My interpetation of the Fed rate cut on the market

The Fed did exactly what was expected and no one on the street knew what to make from it.

To gain some insight on the news, the market looked at the market reaction. When they saw the market starting to trend down, they assumed the news was bad so sold into it adding to the problem. When it came down to it, the traders were just behaving like sheep.

If they knew what the rate cut meant, the market would have instantly spiked down instead of the slow sell off we had today.

Fed rate cuts are a joke

Every time the Fed meets, Wall Street is giddy with anticipation on what the Fed will do next.

Traders make a game out of this process taking bets on what the rate is going to be. The markets spikes in a direction after the announcement and everyone take their gains or over their losses.

Don't over analyze this, it is just a game. Traders are solely basing their decisions off the expectations of other traders which are based off the expectations of other traders. This whole process has nothing to do with real valuations of the companies that they are buying into. This whole process just turns out to be a joke.

After the market absorb the news from the Fed, its effect on stock prices will become insignificant as Wall Street starts to play next weeks game, like guess the earnings of large cap ABC.

Serious long term investors shouldn't be suckered into this game. If the long term outlook of the company you invested in depends on the Fed funds rate, then you are taking on too much risk. Good companies are to be able to weather unforeseeable changes in the economy like changes in the Fed funds rate.

A company might have to pay a higher interest rate a loan hurting earnings by a penny, but everyone is in the same boat. Good companies will be able to stand up these minor fluctuations in the economy and continue to be successful in the long run. There is no reason to change your decision about your investment unless it was a bad company to begin with.

Ignore the volatility on the street and focus on long term fundamentals. Leave the games to the traders and fools.

Microsoft will buy Yahoo

There is only so much pain YHOO share holders can take as they see its price slowly bleed away from that magical $31 dollars

From the news headlines, it looks like Yahoo knows what it has been doing by placing incredible earnings, but looking at the income statement shows something different. Comparing operating income, Yahoo fell down from 169 million to 121 million yoy.

The reason Yahoo has incredible earnings was because of something called 'Equity In Affiliates' which accounted for 455 million last quarter. I am not an accountant so I don't know what Equity In Affiliates means for sure, maybe it's ownership in other companies.

One thing that I do know is that it is not operating income. Yahoo's core business is actually bringing in less income and they are boosting their earnings with some other accounting jargon.

A merger with Microsoft will be the best thing for Yahoo shareholders as well for Microsoft. Google is the growing tech giant right now and both companies need to get their game together if they expect to compete with a much stronger company.

Yahoo and Microsoft can provide real synergy with each other's services so they can combat the 2000 lb gorilla of the Internet. Google will still probably be number one in search, but Microsoft and Yahoo could create an effective alternative that people will want to actually use for once.

I don't see any other ways Yahoo could bring more value for its shareholders than with this merger. If Yahoo had real leadership, they could find ways to exploit their own strengths over Google so it can offer a strong alternative. Instead, they are following Google which is just stupid, because they won't be providing a service that is any better.

If Yahoo's CEO doesn't like the offer from Microsoft, their shareholder will as the stock whithers away. It's only a matter of time.

Microsoft vs Apple

Five years from now, we can confidently bet the Microsoft will stay a leader but you can't say the same about Apple.

The problem with Apple is that it lacks a robust competitive edge for the long run. Apple's competitive edge currently stems from creative innovative design and effective marketing. The main weakness of Apple is that its products have substitutes. There are plenty of alternatives to iPods, iPhones and iMacs out there from companies equally ambitious.

While Apple has effectively stayed one step ahead of the competition in consumer electronics, it as a risky strategy for the long term. A couple of slip ups from Apple's design department can allow the competition to provide superior products for a year or two, and Apple will lose their magic. While this isn't inevitable, it is plausible scenario that the company can face making the stock a risky investment at high valuations.

Microsoft on the other hand has little risks of going anywhere because they are a monopoly with a product that has no substitutes. If Microsoft dropped off the face of the earth one day, the world economy will collapse because business and home computers are dependent on Windows.

In the software industry, with all the compatibility issues, monopolies provide impermeable network effects. If you want to develop software, you have to make it for Windows to be successful, while making it run on a Mac or Linux is a secondary concern. This makes Windows a more attractive OS over the competition ensuring that it will be a leader. It will be near impossible to break this competitive advantage even if you have all the money in the world.

Microsoft is also much more effective on running a business. Their focus group tested strategies aren't sexy, but they bring in the money at the end of the day, which is the most important factor in choosing a stock.

Commodities Bubble?

There are many fundamental reason for the high commodity prices like biofuel subsidies, growing demand in Asia, supply restraints for oil, and a weak dollar.

The major problem I have with the fundamental story is that we are experiencing a global slowdown, yet these prices are just going through the roof. This just doesn't make sense because the slowdown should decrease demand for commodities. I would expect oil at $80 a barrel in these conditions, but at $116 in a slowing economy, financial speculation has to take part of the blame.

The only safe place to park your money today is commodities. Real estate is declining, treasuries are overvalued, stocks are heading down and inflation is eating away your cash. You listen to CNBC, and that's the only sector that's hot and is where all the smart money is heading. People who never invested in commodities are doing so, which is a sign that a bubble is brewing.

Commodities are different from other assets in the fact that they have immediate intrinsic value. Stocks are just pieces of paper and we can hold off buying a house if prices are too high. You have to but gas in your car and buy food. There is no way to avoid the effects.

This can create some crazy feedback effects. Higher commodity prices hurt business's profit margins lowering the incentives to put your money into stocks, making the commodity bet even better. Higher food and gas prices causes inflation which increases the value of the commodity. This feedback loop could make things worst before there can get better when this unsustainable feedback finally loses its momentum.

I hope this pops sooner than later so that are economy can be back in balances, so our investors can chase after the next bubble.

Thoughts on Intel's Larrabee GPU

Intel (INTC) recently announced its plans to get into the discrete graphics business with its announcement of the Larrabee architecture to compete with NVDA and AMD. I don't think that Intel could compete with NVDA and AMD and performance because they lack the experience. NVDA's CEO lampooned Intel recently on this point, which seemed to backfire on the share price.

If Intel wanted to get into the graphics business, they would have done it by now, so I think their are other motivations for their entry of the discrete graphics business.

Using my limited technical knowledge, it looks like that Larrabee is based on the x86 instruction set and is able to do GPU computations.

This sounds familiar with NVDA's CUDA, which allows programmers to easily use the GPU to perform specialized calculations. Using the GPU, these calculations are orders of magnitude faster than a regular CPU. Instead of having a big array of CPU's, you can do the calculations on a GPU.

While the applications are CUDA are limited, it is a threat to Intel's share of the supercomputing business. Intel needed to find a solution to compete, so they proposed the Larrabee chip which used the x86 architecture making it easier to program for compared to CUDA.

Graphic performance is probably a secondary consideration for Intel, since their solution doesn't seem to be the most efficient design. Intel's main goal is to provide a solution that will be competitive with CUDA.

Whether it will be successful or not is another question.

Just accept Microsoft's bid

Yahoo needs Microsoft more than Microsoft needs Yahoo.

Yahoo has value and even many advantages over Google. For example, Google has a better search engine, while Yahoo provides a better news service. The problem is that Yahoo hasn't been able to capitalize this strength and synergy with Microsoft is the best thing that this company can do for its shareholders.

Currently, Yahoo is trading 60x earnings, and I don't see them getting significantly better anytime soon. Microsoft is a solid company trading 16x earnings and can live without the expensive $44 billion investment. I bet Microsoft will call out Yahoo on their bluff.

The only one benefiting form Yahoo's delays right now is Google. Microsoft and Yahoo need to work together if they want to provide competition to the Internet giant.

What is The Irrational Investor

In college, the best investing class I ever took was behavior finance. The most important thing that I learned in this class was that I wasn't rational in making my decisions. This insight was one of the best things that could occur to me about my investing. In this moment of humility, I realized that my perceptions of the market are completely biased, and I need to constantly challenge myself to become an effective investor.

The funny thing is that even when I knew what the rational decision is, my brain compels to act completely different. Investing is a constant battle against yourself to make smart objective decisions. The human mind isn't wired for this type of environment and I need a constant reminder of this fact, so I bring you The Irrational Investor.

I am writing this blog because I am tired of the investment establishment. Everyone is telling you how to beat the markets whether it's CNBC, the latest financial magazine, or some guy selling their latest system to clueless traders. The truth is that most of these folks are no better at predicting the market than a group of monkeys, dressed in fancy suits and hiding behind intelligent sounding names like Long Term Capital Management.

I can't be disingenuous and will be honest in my interpretations of the market. If I don't know about something in the markets, I will say that I don't know than pulling out some crackpot theory. I will probably be full of bull half the time like the others in the market, but I won't be afraid to admit it.

I like having a name like The Irrational Investor because it forces me to prove my self instead of relying on a smart sounding name. It's the type of challenge that I like to take up.