Is Yahoo undervalued?... Moody's ditches the alphabet... Sam Zell buys 7.7% of Starwood and drops another F-bomb... Amex "black card" holders report in... Jeff Clark's one-day, 45% trade... Momentum in the second week...

Don't forget... A private conference call with the management of our favorite microcap gold stock is tomorrow night at 7:30 p.m. EST. Matt Badiali has been watching this stock for over a year, and his L-2 indicator recently said buy. The stock hasn't exploded yet, but after tomorrow's phone call, the word will be out. To participate in the phone call, click here.

Microsoft CEO Steve Ballmer said the Yahoo offer is half cash and half stock because Microsoft doesn't have the appetite to take on too much financial risk. Today, we learn that Microsoft CFO Chris Liddell is thinking about funding some of the cash portion with debt. So who gets the financial risk? Microsoft shareholders and bondholders, that's who.

I never thought I'd see Microsoft deal shareholders the double blow of diluting them and subordinating them to other investors to buy a company that's had its lunch eaten by Google. Microsoft appears to be offering way more than it is getting...

...or is it? Yahoo owns stakes in publicly traded companies (Yahoo Japan, Alibaba.com, and South Korea's Gmarket), cash, and securities worth approximately $11.89 per Yahoo share. So Microsoft's $31-per-share offer values Yahoo's operating business at about $19.11 per share. During the last 12 months, Yahoo has generated about $923 million of free cash flow, about $0.69 per share.

So if you take out the cash and investments, Microsoft values Yahoo at about 28 times cash flow. I don't know for sure, but for the No. 2 brand name in Internet searches, maybe that's not too much.

The Justice Department has already said it would investigate the Microsoft/Yahoo deal. It's easy to see why, too. According to NetRatings, Google handled 56.3% of U.S. web-search queries in December, compared with 17.7% for Yahoo and 13.8% for Microsoft. So a combined Microsoft/Yahoo would have handled 31.5% of U.S. web-search queries in December. The deal would put 87.8% of search queries under only two corporate roofs.

Steve Ballmer's plan to spin the deal as enhancing competition by providing a counterweight to Google's dominance makes no sense. The Justice Department will argue that with one less competitor, there's less competition...

...which, of course, would be a good thing for Microsoft shareholders. It reminds me of what Jack Welch did at General Electric. He knew advantages of scale were all-important, so he just said if we can't be No. 1 or No. 2, we're out. This deal would take Microsoft from No. 3 to a strong No. 2.

What's the best way to ensure we never see another credit blowup with hundreds of billions of dollars in losses? Moody's proposes changing its rating system for debt securities. Currently, top securities garner the "Aaa" rating and the bottom of the barrel is "C." The new system, should it be adopted, will have the same number of grades, 21, but use numbers rather than letters.

Billionaire real estate tycoon Sam Zell bought a 7.7% stake in Starwood Hotels & Resorts, becoming the company's second-largest shareholder. Zell is an incredibly prudent investor. He sold his Equity Office Properties real estate portfolio to Blackstone for $39 billion at the exact top of the real estate market. And he recently bought newspaper conglomerate Tribune at what could well be the bottom in newspapers. If Zell is buying hotels, you probably don't want to be selling.

Zell isn't the only one buying newspapers. Porter recently told his subscribers about a newspaper trade that uses a new strategy he developed – a technique that captures 100% of capital gains while eliminating downside risk. Porter calls it "the perfect setup for long-term investors who are seeking capital gains, but can't afford to lose any money." Mastering this technique will ensure you never see big losses in your portfolio again. To read more about Porter Stansberry's Investment Advisory, click here.

I took an immediate liking to Zell after meeting him at the Grant's Interest Rate Observer Conference in Manhattan. In a room full of dark suits and conservative ties, Zell was wearing a bright pink striped shirt, bright blue blazer, and blue jeans. He told Jim Grant – the host, whom he had never met – "I read your stuff sometimes. It's good part of the time, but most of it is bullsh*t." He then led his profanity-spiced speech with a joke about drinking, smoking marijuana, and having sex.

His gift for the lewd recently landed him in the press after an off-color remark to a reporter from the Orlando Sentinel (a paper he owns). Check it out here.

New high: Raytheon (RTN).

In the mailbag, lots of reader opinions about the American Express Centurion card, the so-called "black card," but not much else. If you have a black card or a green card or if you're just a card yourself, write us at feedback@stansberryresearch.com.

"I do have a black American Express card... I don't charge $250,000 per year and I don't pay the exorbitant fees. It's a perk that comes from banking with Bank of America – The Private Bank. It also comes with a free Priority Pass membership which gets me entry into just about any airline lounge in the world. I haven't used the concierge yet, but am looking forward to it!" – Paid-up subscriber Sharyn

"You ask whether the 'black card,' the Centurion Card, is worth it. The answer is yes, at least for me. It gives you platinum status with US Airways, gold status with Delta, Continental and Virgin Atlantic, and lounge access with all of these airlines plus American. It also gives you high status with several hotel chains. I almost always get upgraded when flying domestically, which matters a lot when you're 6' 4". Five or six upgrades pay for the card. And I've been upgraded to gorgeous hotel rooms that I never would have paid to stay in, like a private apartment at the Kuwait Hilton that was bigger than my first house. The card was an absolute steal at $1000, but it's still worth it at $2500. And one more thing – the folks at Amex customer service are very, very nice to Centurion members. When your desk is a mess and your payment goes out three days late, that matters. So yes, it's worth it." – Anonymous

"I have the dubious honour of holding the Amex Black card. Is it worth the subscription fee? I am based in Hong Kong so the benefits are Hong Kong oriented. It give effective membership of some of the 'exclusive' private clubs, which is certainly worthwhile. One disadvantage is that Hong Kong registered Centurion card members don't have access to the Virgin Atlantic Clubhouse at Heathrow or Newark, a discrimination that vexes me since the card is intended to be for worldwide use. As for the other services, Amex Travel is not ideal if you are looking for the most cost effective tickets on long haul: the Concierge service is not worth using, slow and ineffective. Now we have been issued with a Titanium card in place of the customary plastic so that probably means it will have to be put through the X-ray machines at airports to avoid being frisked. Some of my friends who also have the card have managed to parlay better deals in return for the absurdly high subscription, as much as 500,000 air miles! The bulk of the discounts at various restaurants and retail outlets are no higher than you can get with an Amex Gold card or a Visa Platinum. Added to which, Amex will not 'do nicely thank you' with many merchants. I will be reviewing my subscription when it expires towards the end of 2008. As I argued with Amex, 'Why should I pay you when I am earning for you?'" – Paid-up subscriber Neville Sarony

"Time to put a muzzle on Clark. the last time clark turned technically bearish on gold I missed the big move from 650 to 800. He is doing it again. Please give him a subscription to Richard Russell and don't let him out of the closet until he gets it. He even wants to put stops under gold shares which will get you out at the lows of this consolidation. Then what? whip saw?" – Paid-up subscriber Steve Littlejohn

Clark comment: How come nobody ever wants to muzzle me when I turn bearish on tech stocks, or retailers, or any other sector? The muzzle only comes out when I start barking about gold. It seems to me some gold bugs might be walking around with blinders on.

The thing is, I actually agree with the longer-term bullish arguments for gold. In fact, I said as much in yesterday's S&A Short Report. But the Short Report is a SHORT-TERM trading service. I make most of my recommendations based on what I think can happen over the next few days or weeks. And if I see conditions that set up a good trade for my subscribers, then I'm going to write about it – even if it conflicts with my longer-term views.

To me, the action in gold looks bearish over the short term. But you don't have to pay any attention to me. If your gold positions are long term and you don't mind sitting though a bit of a pullback, then just skip over the part of my newsletter you don't like. On the other hand, if you got into the bearish gold trade I recommended yesterday, you're up about 45% overnight. That's enough to buy a few more muzzles.

Regards,

Dan Ferris
Medford, Oregon
February 5, 2008

How Long Can a Bear-Market Rally Last?
By Ian Davis

Last week, the S&P 500 posted a 4.9% gain – its largest one-week gain in five years. Is it time to jump into the rally with both feet... or take some profit and run?

Let's take a look and find out...

Since 1970, the S&P 500 has rallied 4.9% or more in a week (from the close Friday to the close the next Friday) 33 times. At first glance, what happened after those rallies makes a bullish case...

It makes sense that in a bull market, the S&P would continue to outperform its historic averages. However, the market is on shaky ground right now... and that's got me wondering if we could count on these results in bearish conditions.

During the bear-market years of 1973-1974, 1981-1982, and 2000-2001, the S&P 500 rallied by 4.9% or more 17 times. The following week saw modest gains...

So even in rough weather, the market generally continues to rally one week later. How about two weeks later?

Weekly Overperformance Following a 4.9% Market Rally

This chart shows the average weekly "overperformance" following these occurrences. (Overperformance is the market's return over and above its historic one-week average of 0.16%.)

As you can see, the momentum fails in the second week.

During week two, the market returned 0.23% and was up only 57.6% of the time (about average). In a bear market, the S&P returned -0.35% two weeks later and was down 57.1% of the time.

Despite having the odds in our favor this week, the market is struggling. So far, the S&P 500 is down about 4%. If you're a short-term trader, don't bet on last week's momentum turning this rout around. Remember, the odds favor even more declines next week.

Until next time...

Good investing,

Ian Davis

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