I was having a conversation with someone last week regarding his home equity line being shut down. He was rather distraught and frustrated by the sudden move of the lender to close off his line due to market conditions here in California. “How can they do that? They have no right to […]
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■Real Buyers of Genius: Another $20,000 a year person takes on a $600,000 mortgage.
■$640 Billion in Sub-prime Loans Originated. $386 Billion in Alt-A Loans Originated. $1.026 Trillion in Loans at Risk? Priceless.
■Housing Bloggers Unite: The Housing Blogger Network (HBN) has Started.
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I was having a conversation with someone last week regarding his home equity line being shut down. He was rather distraught and frustrated by the sudden move of the lender to close off his line due to market conditions here in California. “How can they do that? They have no right to take away my hard earned money!” Aside from restraining myself from smacking him upside his head I did ask him how he earned that money that was now gone. “My home equity was my money. The bank has no right in closing access to my money.” Welcome to the new mentality of wealth in our nation.

This simple conversation is the tip of the iceberg of the challenge that is now confronting our nation. In the past few decades, Americans have arrived to the current distorted point in reality where alternate universes collide and somehow debt is now the equivalent to wealth. I should actually clarify that last statement in light of the above conversation about home equity lines being shut down:

“Wealth in the last decade isn’t how much you save or your net worth. Wealth is determined by your ability to have access to large amounts of easy debt via credit lines and maximum leverage.”

That is a very important point and once you grasp this knowledge, you can understand why we are in the predicament we are in. Today, retail sales numbers perked up and the market initially came out of the gate with guns-a-blazing. That is until folks stopped for two seconds and did the current economic math:

A: If all recent data is showing us that consumers are tapped out.

B: Home prices are still declining and foreclosures are rising.

C: Consumer inflation is hitting on every front.

D: Then how can Americans still be spending?

Let me show you how:

“American credit card debt is growing at the fastest rate in years, a fact that may signal coming trouble for the banks that issue them.

The Federal Reserve reported this week that the amount outstanding of revolving consumer credit hit $937.5 billion in November, on a seasonally adjusted basis, up 7.4 percent from a year earlier.

The annual growth rate has now been above 7 percent for three months running, the first such stretch since 2001, when a recession was driving up borrowing by hard-pressed consumers.

The surge in credit card borrowing comes as credit card default rates are gradually rising, albeit from low levels, and may reflect the fact that it has gotten harder for consumers to borrow against the value of their homes, both because home values have fallen in many markets and because mortgage lending standards have tightened.”

Now the above article was posted in January but now we are close to $1 trillion in revolving consumer debt out there. And the more ominous problem is that defaults are rising in this area. So what has occurred in the above equation is due to the lack of wage growth, people were using leverage via mortgages and consumer debt to bridge the Joneses gap. Take a look at the massive explosion in mortgage and consumer debt over the past 20 years:

Source: Fed Flow of Funds Report, June 2008

It is rather shocking that American households have approximately $13.84 trillion in debt obligations. In 1993, this number was at $4.2 trillion so we’ve nearly triple our national household debt in the matter of 15 years. That $13.84 trillion is a very large number and to put that into context, the estimate GDP for the entire United States for 2007 was $13.84 trillion:

Source: Wikipedia

We spend every last penny!  Is it any wonder why Americans have a negative personal savings rate? You really have to wonder how people can spend more than they earn but that is essentially the way we as a nation have been living for the past decade. This housing bubble fueled by the debt bubble was only a logical extension of the cultural financial neurosis. The great majority of the public started associating the ability to access credit with true financial prosperity. Well as we all now know, anyone with a pulse and one tooth was able to get a large mortgage in California by simply making things up. Need we remind you about the farmer making $14,000 a year with access to a $720,000 loan? Or what about the hundreds of credit card offers Americans receive each year in the mail? When debt is no longer seen as a necessary evil and a sign of wealth, new definitions take hold of mass psychology.

Take a look at this ad during the heyday of the housing bubble:

“Chances are, you’ll sell your home before we sell your mortgage.” Is this some sort of race? The underlying implication of course is you’ll make so much equity in a few short years that you’ll be selling your current McMansion for a double whopper McMansion so why worry yourself with whether they sell your mortgage off to some foreign investor. These ads only spoke to the distorted psychology of consumers who thought access to a $500,000 mortgage meant that they had access to a $500,000 net worth.

In a way, it allowed consumers to put on the bourgeois costume for a few years and feel like a million bucks even though they were drowning internally by suffocating debt. Think this isn’t the case? Take a look at the below chart:

That is why at the height of pseudo prosperity and the pinnacle of the housing bubble, Americans had for the first time crossed the negative savings barrier. This is the perfect example of watering down the definition of wealth in our country; collectively as a society people started having an aversion to saving money and a liking to debt. This of course is a major problem and no country can survive in the long run with crushing amounts of debt. I don’t care what kind of math political parties want to sell you but there is no way a country can be prosperous in the long run by running larger and larger deficits.

This implosion of the credit (debt) markets is simply a decade long debt ponzi scheme that can go on no longer. Consumer psychology still can’t understand why fuel is rising or why everything from education to groceries are costing much more. The perfect scheme was to con people into believing that going into debt, meaning you were spending tomorrow’s dollars today, was somehow a prudent way toward wealth. And the entire idea of savings lost its allure. In fact, society punished savers implicitly. For much of the past, if you bought a home folks knew that you had the diligence and restraint to hunker down for 2 or 3 years and put off conspicuous consumption for a larger goal such as a home. That entire romanticism of saving went out the window when anyone and everyone was getting BMWs and McMansions with zero down.

In fact, if you were renting and saving and trying to be frugal, you were seen as an outcast and a bum because you just missed out in a home that just went up $50,000 in one years simply because everyone was smoking the housing peyote. I wonder how many people had a kitchen conversation like this circa 2003:

Spouse A: “We should buy a home. The Perma Bulls down the street bought a home last year and they now have $50,000 in equity.”
Spouse B: “But it doesn’t make sense. How can a home be worth $50,000 more if they didn’t do anything?”
Spouse A: “Well here we are saving and all we’ve been able to save in our 2% savings account is $15,000. What if homes go up $50,000 again next year?”
Spouse B: “That can’t be because that makes no economic sense. Prices go up and correspond to some fundamental reason.”
Spouse A: “I heard that they got a home equity line and took a trip to Europe. Isn’t that great and fantastic? We actually make a bit more than they do but why do we live and feel poorer?”

Spouse B: “I don’t know. It just doesn’t make sense. I feel uncomfortable going into that large of debt. Why is that?”
Spouse A: “Because you’re stupid?”

Spouse B: “No. You are stupid you moron and don’t understand the difference between net worth and being in debt.”
Spouse A: “Isn’t wealth about what you can buy? We don’t take fancy trips or even have our own home! You are the true idiot you financial midget with no home.”
Spouse B: “I hate you.”
Spouse A: “I’m leaving you.”
Spouse B: “Go ahead and take the dog while you’re at it. I always hated how he looked at me anyways.”

What a lovely and heart warming story don’t you think? As you can see from the above sign, many people did have a conversation like this except in our story above, the couple split ways because of diverging financial goals and with that lawn sign, we can see that some folks unfortunately realized that selling a home in a busted bubble is no easy task.

This is the real deal here folks. We are shifting back whether we want to or not. The real psychological shift that is unfolding is the ability to break down wants and needs. A big gas guzzling car is a want and many folks are painfully realizing this. A large crushing mortgage for a McMansion is a want. Food and education are needs. Time to get these equations recalibrated before the market recalibrates them for you.

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Related Posts:
■Superstars of Housing Love: The Sheriff Deputy Evicting People who Default.
■Real Buyers of Genius: Another $20,000 a year person takes on a $600,000 mortgage.
■$640 Billion in Sub-prime Loans Originated. $386 Billion in Alt-A Loans Originated. $1.026 Trillion in Loans at Risk? Priceless.
■Housing Bloggers Unite: The Housing Blogger Network (HBN) has Started.
■About

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The troubled Wall Street titan, Lehman brothers, has had a major shakeup at the top of the org chart, demoting the CFO and naming a new COO as the company tries to avert becoming the next Bear Stearns.

From the aptly-titled Market Watch article:

Lehman Brothers Holdings Inc. said Thursday that Chief Financial Officer Erin Callan and Chief Operating Officer Joseph Gregory are leaving their posts, becoming the latest victims of the credit crisis swirling across Wall Street.

Some analysts said Lehman’s management had lost credibility because earlier this year executives said the brokerage firm didn’t need to raise any more capital. But the credit crisis has taken another turn for the worse in recent weeks, putting intense pressure on Lehman.

“We believe the moves result from the company’s preliminary results, which included the first quarterly loss since going public, and its planned $6 billion capital raise, which has garnered investor criticism,” said Matthew Albrecht, analyst at Standard & Poor’s Equity Research, in a Thursday note to clients. “Headline risk will weigh on the stock.”

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Filed under: Industry, Columns, Stocks to Buy

Editor’s Note: This post was written by Fil Zucchi, one of Minyanville’s many sharp minds.

Drybulk shippers have been slammed over the last few days courtesy of a plunge in capesize spot rates. However, according to the sharp eyes at Dahlman Rose, the volume of new spot fixtures has been exceedingly low of late. And taking a slightly longer perspective, spot rates are up more than 100% since last year.

A few things to keep in mind:

• Not all shippers are created equal: Dryships NASDAQ:DRYS) plays in almost strictly in the spot market and therefore it stands to reason that it should swing hard with spot rates. After closing the purchase of Quintana Marine, Excel Maritime (NYSE:EXM) now has a decent balance of long term and short term fixtures contracts. And then you have an outfit like Paragon Shipping (NASDAQ:PRGN) with most of its fleet leased out on long term - fixed price contracts.

• Despite the vast differences in the business models of these three companies, the market has not been very discerning in how it has treated its stocks, which suggests that there may be some arbitrage opportunity, should one wish to play it that way.
• Despite growing economic risks in China, it’s tough to envision a collapse of infrastructure build-outs, or a sudden change in food needs in the BRIC countries and around the world in general. As long as these two activities hold up, it’s tough to see a collpase in the shipping business;
• I can’t stress enough that my long side interest in EXM and PRGN is heavily influenced by some sizable, and so far not so succesful, shorts in broad commodity ETF’s.
• And lastly, the volatility in the shippers offers some very attractive options selling opportunities.

  (Positions in EXM, PRGN)

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Filed under: Before the bell, Earnings reports, Forecasts, Deals, Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO), Coca-Cola (KO), Market matters, US Airways Group (LCC), Economic data, Housing

U.S. stock futures were mixed to lower early Friday morning as investors awaited data on inflation. News about companies cutting workforce and Yahoo!’s failed talks with Microsoft also soured the mood.

On Thursday, U.S. stocks closed with gains following a surprisingly strong retail sales, but the gains were tempered as the day went on due to rising oil prices and the Yahoo! announcement about the failed Microsoft talks.The Dow industrials ended 57 points, or 0.48%, higher, the S&P 500 rose 4 points, or 0.33%, and the Nasdaq Composite rose 10 points, or 0.43%.

What may yet change the atmosphere on Wall Street is the Consumer Price Index is scheduled for release at 8:30 a.m. EDT. Economists surveyed by Briefing.com expect CPI to show an increase of 0.5% in May following a 0.2% rise in April. Core CPI, which excludes the volatile food and energy prices, is expected to have risen 0.2% in May, after it rose 0.1% the month before.

At 10:00 a.m., the preliminary University of Michigan consumer confidence gauge for June is also due.

Meanwhile, foreclosures data was already released and the number of U.S. homeowners forced into foreclosure further last month, up nearly 50% compared with a year earlier,and up 7% from April, according to RealtyTrac Inc..

The main corporate headline this morning no doubt has to do with Yahoo! (NASDAQ: YHOO). The internet portal said talks with Microsoft Corp. (NASDAQ: MSFT) have ended and announced late Thursday an online ad partnership with Google Inc. (NASDAQ: GOOG), which could be worth $800 million in revenue. Yahoo said it believes the ad deal would be better than selling its search business to Microsoft, but some are concerned anti-trust issues would derail that deal too. Yahoo shares sank 10% on Thursday.

Also US Airways (NYSE: LCC) said that it’s cutting capacity on routes by up to 8%, increasing fees and shedding 1,700 employees. LCC shares closed down nearly 16%.

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Filed under: Forecasts, Toyota Motor Corp. (TM), Economic data, Oil

With the soaring oil prices, oil bulls have been benefiting from nice gains lately but there are some pessimistic signs that this may be about to change. The Fed’s comments related to inflation stirred some worries among investors that interest rates could be lifted soon. A boost in interest rates will immediately lead to a stronger dollar, and could (and should) result in a sell off in crude.

Talking about this circumstance, SmartMoney is thinking about the best way to protect ourselves against losing money. As a first step, SmartMoney suggests that we reduce commodities and increase our allocation in stocks. To back up this idea, the article cites Simeon Hyman, equity strategist of the portfolio advisory group at Lehman Brothers’ private investment management unit, who said the company is currently lighter on commodities and “fully invested” in stocks.

David Reilly, director of portfolio strategies at Rydex Investments, is taking into account the possibility of investing in Japan, which “is the most oil-dependent of all major economies. Reilly cites companies such as Toyota Motor (NYSE: TM) and Canon (NYSE: CAJ) which could benefit from investors’ attention due to declines in crude oil prices.

Continue reading SmartMoney suggestions to avoid the pitfalls of falling oil prices

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Filed under: Major movement, Forecasts, Bad news, Coca-Cola (KO), Options, Technical Analysis

Coca-Cola (NYSE: KO) shares are falling after Coca Cola Hellenic Bottling (NYSE: CCH) revised its 2008 earnings growth estimate to 5% to 8%, well below the 12% to 15% previously forecast. KO owns a 23% stake in CCH. CCH said rising food and fuel prices have adversely affected consumer spending. If you think this stock won’t be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on KO.

After hitting a one-year low of $51.06 last June, the stock hit a one-year high of $65.59 in January. This morning, KO opened at $57.03. So far today the stock has hit a low of $54.01 and a high of $57.10. As of 1:20, KO is trading at $55.02, down $2.12 (-3.7%). The chart for KO looks bearish and steady, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.

For a bearish hedged play on this stock, I would consider an August bear-call credit spread above the $60 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in two months as long as KO is below $60 at August expiration. Coke would have to rise by more than 9% before we would start to lose money. Learn more about this type of trade here.

KO hasn’t been above $60 since April and has shown resistance around $58 recently. This trade could be risky if the company’s earnings (due out in mid-to-late July) are a positive surprise, but even if that happens, this position could be protected by resistance KO might find at its 200 day moving average, which is currently around $59.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in CCH. He does control bullish hedged positions in KO which are struggling. Both this trade above and those positions can expire profitably at the same time.

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Blown Mortgage received a trusted tip this morning that banking giant HSBC closed 82 branches of Household Finance Corporation (HFC) and Beneficial . Both HSBC companies are players in the non-prime markets and specialize in mortgage refinancing and debt consolidation. Beneficial has also done it’s fair share of “personal loans” using a lien on title, which can show up as a 3rd mortgage on title reports.

HSBC has been pulling back by closing branches of HFC and Beneficial over the last several quarters and closed another one of its subprime lenders, Decision One (or D-1 as it was known, or D-Last as it was referred to in my company for their penchant for approving loan files that weren’t approved elsewhere) , back in September of 2007.

HSBC’s ownership in HFC and Beneficial have put it smack in the middle of the US housing meltdown. One top HSBC investor claimed that the company undervalued losses by $30 billion, after announcing first quarter losses of $3.2 billion in mortgage-related writedowns.

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I was digging through the nationwide distressed property information put out for April of 2008. In this data, we have notice of defaults, notice of foreclosure sale, lis pendens, and REOs. This data gives us a snapshot of where we are but also allows us to see where we are heading. For […]
Related Posts:
■Foreclosure Shrugged: The Issue with Finding an Exact Foreclosure Number.
■Foreclosed: Predicting Foreclosures in California. How Many Homes will Be Foreclosed in 2008?
■Foreclosures? Housing Bubble? In Southern California? Impossible!
■Real Homes of Genius: Today we Salute you Cypress. Wait 5 Months, Then Drop Price by $130,000.
■Zillowed, Disappearing Inventory, and Free Housing: 3 Major Psychological Reasons Why Housing is Still Declining and Living Rent and Mortgage Free.

I was digging through the nationwide distressed property information put out for April of 2008. In this data, we have notice of defaults, notice of foreclosure sale, lis pendens, and REOs. This data gives us a snapshot of where we are but also allows us to see where we are heading. For example, we can look at notice of defaults as a leading indicator of how many defaults we will be seeing in a few months.

There are many sources putting out information regarding foreclosures but one cited quite often is data from Realtytrac based out in the heart of Orange County, Irvine. The numbers are stunning no matter how you look at the data. It turns out that only 4 states out of the entire 50 states of our country make up approximately 50 percent of all distressed action! Think about that. We’ve all heard that real estate is about location so we can assume that the same goes for foreclosures. Let us crunch the numbers:

California (Properties with Foreclosure Filings): 64,683

Florida: 35,264

Arizona: 11,620

Nevada: 7,276

Total 4 States Above: 118,843

Total Nationwide distressed filings: 243,353

*Source: Realtytrac

Maybe it would help to visualize the lopsidedness of this:

This is simply stunning when you think about it. Not only is this going to be problematic in the short run, but take a look at what we have to look forward to by examining the notice of defaults that are now turning into foreclosures at an alarming rate:
California (April 2008):

Notice of Defaults: 40,294

Notice of Trustee Sale: 8,822

Real Estate Owned: 15,567

That is a very ominous sign since that 40,294 is only an indicator of how difficult things will get in the future. Many of these homes are 90 days late or are still in the process of hitting the market. If you want an indication of how bad things have gotten in California over the past year, just take a look at the numbers for April of 2007:

California (April 2007):

Notice of Defaults: 24,305

Notice of Trustee Sale: 4,200

Real Estate Owned: 2,000

In one year, notices of defaults have doubled, trustee sales have doubled, and real estate owned has jumped from a low of 2,000 to a jaw dropping 15,567. This is why I simply do not buy into any of the bottom talk and especially not for California. I wanted to cross check the above data with the quarterly foreclosure information posted by DataQuick. For the first quarter of 2008 they list 113,676 notice of defaults.

Realtytrac first quarter data NODs:

January 2008: 38,148

February 2008: 35,731

March 2008: 40,761

Total First Quarter 2008 NODs: 114,640

Not bad at all. At least by using a few different sources we can at least trust to a certain extent the data. So with that said, the troubling implication is that fewer and fewer people are able to manage their way out of a notice of default and are unable (or unwilling) to catch up:

“(DQNews) Of the homeowners in default, an estimated 32 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 52 percent. The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes ‘work-outs’ difficult.”

That is simply shocking. What this tells us is 68 percent of these notice of defaults will go through the full foreclosure process. Now of course this number is simply getting worse because of the state of the California economy and the extent of bubble prices in many areas.  Fuel prices are only the last nail in the coffin. Let us apply this number to the first quarter notice of defaults:

114,640 * 68 percent = 77,955 homes will be foreclosed in California from the homes that received NODs in the first quarter.

Now if last month, 8,822 homes went to a trustee sale and things are pretty bad, just look at the above estimate and take a wild guess how things are going to get for California. Is this really any sign of a bottom? That is why even folks like Ed McMahon are struggling to keep current on their mortgage. The problem with California more so than the other states is the massive size of the mortgages. For example, Ed McMahon on his $4.8 million loan to Countrywide is arrears by an incredible $644,000. Let us assume a $500,000 loan at 6 percent that falls into bad shape. Just look at how badly things can get and how quickly:

Principal and Interest Only:

1^st payment due: $2,997

2^nd payment due: $5,994

Late payment: $40

Total to cure account: $6,034

3^rd payment due: $8,991

Late payment: $40 x 2

Total to cure account: $9,071

4^th payment due: $11,988

Late payment: $40 x 3

Legal fees: $75

Total to cure account: $12,108

5^th payment due: $14,985

Late payment: $40 x 4

Legal Fees: $75 x 2

Total to cure account: $15,295

6^th payment due: $17,982

Late payment: $40 x 5

Legal Fees: $75 x 3

Total to cure account: $18,407

At this point, a bank would most likely issue a demand for full payment including full balance, back interest, plus late charges, and legal fees all at once. The legal notices begin. The lender at this point normally will only accept full payment which of course, if you didn’t have enough to make the $2,997 payment where in the world are you going to get $18,407 to cure the account? But that is why we are seeing that REO number skyrocket and holding steady. Many lenders are now trying to gauge their options assuming they don’t go under. Either they workout a modification with the owner (assuming they want to keep the home) or simply take their losses, take over the home, and try their luck given the current marketplace.

Do lenders really have the force to keep up with this? Some are arguing that they are not and the numbers are looking extremely suspicious. Why is that? First, inventory has been steadily dropping in the Southern California region yet sales haven’t picked up in any sizable fashion. A realtor over in San Diego offers a bit of insight into this:

“Speaking of holding back, the properties assigned to me were all foreclosed just a few days before - and I thought, “yippee, these guys are really on it!” That thought was a bit premature.

Since the end of April when I had 20 properties sent to me, only three have made it to market. Another one got rescinded (stand-by, this one will be a story in itself) and three others have extenuating circumstances why they have stalled. But literally the other 13 are sitting vacant, waiting for Countrywide’s asset managers to give me the green light to put them on the market.

I think they are overwhelmed - there have 60 asset managers at their servicing facility in Simi Valley, each with 100+ files on their desk. The majority of these mortgages are ones they sold to Deutsche Bank and HSBC, both foreign entities. Countrywide is just their servicing agent, meaning they collect the monthly payments, and handle the foreclosure proceedings. There isn’t much incentive for them to not be expediting the sales, unless the banks that actually own the properties are telling them to stall. But why would Deutsche Bank or HSBC want to stall - they can’t be waiting for a bailout, who is going to give them a hand? The U.S. Government? No way.”

Jim actually puts out some good information at his bubbleinfo blog and you should check it out when you get a chance. What Jim talks about was my gut reaction at first. These lenders are simply overwhelmed. By looking at the NODs we already know that we have an absolute tidal wave of bad mortgages coming our way. You can only infer that lenders with a heavy weighting of mortgages in California are going to be creamed. Washington Mutual who holds many California mortgages including one for our beloved California Democratic representative mogul would-be Donald Trump Laura Richardson isn’t exactly doing so hot recently. Take a look at the 1 year performance of WaMu:

Down 84% in one year! That isn’t exactly what I would envision as a bottom. I would be especially angry if I ended up buying stock at $44 a share last year. Either way, the problem is we have many investors not from this area that simply do not have any sense of the magnitude of Real Homes of Geniuses with banana republic mortgages that are floating out there.

Now riddle me this. If California, Florida, Nevada, and Arizona make up nearly 50 percent of all distress property filings in April and their early indicators are telling us that we have even more pain ahead, what is going to get these NODs cured? Here is a quick and dirty fact for you; all those HELOC and those piggyback loans once so popular in California just got annihilated. Many of these lenders are out 100 percent. Heck, the 30 percent median price drop last year pretty much wiped out 2 years worth of 2^nd mortgages on homes.  The only thing that remains is lasting memories of Maui, a gas guzzling Hummer, and a new granite countertop.

Do you really think the pain is done?

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Related Posts:
■Foreclosure Shrugged: The Issue with Finding an Exact Foreclosure Number.
■Foreclosed: Predicting Foreclosures in California. How Many Homes will Be Foreclosed in 2008?
■Foreclosures? Housing Bubble? In Southern California? Impossible!
■Real Homes of Genius: Today we Salute you Cypress. Wait 5 Months, Then Drop Price by $130,000.
■Zillowed, Disappearing Inventory, and Free Housing: 3 Major Psychological Reasons Why Housing is Still Declining and Living Rent and Mortgage Free.

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Filed under: Deals, Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO)

As anticipated, Yahoo! Inc. (NASDAQ: YHOO) and Google (NASDAQ: GOOG) announced a deal. The Wall Street Journal reports it’s worth between $250 million and $450 million in additional cash flow to Yahoo.

The deal will be delayed a few months for regulatory approval. Under its terms, Yahoo will select which search term queries it offers Google paid search results for, the number and placement of Google results and how they are blended with its own results and those of other providers. Yahoo said either party can end the agreement in the event of a change in control. If control of Yahoo changes hands in the next 24 months, Yahoo must pay a termination fee of $250 million.

Poor Carl Icahn. He could have had a $33 a share deal from Microsoft Corp. (NASDAQ: MSFT), now all he has is 33 cents a share from Google. Cover your ears before his moaning and groaning begins. Yahoo shares are up 1% after hours after losing 10% during regular trading.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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Filed under: Newsletters, Teva Pharm Indus ADR (TEVA), Stocks to Buy

“Analysts estimate the worldwide market for generics will increase from $75 billion to $125 billion by 2012,” says Michael Shulman.

In his ChangeWave Biotech Investor he states, “The key question for us is: Who is going to make the most money from these expirations? And the 800-pound gorilla in this market is our long-time holding, Teva Pharmaceuticals (NASDAQ: TEVA).

“Teva is the largest and best generics company in the world with $9.4 billion in sales in 2007 and the gap between it and its competitors is growing. Teva has 331 products on the market, 65% more than its closest competitor.

“More importantly, based on its business model of a mix of proprietary and generic drugs, the company’s operating margins are 10 points higher than competitors and that gap is widening. In fact, in the United States, the number of prescriptions filled with Teva generics is 50% more than its closest competitor.

“Be clear on this point: When it comes to generics, size does matter. The more a company sells, the more profit and cash it has available to do research and acquire more generics to add to its product list — and the beat goes on.

Continue reading Teva: The 800-pound gorilla of generics

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