End Of July Market Musings & Microhoo deal

As another month comes to a close, the market’s resistance proof rally continues on the strength of strong earnings and more signs of a waning recession. GDP numbers out for the previous quarter showed a decline of 1% in American GDP, this was better than the expected 1.5% decline, which showed economists that slowly but surely the United States is making its way out of the recession.

But the markets knew that in March right?! As the S&P (^GSPC)  continues to fly from March lows of near 650 to to cusp of 1000 yesterday. Just about a 50% rise for the broad market indicator. The real driver of this continuing rally is the strength in Corporate Earnings this quarterly season, which will be a difficult act to follow for the remainder of the summer as those results fade and current unemployment rears its head again. However, companies now have learned, adapted and retooled their operations and streamlined their businesses during the economic bottom (1st quarter of this year) and are now awaiting the increases in demand that are expected to come in the 2nd half of this calendar year.

On the deal front in recent news, was the Internet Search deal between Microsoft (MSFT) and Yahoo (YHOO). By combining search operations to Microsoft and sales operations to Yahoo the companies hope to put a dent into market leader Google (GOOG). However, the deal has widely been panned for Yahoo, with Investors sending shares down heavily in the few days after the deal was officially announced. The partnership is a revenue sharing one with no payments made upfront and is a far cry from the $40Billion buyout offer Microsoft initiated, nor is it even close to the $1Billion Microsoft most recently offered in cash along with Billions more in stock purchases.

The news media certainly has the right grasp, as the deal, which Yahoo had always held the upper hand on, has gone completely to Microsoft. Yahoo essentially gave away 20% Market Share in search, for cost savings and the chance to deal with all the sales hassles related to Search Advertising between both companies. Microsoft will now control about 28% of search queries through its new Search Engine but it still has a ways to go to get to the monetization levels Google has spent the last few years achieving. And that doesn’t even begin to mention the complexities in integration relating to the now-coined “Microhoo” partnership. Executives at both companies expect this to take 2 years to get through fully. That’s about half a lifetime on the Internet I’m afraid, so while Google will wave its hands and put pressure on both companies to drag out the legal battles, secretly they’ve got to be happy, as 2 years of distractions await their newest competitor, now with 8.5% market share, Bing!

Disclosure: Author owns GOOG

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