Wake Up Call - YahooooooooOoooo!

The purpose of "Wake Up Call" is to provide you with the market-moving news of the day, hand chosen, with value-added original commentary.

Just when you're sure you know the day's catalyst, the market slaps you in the face. As an analyst, I regularly had my day's schedule reshuffled, shredded and thrown out the window on unanticipated news. New York Post and Wall Street Journal articles raised market attention this morning to the possibility of Microsoft (MSFT) actively pursuing Yahoo! (YHOO) in order to take a more important portion of the Internet search market and gain a serious competitive position versus rival Google (GOOG). Microsoft has the cash and the desire and Yahoo! has the foothold. I am buying into this one, figuratively, though I did have a long option position in Yahoo! that I exited this morning due to the time to expiration and the news inspired excitement.

Without any followup news from Microsoft or Yahoo! to confirm the story, excitement is likely to trail off, and the stock could give back some ground. Still, there is the inevitable mention in Barron's this weekend that could give the stock a second lift on Monday. Long term investors are likely wise holding both Microsoft and Yahoo! in my humble opinion, and I may look to reenter Yahoo! today should it weaken enough. Remember, the valuation placed on the stock within the article was approximately $35. In any deal, and I mean real contracted deals that are likely to occur, the stock typically jumps to a level just short of the acquisition price, because there remains risk that the deal may not be completed. In this case, there is no real deal, so the margin is bigger, and there will be regulatory questions, though Microsoft's share of big Internet markets will still be competing with Google (GOOG). In other words, I don't see regulatory barring this deal. There is also the potential that Microsoft's real offer, when/if it occurs, could be more than speculated upon in the article. Also, other bidders may come to fore since media is extremely interested in capturing Internet space. A lot of speculation here driving excitement, but that ceiling of $35 seems to be capping it for now.

Asia:
Hang Seng Index +0.77%; Shanghai/Shenzhen CSI 300 NA; NIKKEI 225 NA; S&P/ASX 200 +0.95%; Taiwan TAIEX +1.76%; BSE SENSEX 30 -1.02%; KRX 100 +0.39%; Ho Chi Minh +1.04%

U.K., Europe & Middle East:
DJ STOXX 50 Index +0.38%; FTSE 100 +0.9%; CAC 40 +0.98%; DAX +0.28%; Russian RTS Index +0.36%; ASE General +0.55%; Tel Aviv 25 NA; Tadawul All Share NA; DFM General NA

Our value-added take on today's key news:

• *** Microsoft going after Yahoo!?
• *** The Labor Department released its Employment Situation Report showing unemployment rose to 4.5%, nonfarm payrolls edged up 88,000 and average hourly earnings rose 0.2%. The 88,000 payrolls rise in April was well off the strength of March's 177,000 growth. We note the weakness within the retail sector, with retail jobs declining. There was a strong rise in retail during March that benefited from weather, and with April being relatively cold, weather may have impacted it as well. Services overall rose 116,000 in March, the smallest amount since last June. As we outlined in yesterday's article, ISM service sector data should trail weaker consumer spending and retail weakness. We see unemployment rising this year, and a stubborn economy that includes companies that are benefiting from solid international sales, eventually giving way to a weakening consumer. The housing sector is the most important portion of our economy, and its impact on lending has broad reaching implications for American consumers. A weakening domestic market is more important to large American multinationals than their foreign sales, and should eventually prove so. Thus, Wall Street Greek views the current rise in stock prices as a set up for a fall. The sails remain full for now, thanks to the overriding international theme driving Dow and large S&P 500 components. It's hard to call the inflection point, where sentiment will turn, but I would look to economic data for a catalyst. Next week brings key retail sales data and an FOMC meeting, so beware!
• *** Earnings season rolls on.

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