for AOL in 2010

Produced By: Kamelia Angelova & William Wei

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When Will Tim Geithner Resign?

Henry Blodget — Fri, 20 Nov 2009 11:17:00 -0500

Geithner's Resignation (3 min):

Grandstanding congressmen said the public has lost faith in Geithner
Geithner-to-Goldman clock now ticking louder...
Should the Treasury Secretary resign?
When?

Produced By: Kamelia Angelova & William Wei

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Geithner-To-Goldman Clock Now Ticking Louder...

How To Survive The Coming Global Economic Collapse

Henry Blodget — Fri, 20 Nov 2009 10:10:00 -0500

The following excerpt is from the blog "Surviving In Argentina," by Fernando Ferfal Aguirre.

Ferfal lived through Argentina's economic implosion in 2001. Here, he shares some of his secrets to survival.

So, guys, things don’t look good.

It pains me to see America going through this and the consequences it will bring.

These are critical days. Now is when we’ll get a better picture of how bad things will actually get, how long until we see the economy back on its feet. Instead of trying to guess what will happen, let's go through some things you should to right now, if you haven’t taken care of them already.

First, how about what NOT to do?

*Don’t open your big mouth!

It’s ok that you feel all nice and warm about the 1/5/whatever year food supply you already have, but there’s no need to talk about it with the guys at work, the neighbors, friends or even family that is not directly related.

Other than my wife and kids, these are things that we simply do not talk about with people that know us, know our faces, names and know where we life.

Next thing you know someone’s knocking on your door, asking for favors you simply can’t afford.

Not long ago a friend asked if I could lend him a gun for self defense… yes, right.

Here, the owner of the gun is responsible for it and is not allowed to lend it to other non licensed persons. Other than my brother, I’m not giving a gun away to just anyone.

*Don’t waste your money!

How many times have we read about paper money only being good for TP after a crisis?

Though it may have happened in some extremely primitive nations, or countries destroyed by war, do not expect that to happen in USA. It won't. Rather the other way around, you’ll consider it a precious commodity even more. As prices go up, you’ll save every penny.

If you already have savings you want to protect, buy precious metals, or if you have enough money, buy real estate. It’s a buyer’s market right now.

A small apartment would be a good investment.

Give it a few months, you’ll see rent prices go up in no time.

People can’t get loans to buy or they don’t have the money, so people start renting more. More demand, prices go up.

*Don’t run for the hills

This isn’t a hurricane or flood, you can’t run from this.

Running to your bug-out location and “living off the land” is a terrible idea, almost as stupid as thinking about quitting your day job to start growing corn.

If you are a farmer and that’s what you do for a living, that’s just perfect. But if you are doing it as part of preparedness for the end of the world, you need to think things a bit better. For a farm to be a profitable, you need a margin of production large enough to make it economically sustainable.

Farming as a way of producing your own food is a terrible mistake. Spending an entire day to produce the food equivalent of what you can buy with 15 minutes of your current salary isn’t smart.

Yes, inflation, I know about it, as a matter of fact I know about it very well, but the solution isn’t growing your own food, building your own car, building your own house, digging your own petrol site or fixing your teeth yourself. :)

The solution is making more money and reducing expenses as much as possible.

Money ( in one form or another) makes the world go around and it’s been this way for more than 10.000 years, wont change any time soon.

No more toys, guys, at least for a while.

Ok, now for things to do...

Keep reading at Surviving In Argentina >

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SocGen: Prepare Yourself For The Worst Case Scenario!

Geithner-To-Goldman Clock Now Ticking Louder...

Henry Blodget — Fri, 20 Nov 2009 08:54:00 -0500

UPDATE: Secretary Tim Geithner got hammered on Capitol Hill yesterday. Congressmen said the public has lost faith in him and asked for his resignation.

Why has the Geithner rage flared up now, a full year after he reamed taxpayers to save Wall Street?

Because a year ago, everyone was worried about the whole world ending, so no one cared about the details. Now, for Main Street, the world has ended: The unemployment rate is over 10%. On Wall Street, meanwhile, times have never been better. That inequity has made Americans mad as hell, and Congress isn't going to take it anymore.

So it's time to revisit our Geithner-To-Goldman Clock!

As you'll recall, this clock is counting down the days, hours, and minutes until Tim takes his seat at Goldman Sachs. When you've got a guaranteed job at Goldman Sachs, you make chicken-feed public-servant wages, you can't sell your house, and you've got annoying Congressmen bitching at you on live TV, your days as Treasury Secretary are numbered...and our clock reflects that.

But!

You'll notice that the clock is still saying that Tim won't take his job at Goldman until 2012. Why are we keeping it there, even though it now seems that Tim will depart for the private sector much sooner than that? Because right now, if Tim jumped directly to Goldman, the resulting outrage would probably trigger World War 3.

Given the outrage about both Tim and Goldman these days, as well as the suspicion that Tim has been secretly working for Goldman all along, Tim will have to twiddle his thumbs at a private-equity shop for a while. Carlyle and Blackstone are too high profile--they would have the same perception problem. But there are plenty of other shops that will happily pay Tim $5 million a year to make a phone call and come into the office once in a while. So he'll probably spend a couple of interim years there.

EARLIER: Treasury Secretary Tim Geithner has survived his early brush with death.

He has recovered from early missteps, and those who still loathe the Wall Street bailouts, PPIP, AIG, and other Geithner policies have cooled down now that the stock market is rising.

So, for the moment, Geithner's job is safe. Which means he can start focusing on the next one.

It sucks to be paid like a government employee when most people you work with and schmooze with are loaded. Especially when you can't even unload the dime-a-dozen million-dollar house in the burbs you got stuck with when you were a nobody.

But the good news is, when you've been Treasury Secretary, and when you've done as much for Wall Street as Tim Geithner has, you don't have to paid like a government employee forever. You can just jump into the empty chair at a dozen firms that's already reserved for you the moment you want it.

So when is Tim Geithner going to Wall Street? Which firm will he join? How much will he make? Where will he live?

We've made our best guess on the first question--one year into President Obama's second term (yes, there's an assumption embedded in there, which could well be wrong. If it is, Tim will be in the money even quicker). And we're pleased to announce the launching of our Geithner-To-Goldman Clock (below), which will conveniently count down the days, hours, minutes, and seconds until that happy moment occurs. We'll republish it occasionally, so you can monitor how much longer Tim has to scrimp and save.

As for the other questions, we need your help! What's the wisdom of the crowd?

To make this easy, we've put together three polls, which will capture and calculate the results. You can register your votes and see all the results here >

Or you just choose a poll from the list below:

Which Wall Street Firm Will Tim Geithner Join When He Leaves Treasury? >

How Much Will Geithner Make Per Year On Wall Street After He Leaves Treasury? >

Where Will The Geithners Live When Tim Geithner Goes To Wall Street? >

And of course, feel free to weigh in on the timing of Tim Geithner's departure for Wall Street in the comments below.

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Whoops: Stocks Now 20%+ Overvalued

Henry Blodget — Fri, 20 Nov 2009 06:14:00 -0500

Stocks have jumped 65% from the March lows. They have also blasted past fair value, which is about 900 on the S&P 500 on a cyclically-adjusted price-earnings ratio (see professor Robert Shiller's chart below). So, unless it's different this time, they're now more than 20% overvalued.

(Jeremy Grantham puts fair value at 880 on the S&P 500. That seems a bit precise. Let's call it 900).

Of course, today's overvaluation doesn't tell you much about what stocks will do next week, next year, or even the next 5-10 years. As the chart above shows, before the 2007 market crash, stocks were overvalued for the better part of 20 years--and observing that didn't help you make money. On the contrary, it usually got you fired.

What today's valuation does suggest is that stocks are priced to return a bit less than average over the next decade, perhaps 3%-4% real per year (inflation adjusted), as compared to the 6%-7% average.

Today's valuations also suggest that stocks may have gotten way ahead of themselves, especially in light of the structural problems that will continue to bog down the economy.

As the chart above illustrates, every one of the prior mega-busts in the past century has been followed by a "trough" in which the cyclically adjusted PE ratio hit the high single-digits. We didn't quite make it there in March (the P/E bottomed around 12X), although we did get close.

This, combined with what is likely to be a decade of deleveraging, consumer retrenchment, and sluggish growth as we work off our debt binge, suggests that we still yet might hit that single-digit low before we take off on another secular bull market again. This could be achieved either through another market crash, or a prolonged period of backing and filling as earnings growth gradually reduces the long-term PE ratio (this is what happened in the 1970s).

On the other hand, it is possible that that enormous stimulus and zero interest rates over the past two years will produce that "v-shaped" recovery. At this point, given the extent of the recent rally, it would presumably have to be one heck of a "V" to send stocks soaring from here. But the last eight months have already made idiots out of almost everyone.

See: The Stock Market Rally That Turned Gurus Into Fools

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Felix Salmon: Henry Blodget Should Be Banned From The Industry

Henry Blodget — Thu, 19 Nov 2009 14:13:00 -0500

The king of financial bloggers, Felix Salmon, is annoyed by me.

Specifically, if I read him correctly, Felix is annoyed that:

1) I have a job that in a just world would belong to a normal out-of-work journalist who hasn't been at the center of a huge financial scandal, and

2) I have not explained every last detail of my scandalous background in my Business Insider bio, which states merely that, at the end of my Wall Street career, I was "keelhauled by then-Attorney General Eliot Spitzer over conflicts of interest between research and banking."

Well, it is no fun to annoy the king of financial bloggers, so let me address these points, starting with the second one.

In the 7 years since I settled the widely publicized civil securities-fraud complaint brought against me by Eliot Spitzer and the SEC, I have contributed commentary to more than a dozen news organizations, including Slate, Fortune, NPR, MSNBC, CNN, FT, the BBC, The Atlantic, Forbes, The New York Times, Bloomberg, EuroMoney, Yahoo (I'm a host of their finance show, TechTicker), and CNBC. When appropriate, I have gone to great lengths to detail every last bit of what had happened, so the readers, viewers, and listeners of these organizations would know exactly who they were dealing with (cue scary music).

In the early years, I also launched my own blog, Internet Outsider, in which I addressed what had happened in as much detail as I was able to. (Thanks to various legal agreements, I have never been able to discuss the allegations publicly. Eventually, when there's not a soul left on earth who gives a damn, I'll be able to tell my side of the story. My grandchildren will love it!)

Two years ago, when we launched Business Insider, I again frequently discussed what had happened to me, lest there were any readers who had not already gotten sick of my story. This effort was made easier by the help of the folks who posted Eliot Spitzer's press release in the comments whenever I said something they disagreed with. Whenever possible, I responded to readers' questions about the allegations as directly as I could. And I continue to do so today.

I am glad to say that, 7 years after my run-in with Eliot, 2+ million readers a month are now giving me the chance to earn back their trust one post at a time. As I have often said, I will forever be grateful for that.

In case there are some readers who do not fully appreciate the depths of my alleged depravity, however, here's a quick summary:

From 1996-2001, I was a technology analyst on Wall Street

From 1999-2001, I ran the global Internet research team at Merrill Lynch, where, in 2000, I was the top-ranked analyst in the industry

In 2002, after I left Merrill, Eliot Spitzer attacked the way research analysts and investment bankers had worked together in the 1990s, alleging that the conflicts and tensions in this relationship had rendered some of my research fraudulent and/or misleading. Eliot was kind enough to drop me from his lawsuit before settling with Merrill, but the SEC then brought the same civil charges against me.

In 2003, I settled the SEC's charges without admitting or denying them. In the context of this settlement, I "disgorged" an astronomical amount of money ($4 million) to compensate those I had allegedly defrauded. I also agreed to a bar from the securities industry.

From 2003-2007, I defended some of the hundreds of civil lawsuits that had been filed against me as a result of Eliot's allegations. The vast majority of these lawsuits, I am glad to say, were dismissed. The others, I am even more glad to say, resulted in no judgements against me.

In June of 2009, the SEC announced that it had finally figured out what to do with the $4 million I had given it to compensate those I had allegedly defrauded: Turn it over to the Treasury. As it turned out, to my great relief, so few investors had filed grievances that my disgorgement had mostly accrued interest for six years. And now, I am happy to say, it has been used to reduce the national debt.

In August of 2009, I did a 45-minute video interview with Eliot Spitzer, in which we reminisced about our respective scandals, discussed politics, regulation, and Wall Street, and observed how ironic it was that the first step in each of our "comebacks" had been writing for Slate. This interview was written up all over the place.

Over the years, I have described some of this for Business Insider readers (and others) who have not yet gotten completely bored of it. Since we launched the site, I am also happy to say, I have not gotten a single complaint that my disclosure of my scandalous past is inadequate.

Until the king of financial bloggers became annoyed by me.

As I mentioned above, Felix is not just annoyed by my disclosure. He is also irritated on behalf of journalists everywhere who have been downsized and now have no place to ply their trade. If there was any justice in the world, Felix seems to be saying, one of these journalists would be sitting in my chair instead of me.

Well, let me first say to out-of-work journalists everywhere, I am sorry that the organization and industry that you poured your heart and soul into has cratered. From the perspective of those getting disrupted, creative disruption sucks. I can certainly sympathize with not being able to work in your chosen profession. Happily, I can also respectfully suggest, that, with luck, your fresh start will lead to something better.

As to whether I deserve to be sitting my chair...

I feel like I do, in part because I helped create it. Two years ago, where there is now a thriving company, there was nothing but air. Now, thanks to the efforts of my colleagues, our investors, and our awesome readers and clients, Business Insider is read by more than 2 million people a month. It has also, I am happy and proud to say, created 20 full-time jobs, including 10 for journalists.

In the next few years, if things go well, I hope we can employ 30 or 40 journalists. This will not replace all the jobs wiped out by the collapse of the newspaper industry, but it will help ensure the success of the next generation of business journalism. And, in some small way, it will help our economy crawl out of a hideous hole.

If we defy the odds and make that happen, will it erase my scandalous past?

Of course not.

But, with luck, it will make the king of financial bloggers less annoyed by me.*

* In the meantime, to protect future readers and pacify Felix, I've also added six more words to my bio: "...and booted out of the industry."

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Blodget's SEC Fine To Reduce National Debt By $4.2 Million

Obama Trying To Figure Out How To Extend Bank Bailout Without Triggering More Public Outrage

Henry Blodget — Thu, 19 Nov 2009 07:38:52 -0500

The White House finds itself in a pickle: How to extend the TARP bank bailout without so enraging voters that incumbent Dems get the heave-ho next year.

And here's one creative solution on the table: Use the rest of the TARP to reduce the national debt!

Doesn't that sound good?

Well, of course it does. Except that it's ridiculous spin. The government borrowed money for the TARP. Using what remains to "reduce the national debt" would simply mean giving our lenders (some of) their money back.

Meanwhile, however, other legislators are desperate NOT to return the TARP money to lenders but to use it for additional stimulus--this time of the allegedly job-creating variety.

David Cho, Michael D. Shear and Lori Montgomery, WaPo: The Obama administration is poised to extend the life of the highly unpopular $700 billion financial bailout and, to display a commitment to fiscal responsibility, is planning to use much of the leftover funds to reduce the national debt, government sources said.

Administration officials are grappling with how best to announce the extension of the Troubled Assets Relief Program at a time when the economy is struggling and the unemployment rate is at its highest point in 26 years. The officials are hoping that by putting roughly $200 billion toward paying down the $12 trillion national debt, they could mitigate the political fallout, the sources said.

No final decision about the fate of the bailout has been made, and officials are keenly aware that their preferred course contains risks.

Keep reading >

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AOL May Dump Dying MapQuest, Too

Henry Blodget — Thu, 19 Nov 2009 06:41:00 -0500

AOL's wise urge to dump dead wood, non-core properties, and fat has finally led it to MapQuest:

Kara Swisher: [A]ccording to sources inside and outside AOL, one of the next candidates for sale could be its MapQuest online map service.

Purchasers for the service that provides mapping and directions, sources said, are likely to be other mapping giants, especially Microsoft (MSFT).

But it is not clear if the software giant or anyone would fork over a huge sum of money for MapQuest.

No, it isn't clear. But it doesn't make much sense to keep starving it to death, either. (Only two good routes here: Make it great again or sell it...)

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Ken Griffin Used To Send Driver 200 Miles To Pick Up Milk Shakes

Henry Blodget — Thu, 19 Nov 2009 06:25:00 -0500

Ah, the good old days...

WSJ: As [Citadel founder Ken Griffin's] wealth grew, he became a collector of art and Ferraris. He occasionally dispatches his driver on a 200-mile round trip to fetch milkshakes from LeDuc's Frozen Custard in Wales, Wis., near where Mr. Griffin grew up. The folks at LeDuc's refer to the financier as "the man of a thousand shakes," based on a birthday order in 2004 that was so big, it got shipped to Chicago in a truck.

But Mr. Griffin's driver "hasn't been around in maybe six months or a year," says Jim Shackton, owner of LeDuc's, whose staff in past years came to recognize him when he'd pull up to the little pitched-roof custard shop in a silver Mercedes sedan. ("Nice car," Mr. Shackton says.)

Read the whole thing >

What's so special about LeDuc's?

Waukesha's #1 Choice for Frozen Custard Restaurants

Welcome to LeDuc's Frozen Custard Restaurant, where we pride ourselves on serving only the highest quality food, drinks and frozen custard products. Our commitment to using only choice ingredients insures that whatever you eat from LeDuc's will be the best it can be.

Everyday at LeDuc's we produce three fresh custard flavors for you to enjoy: chocolate, vanilla and a flavor-of- the-day. As with all of our products, these are made using only the highest quality homemade custard mix. Stop in and try one of our delicious custard treats and you will see why Leduc's custard is famous throughout Waukesha County.

Our flavor-of-the-day is selected from an ever-growing list of about different 75 flavors! We pride ourselves in carrying, at all times, the largest selection of packaged custard, which is available in pints and quarts.

In addition to our take home packaged treats, we offer an extensive menu, which includes:

Delicious Frozen Treats

Sundaes: Basic, Dusty, Armadillo, Turtle, Chiquita, Monthly, Banana Split
Shakes & Malts: Thick or X-Thick
Cones: Regular or Waffle
Packaged Frozen Custard

Fantastic Sandwiches:

1/3 lb. Burgers: Black Angus or White Turkey
Hot Dogs: Regular, Chili, or BBQ
Bratwursts
BBQ
BLT (and Turkey BLT!)
Pulled Pork
Hot Roast Beef
Turkey Deluxe
Cod Fillet
Bacon Cheddar Chicken Ranch
Chicken Tender
BBQ Rib Sandwich

Extras:

Soup-of-the-day (Seasonal)
Chili
Fries
Onion Rings
Mozzerella Sticks
Chicken Tenders

Specialty Items:
(For Special Order only)

Custard Pies: Turtle, S'More, Grasshopper, Toffee, Neapolitan, Peanut Butter Cup, Cookies n Cream

Conveniently located 3 miles south of I-94, just east of the Hwy. 18 - Hwy. 83 intersection.

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Citadel Making Comeback But All Anyone Wants To Talk About Is The Crash

Henry Blodget — Thu, 19 Nov 2009 06:08:00 -0500

After a disastrous 2008 that almost destroyed the firm, Citadel is up 58% for the year. Ken Griffin has reduced is flying all over the globe, trying to raise money. Alas, all anyone wants to talk about is last year...

Jenny Strasburg and Scott Patterson, WSJ: Hedge-fund titan Kenneth Griffin lost $8 billion of his clients' money last year.

Now, he is trying to persuade investors to trust him with more.

"We showed a level of human fallibility," he told his staff at a late-September lunch in Manhattan.

The price of fallibility: a 55% loss in the big hedge funds at his firm, Citadel Investment Group. His funds' declines far outstripped the 19%, on average, that hedge funds lost as a whole, according to Hedge Fund Research Inc. For the past year, Citadel prevented investors from withdrawing money they wanted to take out from his two main funds, Kensington and Wellington.

Mr. Griffin is looking for the next big opportunity even though the hangover from the last one is fresh in clients' minds. He is launching four new funds and expanding in investment banking -- hoping to fill the profitable hole left by the collapse of Lehman Brothers.

Keep reading >

(btw, where does being down 55% one year and then up 58% the next leave you? Down about 30%).

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The Most Important Housing Chart Shows Things Are Still Getting Worse

Henry Blodget — Thu, 19 Nov 2009 05:39:00 -0500

Bulls are beside themselves about the recent housing recovery in house prices: It's off to the races again!

This is a happy theory, but the trouble with it that the fundamental problem in the housing market is still getting worse, not better. To wit: In the bubble years, we just built too damn many houses.

This overbuilding has led to record vacancy rates, both in rentals and in rentals plus owner-occupied (not) housing. This situation is not getting better. On the contrary, it is getting worse.

This chart from Calculated Risk tells the story. The red line is vacancies. The blue line is housing starts. Calculated Risk wisely observes that housing starts will not return to normal until we need more houses. And we won't need more houses until vacancy rates start to drop.

Now, the National Association of Realtors (and others) have made huge noise about the recovery in Existing Home Sales. This recovery is largely due to falling house prices, falling mortgage rates, and the home-buyer tax credit (which pulled demand forward). Importantly, however, just because houses are trading does not mean that they are being filled.

Part of the issue here is that the home-buyer tax credit, et al, have encouraged some renters to buy instead of rent. When they choose to do this, they move into an owner-occupied house but vacate a rental. So the vacancy rate stays the same. The only things that will help the vacancy rate are:

New household formation
A surge in second-home buying (any day now)

Calculated Risk also notes the important connection between residential investment and the performance of the economy as a whole. In short, residential investment is a leading indicator. Without a pickup in residential investment--which includes housing starts--it's hard to envision a strong recovery in the economy. And it's hard to envision a strong recovery in residential investment until we work off some of this excess housing supply.

Here's Calculated Risk's excellent summary of the housing situation and its likely impact on the economy:

After reading some of the commentary regarding the housing starts report this morning, it might be useful to reiterate these three points:

Residential investment is the best leading indicator for the economy.

Residential investment will not recover rapidly because of the large overhang of existing vacant housing units.

Existing home sales are largely irrelevant for the economy...

This morning several commentators suggested that housing starts were depressed in October because of the expiration of the tax credit (new home buyers had to close by Nov 30th to get the tax credit), and also because of the weather. Probably. But the key point is that housing starts will not increase rapidly because of the large overhang of existing vacant housing units (see 2nd graph here). And that suggests that the economy will not recover quickly either.

Another key point is that existing home sales are largely irrelevant for the economy. This is an important point to remember next week when the NAR announces that existing home sales surged to 5.8 million units or so in October (seasonally adjusted annual rate). Some reporters and analysts will jump on the existing home sales report as evidence of a housing recovery. Others will point to it as showing that the first-time home buyer tax credit is helping the economy.

Both points are wrong.

The only contribution from existing home sales to the economy are some commissions and fees. That is good news for real estate agents and mortgage brokers, but not for the overall economy.

The good news is the level of inventory for new and existing homes is declining. The bad news is the inventory of rental units is at record levels - as is the combined inventory of vacant single family homes and rental units. Residential investment will not increase significantly until this overhang is reduced.

The key to reducing the overall inventory is new household formation (encouraging renters to become owners accomplishes nothing in reducing the overall housing inventory). And the key to new household formation is jobs. And usually the best leading indicator for jobs is residential investment. Somewhat of a circular trap.

And that suggests the recovery will be sluggish and unemployment will stay high for some time.

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Apple Tablet Delayed Until Late 2010, Says Taiwan News Source

Henry Blodget — Thu, 19 Nov 2009 04:48:00 -0500

Max Wang, Taipei; Joseph Tsai, DIGITIMES:

Apple reportedly plans to postpone the launch of its tablet PC from an original March launch schedule to the second half of 2010, as the vendor has decided to switch some components and plans to launch a model using a 9.7-inch OLED panel from LG Display, according to sources from component makers.

The sources also indicated that in addition to Foxconn Electronics (Hon Hai Precision Industry), Quanta Computer and Pegatron Technology are expected to be manufacturing partners for Apple's two tablet PC models - one of which will have a 10.6-inch TFT LCD panel while the other will have a 9.7-inch OLED panel. However, the sources did not explain how production for the two models would be split between the three makers.

Read the whole thing >

DigiTimes's sources also said the tablets will cost $1,200-$1,500 to make and sell for $2,000 to consumers. If that's actually true, the Apple tablet will be a flop--at least until the price comes waaay down.

Image: Adam Benton

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Introducing The World's First AOL EPS Estimates!

Henry Blodget — Wed, 18 Nov 2009 13:07:00 -0500

The Time Warner AOL spinoff values AOL at about $3.2 billion (pre-spin). This valuation is a reasonable 1X multiple of revenue. More importantly, it sets a very low bar for the stock going forward.

AOL has all sorts of problems, which we have described in detail here. But the spinoff valuation is low enough that the company should be able to generate enough cash to justify it even if the turnaround fails and AOL eventually dwindles away to nothing.

Thanks to AOL's dying subscription business, revenue and operating income will likely decline for the next several years. But major cost cuts will keep cash flow strong, and Tim Armstrong will likely be able to at least stabilize advertising revenue next year. Given that most people have written AOL off for dead, this sets the table for a modest positive surprise.

In short, even if AOL keeps crumbling, it will likely throw off $3 billion of cash before it dies. One way of looking at the stock, therefore, is that you get an option on the turnaround for free.

Below, we estimate how much cash AOL will generate over the next few years. We also introduce the world's first AOL EPS estimates. To wit:

2010E EPS: $3.20
2011E EPS: $2.80
2012E EPS: $2.45

We'll adjust those estimates when we see the magnitude of AOL's cost cuts, which should take place just after the spinoff.

Keep reading >

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Microsoft Already Stabbing Yahoo In Back - Trying To Steal Search Partners

Henry Blodget — Wed, 18 Nov 2009 09:07:23 -0500

The way the Microsoft-Yahoo search deal is constructed, Microsoft (MSFT) makes more money on searches conducted directly through Microsoft than searches conducted through Yahoo (YHOO) or via a Yahoo partner.

So no surprise then that Microsoft is reportedly trying to steal Yahoo's search partners.

Colin Gillis, Brigantine Advisors:

Adding to Yahoo's woes is the fact our checks have discovered Microsoft (MSFT, unrated, $30) is aggressively bidding for Yahoo's search partners -- the same partners that would fall under the MSFT-YHOO search agreement.

This reduces any revenue share that Yahoo would receive from Microsoft. While it is expected that the final search agreement has provisions for Yahoo to receive payments for search partners that are bid away to Microsoft -- we continue to point out that the transition process for Yahoo in search is painful - and any extended delays could increase the appearance that Yahoo search is "withering on the vine".

"Withering on the vine" is an understatement. It's time for Yahoo investors to recognize that the company's search business is basically done.

The company should and will continue to collect revenue share from Microsoft for a few years, but the dream of becoming the one-stop shop where advertisers can integrate search and display--and Yahoo can generate billions of dollars of annual revenue from this--are going bye-bye.

Yahoo's search collapse, by the way, is a bummer for Microsoft, too. A year ago, the two companies had about a third of the U.S. market. Now their combined share has fallen to 28%.

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Business Hiring Plans Are Still Very Weak

Rory Maher, CFA and Henry Blodget — Tue, 17 Nov 2009 09:00:00 -0500

From OPEN Forum: The number of businesses expecting to hire new employees in the following three months began falling in summer 2007, a few months before the recession began (this makes sense, as it's a leading indicator). Fortunately, the measure recovered somewhat this summer, although it's still in negative territory.

Hiring is all about confidence, and right now, confidence is still flimsy. Business owners are worried that the recent uptick in business is just temporary -- and understandably so. Lots of economists still believe that the recovery we've seen so far is largely a "relief rally," as consumers breathed a sigh of relief that we didn't plunge into a second Great Depression.

The next six months, therefore, will be critical. Optimists believe that by the first quarter of 2010, the economy will start to show real organic growth (ex stimulus spending). If so, this will likely lead to a gradual increase in confidence -- and, with it, a boost in hiring plans.

Note: this article was previously published on The OPEN Forum. See more:

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Overstock Fires Auditor, Elects To Go It Alone

Henry Blodget — Tue, 17 Nov 2009 08:17:00 -0500

Overstock.com (OSTK), which is again under investigation for accounting issues, has fired its auditor, Grant Thornton. As of now, therefore, Overstock no longer has an accounting firm.

Overstock has also done something we can't recall seeing in 15+ years of analyzing public companies: It has filed a quarterly SEC document that hasn't been reviewed by an accounting firm.

To say this behavior is a "red flag" is so obvious as to be boring. So for now, we're just going to describe it as bizarre.

CEO Patrick Byrne explains:

Overstock.com, Inc. (Nasdaq: OSTK - News) today filed an unreviewed Form 10-Q for the period ending September 30, 2009. Below is a letter from Patrick Byrne, the company's Chairman and CEO.

"All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth." - Friedrich Nietzsche

Dear Owner:

We have elected to file an unreviewed Form 10-Q for the period ending September 30, 2009. Here is why:

In February 2009, we were notified by a partner that we had overpaid it approximately $700,000, but that the partner wanted to reach a mutual solution to this overpayment and another open issue (the partner has asserted that we might owe it in excess of $400,000 regarding this other issue). At that time, we doubted our ability to recover this overpayment and we could not reasonably estimate what we might recover.
Thus, we had to decide between either immediately recognizing as income a sum whose magnitude, collection, and collectability was in doubt (which we felt was an incorrect and aggressive position, especially in light of the economic and retail environment of the time), or whether we should take a more conservative position of negotiating with this vendor who owed whom, how much, and on what terms, including timing of payment, and recognizing those sums only if and when we received the payments.
The accounting for this transaction required significant judgment and interpretation of the facts and circumstances -- which others with 20/20 hindsight might later question. Weighing all the facts and circumstances at the time, we decided it would be a mistake to book this overpayment as an asset as of December 31, 2008, deciding instead to recognize the sums as we recovered the money (that is, we thought the conservative position was the correct position). Our auditors at the time, PricewaterhouseCoopers ("PwC"), agreed with this course of action, and we prepared our 2008 Form 10-K on the basis of this decision.
Although PwC had given us eight years of fine service, after we filed our 2008 Form 10-K, we ran a formal RFP process for selecting our 2009 auditors as a reflection of my belief that changing auditors every decade or so might be healthy. Grant Thornton won that RFP, and the Audit Committee selected Grant Thornton as our 2009 auditor.
Before Grant Thornton took our audit engagement in Q1 2009, it reviewed our filed 2008 Form 10-K and told us it was comfortable with our past accounting practices.
In late Q1 2009, we received $785,000 relating to the partner overpayment discussed in point 1 above (even though the other issue with that partner remained unresolved). Thus, we recognized $785,000 in our 2009 Q1 Form 10-Q financials, which Grant Thornton reviewed as our auditors. In addition we highlighted $1.9 million (of which the $785,000 was a part) attributable to the collected overpayment, certain partner under-billing collections, and a freight carriers' refund of overcharges in one-time, non-recurring income in that quarter's earnings release, earnings conference call and Form 10-Q.
As our auditors, Grant Thornton reviewed our financial statements in Q1 and Q2 2009 before we filed Form 10-Q's for those quarters. Throughout 2009, our Audit Committee has repeatedly asked Grant Thornton if there was any accounting that it would do differently, and repeatedly received the answer, "No." In fact, as recently as late-October 2009, Grant Thornton confirmed to us that it supported our accounting method for recognizing the $785,000.
In early October and again in early November, the SEC sent us comment letters asking us, among other things, to advise it on and justify the accounting treatment we used regarding the $785,000.
Last week, Grant Thornton advised us that, on further consultation and review within the firm, it had revised its position and that it now believes that we should have recorded the $785,000 as an asset in 2008. As a result of its accounting position, Grant Thornton said it would be unable to complete its review of the financial statements in our Q3 Form 10-Q unless we amended our previous 2009 quarterly filings and restated our 2008 financial results. On November 13, Grant Thornton also advised us that it believes that we should make disclosure or take action to prevent future reliance on our March 31, 2009 financial statements and June 30, 2009 financial statements filed in our Q1 and Q2 Form 10-Q's, as a result of this issue.
We disagree with Grant Thornton. We, along with PwC, continue to believe that we have accounted for the $785,000 correctly and thus our Q1 and Q2 financial statements are correct. Both we and PwC believe that it is not proper to reopen our 2008 Form 10-K, subject to resolution with the SEC of its comment letters.
Thus, we are in a quandary: one auditing firm won't sign-off on our Q3 Form 10-Q unless we restate our 2008 Form 10-K, while our previous auditing firm believes that it is not proper to restate our 2008 Form 10-K. Unfortunately, Grant Thornton's decision-making could not have been more ill-timed as we ran into SEC filing deadlines.

As a result, we have elected to dismiss Grant Thornton, file an unreviewed Q3 Form 10-Q (as we have no current auditor), continue to work with the SEC on the issues addressed in its comment letters, and engage another independent audit firm. Once we have completed these last two items, we will file a reviewed Q3 Form 10-Q/A.

In the meantime, I will continue to focus on the business during this busiest part of the year.

I will hold a conference call to further explain and answer questions regarding this matter on Wednesday afternoon at 5:00 p.m. EST (details below). Until then, I remain,

Your humble servant,

Patrick M. Byrne

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AOL Spinoff Valuation Is Only ~$3.2 Billion*

Henry Blodget — Mon, 16 Nov 2009 17:48:00 -0500

Time Warner announced the terms of the AOL spinoff.

Based on the the current Time Warner share price and the registration statement filed with the SEC today, the implied valuation of AOL is about $3.2 billion.

This is significantly below most recent estimates of the company's value.

In the spinoff, each Time Warner shareholder will get 1 share of AOL for every 11 shares of Time Warner.

According to the SEC filing, the pro forma (as adjusted) standalone AOL will have $100 million of cash and about $72 million of debt. AOL shareholders, therefore, will be getting net cash of about $25 million from Time Warner along with the company (immaterial).

Today, Time Warner's stock closed at $32, giving Time Warner an equity market cap of $38 billion. One-twelfth of that equity market cap is about $3.2 billion.*

Most recent estimates put AOL's value at about $4-$5 billion.

If memory serves, just before the AOL-Time Warner merger was announced, AOL's valuation was closing in on $200 billion.

Ouch.

See Also: AOL Spinoff Coming December 9

* At today's close, the combined AOL-Time Warner stock was worth $38 billion. Time Warner will issue 1 share of AOL for every 11 shares of the combined company. The current Time Warner value, therefore, will be divided into 12 parts, of which Time Warner is worth 11 ($34.8 billion) and AOL is worth 1 ($3.2 billion).

(Alas, when we first did the math, we made the boneheaded mistake of just dividing the $38 billion by 11).

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25 Things You Need To Know To Become A New Media Mogul

Henry Blodget — Mon, 16 Nov 2009 15:01:00 -0500

Ken Auletta, author of "Googled: The End Of The World As We Know It," just spent a year soaking up the lessons of Google.

After finishing the book, he also wrote an addendum in which he lays out the 25 things you need to do to build a kick-ass new media company.

A legendary New Yorker writer and book author, Ken thinks in articles, not bullets--so we've included the full article below. For those who think in bullets, however, here are the 25:

25 Media Maxims

Passion wins
Focus is required
Vision is required
A team culture is vital
Treat engineers as kings
Treat customers like kings
Brand often means trust
Every company should strive to take the risks out of capitalism
Every company is a frenemy
The speed of change accelerates
Adapt or die
"Life is long but time is short"
A "free" web is not always free
Digital is different
Don't think of the web as another distribution platform
Technology provides potent new targeting tools
The web forges communities and threatens privacy
Beware the government bear
Paradox: The web forges both niche communities and large communities
More media concentration, yet more choice
Luck matters
No more old media magic
No more new media magic, either
Don't ignore the human factor
There are no certitudes

Ken Auletta : Media Maxims

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Murdoch's Just Trying To Bludgeon Google Into Throwing Him A Bone

Henry Blodget — Mon, 16 Nov 2009 14:33:48 -0500

On Bloomberg this morning, Erik Shatzker, Carole Massar, and I discussed Rupert Murdoch's recent war against Google, in which the mogul has accused Google News of "stealing" his content when in fact Google is sending him boatloads of readers for free.

I suspect that what Rupert's really trying to do here is whip up solidarity among the traditional news organization in hopes that Google will try to win some PR points by throwing him a bone.

(What kind of bone? A revenue share on the ad revenue Google makes from Google News pages).

This is a ludicrous position, and Google should stick to its guns. It sends Rupert and other newspaper moguls millions of readers for free. If Google News didn't exist, in fact, Rupert probably would be offering to pay Google for traffic referrals, rather than demanding that they pay him.

Will Rupert follow through on his threat to pull his content off Google News? If Google doesn't cave, yes, he probably will. Doing so will only cost him 10%-15% of revenue, in our estimation, and he can handle that. At least for a while.

Will pulling WSJ content off Google News be a smart business move?

No. The news aggregation genii is out of the bottle, and no amount of jawboning will stuff it back in.

Meanwhile, if Rupert does browbeat Google into throwing him some money, we'd be glad to take some, too. We make content that Google is currently kind enough to include in Google News. Until now, we thought we should just thank Google profusely for all this free traffic they're sending us. If Rupert's going to get paid for his free traffic referrals, however, we're certainly going to want to get paid, too.

You can watch the video here >

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How To Fix Wall Street? Step 1: Break Up Goldman Sachs...

Henry Blodget — Mon, 16 Nov 2009 11:25:00 -0500

Roger Ehrenberg, Founder/Managing Partner, IA Capital

How do we fix Wall Street?
Improve transparency
Regulate derivatives by placing them on an exchange
Break up firms like Goldman Sachs (separate customer business and hedge-fund business)

Produced By: Kamelia Angelova & William Wei

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