Bonds, Stocks Show Bernanke Progress Repairing Financial System

April 29 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is persuading investors that the financial markets are working again.

The Standard & Poor's 500 Index gained 8.4 percent since the central bank backed the purchase of Bear Stearns Cos. on March 16. Companies sold $45.3 billion of debt last week, the most ever. High-yield bonds are poised for their best month in five years and mortgage securities are outperforming Treasuries for the first time in 2008.

``In the near term, if he's a triage nurse, you have to say he's definitely stabilized the patient,'' said James Swanson, who helps oversee $204 billion as chief investment strategist at MFS Investment Management in Boston. ``That's what I'd call it, a triage nurse using radical procedures. But they worked. Whether they'll be proven right in the long run, I don't know.''

By cutting interest rates six times since September, backing the Bear Stearns takeover and pumping $915.5 billion through the financial system, Bernanke provided relief to investors stunned after banks reported $312 billion of losses and writedowns from mortgage-related securities and leveraged loans.

Policy makers meet today and tomorrow to set interest rates. Futures contracts on the Chicago Board of Trade show there's an 80 percent chance the Fed will cut its target for overnight lending between banks by a quarter percentage point to 2 percent.

Citigroup Inc., the biggest U.S. bank by assets, and Merrill Lynch & Co., the largest broker, together recorded $72.6 billion of losses and writedowns as subprime loans infected credit markets. Last week, the New York-based companies led bond sales with a total $15.6 billion.

Subprime Collapse

While the collapse of subprime mortgages in July caused the credit market seizure, AAA securities tied to similar loans returned 0.12 percentage point more than Treasuries this month, the best since December, according to Lehman Brothers Holdings Inc. index data. Mortgage bonds guaranteed by government- chartered Fannie Mae and Freddie Mac returned 0.67 percentage point more than Treasuries as of April 25, the most since September 1999.

``The markets are giving him credit for having turned the corner and bringing stability back,'' Kenneth Hackel, a managing director for fixed-income strategy at Greenwich, Connecticut- based RBS Greenwich Capital Markets, said of Bernanke. The firm is one of 20 primary dealers that trade with the Fed. ``Issuers are able to come to market and investors have some confidence in their willingness to put riskier assets back on their books.''

Bernanke slashed the central bank's target rate for overnight loans between banks by 2 percentage points since January, the fastest reduction in two decades.

`Radical, Shocking Stuff'

The Fed began auctioning as much as $200 billion of Treasuries as loans to primary dealers last month, and backed New York-based JPMorgan Chase & Co.'s purchase of Bear Stearns. Policy makers offered loans to securities firms as part of its biggest expansion of credit since the Great Depression.

``It was radical, shocking stuff,'' said MFS's Swanson. ``He's really way out there, preemptive and radical.''

Bernanke was responding to the paralysis caused when AAA subprime-related securities suddenly started behaving like junk bonds as defaults by borrowers with poor credit rose to the highest on record.

As demand for all but the safest government debt evaporated, banks were left with more than $230 billion of loans used to fund leveraged buyouts. Investors fled commercial paper backed by mortgages and credit cards, reducing the amount of the debt outstanding by 36 percent to $767.1 billion since August.

Limits to Confidence

Money markets still show limits of investor confidence. The difference between the yield on three-month Treasury bills and the rate on dollar-denominated loans in London, an indication of credit risk known as the TED spread, expanded to 1.54 percentage points from this year's low of 0.78 percentage point on Feb. 12.

``The reluctance of banks to lend is still ongoing from last summer,'' said Moorad Choudhry, an economics professor at London Metropolitan University, and co-author with Frank J. Fabozzi and Steven V. Mann of ``The Global Money Markets.''

Citigroup Chief Executive Officer Vikram Pandit said April 22 that the credit-market contraction is abating, echoing remarks by Jamie Dimon, his counterpart at JPMorgan, who said April 16 that the credit-market freeze is more than half over. Richard Fuld, CEO of Lehman, Goldman Sachs Group Inc. CEO Lloyd Blankfein and Morgan Stanley CEO John Mack offered similar assessments.

The S&P 500 is up 5.6 percent this month. Finance company shares rose the most, gaining 14 percent on average. Citigroup advanced 36 percent on the New York Stock Exchange and Merrill Lynch is up 14 percent.

High-yield bond returns may be the best since 2003. Company debt rated CCC or less by S&P returned 6.75 percent since March 17, compared with 5.02 percent for all junk bonds, Merrill Lynch index data show. Junk bonds are rated below Baa3 by Moody's Investors Service and BBB- at S&P.

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Visa Falls Victim To High Expectations

Since going public in March, Visa has soaked in the market's love, rising 33.9%, but will the good vibe remain after its conservative outlook?

Despite posting a 27.6% rise in second-quarter earnings, investors kicked the San Francisco-based credit card company down 6.4%, or $4.80, to $70.83, in after-hours trading after it issued a three-year outlook that some might deem conservative for a company considered to be one of the best positioned in the card business: annual sales growth of 11.0% to 15.0%, annual adjusted operating margin in the low 40.0% range, annual adjusted earnings-per-share growth of 20.0% or greater, and annual free cash flow above $1 billion.

"At some point, the softening economy will likely impact our business in the U.S.," Chief Financial Officer Byron Pollitt said in a conference call with analysts.

For the quarter that ended March 31, Visa (nyse: V - news - people ) reported that its profit rose 27.6% to $314.0 million, or 39 cents per share. Analysts tend to exclude one-time gains and losses from their forecasts; excluding certain factors including litigation expenses, Visa's earnings amounted to 52 cents a share. The consensus analyst forecast in a Thomson Financial poll was 46 cents per share.

Litigation, though, is one of Visa's primary concerns. So far the company has set aside an astounding $3 billion from its initial public offering to cover potential liabilities from lawsuits accusing Visa of working to undercut competition and fix prices. A case brought by Discover Financial Services (nyse: DFSWI - news - people ) is scheduled to go to trial in September. Visa settled a similar suit with American Express (nyse: AXP - news - people ) last year.

During the second quarter, Visa said it paid American Express $945 million under a settlement that requires Visa to give its rival $2.07 billion over the next four years. Most analysts, however, have been fairly optimistic about Visa's prospects. Before Visa reported earnings late Monday, several analysts issued positive assessments of the company, based on a brand that was launched in 1977 and now has operations in 170 countries.

Visa had a huge coming out party in March as its shares rose 28.4% to close its first trading session at $56.50. The initial public offering was the largest on record, raising $17.9 billion. (See: "Investors Gobble Visa Shares")

Mars, With Buffett, to Buy Wrigley for $23 Billion

April 28 (Bloomberg) -- Mars Inc., backed by billionaire Warren Buffett, agreed to buy Wm. Wrigley Jr. Co. for $23 billion to create the world's biggest candy maker.

Wrigley surged 23 percent in New York trading today after the companies said Mars would pay $80 for each of the gum maker's shares, with Buffett's Berkshire Hathaway Inc. providing part of the financing. Mars is offering 28 percent more than Chicago-based Wrigley's closing price on April 25.

The combined company will have $27 billion in annual sales and 14 percent of the world's candy market. Buffett will get more than 10 percent of Mars's Wrigley unit. Mars, the maker of M&Ms and Snickers, will add its Starburst and Skittles candies to 117-year-old Wrigley's Lifesavers and Altoids brands.

``It's a great price,'' said Thomas Burnett, director of research at New York-based Wall Street Access. ``Nobody is going to pay more than that. Who is going to go up against Mars and Buffett?'' He doesn't own shares of Wrigley or Berkshire.

Mars and Wrigley together will control almost 28 percent of the U.S. candy market, eclipsing Hershey Co.'s 24 percent share of consumer purchases, according to Euromonitor International Inc. in Chicago, citing 2006 sales. It will also become the largest candy maker in the world, surpassing Cadbury Schweppes Plc's 10.1 percent share.

The purchase will be financed with $11 billion from Mars, $4.4 billion from Berkshire and $5.7 billion from Goldman Sachs Group Inc. Berkshire will also buy a $2.1 billion stake in the Wrigley division once the purchase is completed.

Candy Brands

``There's really nothing that can go wrong with something like the Wrigley and Mars brands,'' Buffett, 77, Berkshire's billionaire chief executive officer, said today in an interview on the CNBC television network. ``People are eating more and more of their products every day.''

Berkshire also owns See's Candies, an 87-year-old confectioner in San Francisco, which had sales of $383 million in 2007, Buffett said in his annual letter to shareholders. Mars has annual revenue of $22 billion while Wrigley's sales were $5.39 billion last year.

Wrigley, which started trading on the New York Stock Exchange in 1923, jumped $14.46 to $76.91 at 4 p.m. The shares had gained 6.7 percent this year before today. McLean, Virginia-based Mars is the eighth-largest private company in the U.S., Forbes magazine said in November.

``Buffett gives it a lot of credibility so there's not a financing issue here, which is so important these days,'' Burnett said.

Hershey Shares

Hershey rose 4.6 percent in New York trading, while Cadbury climbed 2.8 percent in London as analysts including Eric Katzman from Deutsche Bank Securities Inc. suggested other mergers may occur. U.S. confectionary companies are exploring combinations as competition intensifies and milk and sugar prices rise.

Mars ``is primarily a chocolate company and we are primarily a chewing gum company,'' Bill Wrigley, Wrigley's chairman, said today on a conference call. Combining is ``about being able to invest for the long term and grow our business. We are very pleased with our competitive stance.''

Mars ``intends for us to run as a separate, stand-alone entity with a high degree of autonomy,'' said Wrigley, who plans to remain executive chairman and said other executives including CEO William Perez will stay in place. No employee cuts are planned, Wrigley said. It had about 16,400 employees at the end of 2007.

William Wrigley Jr. began selling soap in Chicago in 1891 and eventually turned to chewing gum, an item he was giving away for free with each sale, according to Wrigley's corporate Web site. He introduced Juicy Fruit and Wrigley's Spearmint in 1893, two brands the company still sells today.

Outside Chief

In 2006, Wrigley named former Nike Inc. chief Perez president and CEO, the first person outside the Wrigley family to head the company.

Sales at Wrigley may rise 9 percent this year, the slowest pace since 2000, according to the average estimate of nine analysts surveyed by Bloomberg. Competition from London-based Cadbury's Trident and Dentyne gums in the U.S. has eroded its market share.

Cadbury, the maker of Dairy Milk chocolate, bought Pfizer Inc.'s Adams candy unit for $4.2 billion in 2003 to become the world's second-largest maker of chewing gum.

The purchase price values Wrigley at 32 times estimated 2008 profit, compared with about 18 times earnings for the Standard & Poor's 500 Packaged Foods Index, according to Bloomberg data.

``This valuation looks extremely rich,'' Alexia Howard, an analyst with Sanford C. Bernstein in New York, said in a research note today. Wrigley hasn't traded at such a multiple since 1998, she said.

First Quarter

First-quarter net income climbed to $168.6 million, or 61 cents a share, compared with $142.7 million, or 52 cents, a year earlier, Wrigley said today in a separate statement. Revenue advanced 16 percent to $1.45 billion, helped by the weaker dollar and sales in China and Russia.

The trust that controls Hershey discussed ways to merge the chocolate company with Cadbury in a way that wouldn't decrease the trust's ownership, the Wall Street Journal reported last year. Cadbury will split off its U.S. drinks unit May 7 and begin trading as two separate companies: Cadbury Plc in London and Dr Pepper Snapple Group in the U.S.

A combination of Hershey and Cadbury probably won't happen, given the pressure that Cadbury faces from its shareholders to improve performance, Howard said.

``The idea that Cadbury's board would approve a sizeable deal and pay a significant control premium to acquire a weak performer in a slow-growing, developed market is extremely unlikely,'' she wrote.

Hershey Trust spokesman Tim Reeves declined to comment.

Mars History

Mars, founded in 1911 by Frank C. Mars, is still family owned. The company gets about 45 percent of revenue from chocolates and other snacks. Its biggest division is pet food, which sells Whiskas cat food and Pedigree for dogs, and accounts for 46 percent of sales, according to the company's Web site.

Berkshire Hathaway, based in Omaha, Nebraska, has about $40 billion to spend on acquisitions. Buffett has built Berkshire over four decades from a failing textile maker into a $195 billion holding company with businesses ranging from candy making to insurance.

Berkshire has stakes in companies including Coca-Cola Co. and Buffett ranks as the world's richest person, according to Forbes magazine.

Additional financing as well as advice is coming from JPMorgan Chase & Co, Mars said. Simpson Thacher & Bartlett LLP is acting as its legal counsel.

Goldman Sachs and William Blair Inc. provided Wrigley with financial advice. Skadden, Arps, Slate, Meagher & Flom, LLP served as legal adviser.

To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina, at cburritt@bloomberg.net.

Pain Is Their Gain

Crumbling U.S. home prices and $100 oil helped Wall Street's Highest Earners pull in $19 billion last year

Problems paying the mortgage, filling the gas tank and feeding the family have eroded living standards for millions of Americans during the past several months. Not so for people who manage big piles of money--many of them made a fortune betting correctly on the housing debacle and rising commodity prices last year.

Our look at the pay of folks who run hedge and private equity funds shows that the top 20 took home a collective $18.7 billion last year, 43% more than in 2006. To even make the list you needed minimum earnings of $350 million, which is $90 million higher than the year before. No chief executive of a traditional Wall Street investment bank even came close.

Our top-ranked earner, hedge fund manager John Paulson ($3.3 billion), reaped much of his bounty from shorting the abx Index, which tracks the strength of the subprime mortgage market. Paulson earned an estimated $2.3 billion from his share of fees charged to investors and $1 billion from the appreciation of his own capital invested in Paulson & Co. funds.

Fund manager Philip Falcone, who ranked third with $1.7 billion, posted triple-digit returns by shorting subprime credit, resulting in $11 billion of growth for his two Harbinger Capital funds, excluding assets raised from new investors. John Burbank, who runs San Francisco hedge fund Passport Capital, made $370 million last year, also in large part by shorting home mortgage companies and mortgage-related debt ( see story).

Some members of our list, like Texans T. Boone Pickens ($1.2 billion) and John Arnold ($700 million), made their fortunes the old-fashioned way: betting on energy. Pickens' $2.7 billion bp Capital Equity Fund grew by 24% after fees, while his $590 million Commodity fund grew 40% thanks to large positions in Suncor Energy (nyse: SU - news - people ), ExxonMobil (nyse: XOM - news - people ) and Occidental Petroleum (nyse: OXY - news - people ).

For hedge fund billionaires Pickens and second-ranked George Soros ($2.4 billion), whose own investments compose a significant portion of their funds, there's more to be made from asset appreciation than from fees. Soros made $2 billion from the growth of personal investments within his $17 billion Quantum Endowment Fund, which returned 32% for the year.

To determine Wall Street's 20 highest earners of 2007 we examined hedge, private equity and mutual fund principals and traders, as well as investment bankers. The hedge fund and leveraged buyout bosses typically reap fees equal to 20% of profits and 2% of assets.

Our paychecks are pretax and net of the firm's expenses, and exclude proceeds from selling shares in their own business. For example, we count the $400 million that Stephen Schwarzman of Blackstone Group (nyse: BX - news - people ) earned from annual salary, distributions of percentage fees and capital appreciation on his investments in Blackstone's funds, but exclude the $4.8 billion that he took out of the business when he sold shares to the public and to the Chinese government.

Microsoft Profit Drops; Forecast May Miss Estimates

By Amy Thomson

April 24 (Bloomberg) -- Microsoft Corp. declined 5 percent in extended trading after it reported an 11 percent drop in third-quarter profit and forecast earnings that may miss analysts' estimates as Windows software sales fell.

Net income dropped to $4.39 billion, or 47 cents a share, from $4.93 billion, or 50 cents, a year ago. Revenue was little changed at $14.5 billion, matching analysts' estimates and disappointing investors looking for more after industry reports showed better-than-expected demand for personal computers.

The world's biggest software maker said sales of Windows for PCs sank 24 percent and revenue from its online advertising unit came in at the low end of its projections. Microsoft's report contrasted with positive comments from chipmaker Intel Corp. and computer company International Business Machines Corp.

``People were expecting more of a blowout,'' said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon. ``It's a decent quarter. It's not a great quarter by any means, and people were expecting a great quarter.''

Earnings in the quarter, which included costs of 15 cents a share for a European Commission fine, beat the 44.5-cent average of analysts' estimates. Profit and sales a year ago were helped by $1.67 billion in Windows and Office software orders held over from the previous quarter for accounting reasons.

Chief Financial Officer Chris Liddell said Microsoft will stand firm on its offer for Yahoo! Inc. and will explore other options, including a proxy fight or abandoning the offer, if no deal is reached by this weekend. Yahoo spokeswoman Diana Wong declined to comment.

Shares Fall

Microsoft declined $1.60 to $30.20 in extended trading after closing at $31.80 at 4 p.m. New York time on the Nasdaq Stock Market. The stock has fallen 11 percent this year.

For this quarter, Microsoft forecast profit of 45 cents to 48 cents a share on sales of $15.5 billion to $15.8 billion. That compares with analyst estimates of 48 cents and $15.5 billion.

The results stoked concern that corporations are tightening their belts as the U.S. economy cools, even after a report from researcher IDC showed PC sales exceeded forecasts in the quarter. PC shipments rose 15 percent, Framingham, Massachusetts-based IDC said this month. Microsoft had forecast as much as 11 percent.

Windows sales fell to $4.03 billion in the quarter. UBS AG's Heather Bellini, the top-ranked software analyst by Institutional Investor, predicted $4.3 billion. Sales of Office word-processing and spreadsheet applications trailed forecasts slightly as well.

Windows Concern

Chief Executive Officer Steve Ballmer has sought to bolster sales by selling more higher-priced versions of Windows, the operating system that runs more than 90 percent of the world's PCs. Those gains were limited last quarter.

More Windows sales came from emerging markets, where prices are typically lower, Liddell said in an interview. Piracy rates also picked up in Asia, particularly China, Liddell said.

``That means that we are seeing revenue growth relative to unit growth isn't as strong,'' he said. The company expects PC growth of as much as 13 percent for fiscal 2008.

Microsoft said total sales in the year that starts in July will rise to between $66.9 billion and $68 billion, beating the $66.6 billion average of estimates in a Bloomberg survey. Profit will increase to between $2.13 and $2.19 a share, topping an estimate of $2.11.

Online Business

In the online business, where Ballmer is seeking to build sales by bidding for No. 2 search engine Yahoo, the loss widened to $228 million. Sales rose 40 percent to $843 million. Microsoft had forecast 40 percent to 45 percent growth. Google Inc.'s revenue, excluding sales passed on to partner sites, climbed 46 percent in the period, to $3.7 billion.

Microsoft has options for building out the online business without Yahoo, including other investments and partnerships, Liddell said on a conference call. Talks between the two companies were characterized by ``unrealistic expectations of value,'' and have been ``anything but speedy,'' he said.

``Yahoo continues to lose search share and profit continues to decline year on year,'' Liddell said on the call. ``We have been clear that speed is of the essence for the deal to make sense.''

Yahoo CEO Jerry Yang spurned Microsoft's advances, rejecting the $31-a-share bid and approaching rivals such as Time Warner Inc.'s AOL. Ballmer may begin a proxy contest to oust Sunnyvale, California-based Yahoo's board as soon as this weekend.

The acquisition, which would be the largest in Microsoft's history, may help the company take a bigger chunk of the $41 billion market for Internet ads away from Google.

Xbox Growth

One bright spot in the quarter came from the Xbox video-game unit, where sales growth was almost double some forecasts. The business posted its third straight quarterly profit and revenue rose 68 percent to $1.58 billion. Microsoft predicted growth of 25 percent to 35 percent.

Ballmer has lined up exclusive titles such as ``Halo 3'' and ``Mass Effect'' to win users from Nintendo Co.'s Wii system and achieve the first annual profit in the Xbox unit.

It was ``an outstanding Xbox quarter,'' said Canaccord Adams Inc. analyst Peter Misek in Toronto. ``It's just amazing that a company this size is being driven by video games.''

Microsoft has cut the price of the Xbox 360 console in Europe at least twice in the past year, prompting sales to more than double, Chris Lewis, vice president of the company's interactive business in Europe, said this month.

To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net

The Lonesome Bubble

Suddenly, I find myself playing Scrabble in Chinese, filling in spaces on the board with words like copper, oil and potash. China thirsts for all these commodities to keep its economy humming. So far, I'm batting .400.

When oil broke through the $100 a barrel hurdle, I said it was time to join the crowd. Value stocks, after badly trailing growthies all last year, outstripped the Russell Growth Index during the March quarter. Energy is now over 13% of the S&P 500 Index, double its weighting a few years ago. After the oil shock in the 1970s--when the Saudi king took oil from $3 to $12 a barrel, offended by our pro-Israel diplomacy--energy peaked near 25% of the market's valuation.

The last bubble is energy. Nobody can tell you exactly why oil futures just spiked to more than $119 a barrel. After all, the world is in a decelerating growth mode barring China. Monetary authorities there managed to smother stock market exuberance with high interest rates, but the March quarter's gross domestic product (GDP) growth logged in at over 10%. This was much higher than students of the Chinese economy projected.

I can't recall when I last owned oil giants and commodity plays. I avoid ExxonMobil (nyse: XOM - news - people ) ( see last week's piece). The company is unable to increase oil production, stagnant for several years. If I'm wrong on copper, I own an open pit filled with polluted water.

As for oil, drilling and exploration costs are going through the roof, escalating 10% to 15%, annually. A class-five deep-water drill rig leases out at $625,000 a day, double the rate of a few years ago.

So far, during April, growth stocks are outperforming value properties, a big change. I never turned my back on Google (nasdaq: GOOG - news - people ) and Apple (nasdaq: AAPL - news - people ), now getting a second wind. What kept me in Google was its share of market in paid search gained, while Microsoft (nasdaq: MSFT - news - people ) and Yahoo! (nasdaq: YHOO - news - people ) lost yardage. Stocks like IBM (nyse: IBM - news - people ) stay buoyant, beneficiaries of the weak dollar. Google and IBM log more than half their business abroad, along with Intel (nasdaq: INTC - news - people ) and Hewlett Packard (nyse: HPQ - news - people ), also winners.

Google has $600 written all over it after its 90-point sprint last Friday. It sells at 22 times next year's earning power with a run rate of $5 billion in free cash flow. This is serious money for any major corporation, enough for major strategic acquisitions to expand Google's footprint in Internet advertising worldwide.

While I've poured money into energy and commodity operators, I'm riddled with ambivalence. Oil-related equities, copper, iron ore and fertilizer are tied to escalating prices China must pay to keep their industrial heartland humming.

Not one of the energy giants, like Exxon, is finding much new oil. Reserve life is stalled out, and they are barely maintaining present production levels. Costs of finding new oil are near punitive. It's why I own rig operators like Transocean (nyse: RIG - news - people ) and Diamond Offshore and service operators like Schlumberger (nyse: SLB - news - people ). Occidental Petroleum (nyse: OXY - news - people ) gets my money, because it can increase production at least a few years longer.

Much of the copper and iron ore the Chinese buy from Freeport-McMoran Copper & Gold (nyse: FCX - news - people ) and Vale goes for domestic consumption rather than exports. A mild contraction of worldwide GDP momentum is not the pivotal variable for demand. Copper production is difficult to scale up. Inventories are moderate, and wildcat strikes, a way of life, constrain output.

Demand for potash-based fertilizers is also China-driven. The Chinese are eating more grains and meat as their middle class swells year after year. Potash Corporation of Saskatchewan (nyse: POT - news - people ) and Mosaic (nyse: MOS - news - people ) will double earning power next year based on the enormous increases in annual contractual prices just agreed upon. The possibility of another big increase in prices next year is not yet built into these stocks.

Don't get carried away. Worldwide production of wheat and corn is a function of the price level of these two commodities. A bumper crop next year would impact fertilizer prices big time. Stocks like Mosaic and Potash need to experience prolonged highs in futures prices for wheat and corn. Fertilizer production incidentally is difficult to scale up year over year, a plus factor that limits oversupply.

In short, futures pricing is everything for oil and commodity plays. Wall Street's analysts never expected the surge in futures quotes. Earnings estimates at year end for energy stocks baked in $85 oil. Only in the past few weeks have analysts given in on hundred-dollar oil in their earnings models. Still too low. The same goes for natural gas.

Followers of the copper market expected copper this year to average $2.50 a pound, not the 4 bucks we're seeing. Nobody can gauge to what extent the bull run in futures market is a product of speculation and sizable capital allocated to commodities markets by institutional investors and hedge funds seeking uncorrelated alpha. That's performance unlinked to worldwide bourses.

Google peaked at $740 last November, and Apple stood at $200. A month ago, Google touched down at $412, and Apple based at $120. For investors with no ice water flowing in their veins, such volatility is unacceptable.

Viability for a growthie is its magic word. A pretty girl strolling down Fifth Avenue, her summer dress fluttering in the breeze, doesn't need a sign on her back that says she's a knockout. When she stops at Gucci, follow her in. Maybe she'll take lunch with you after she hears you like her dress.

There's no dream in oil and commodity plays. I hold to my working hypothesis that finding oil costs more as you drill deeper offshore and onshore. The elephantine fields in Mexico and Russia topped out, and Saudi Arabia may be next. Nobody in the world has projected the price for oil accurately for more than a short time, and that includes ExxonMobil and me.

Google and Apple are my girls in pretty dresses. The efficient market theory doesn't work on these babes. How do you model vivacity?

GooHoo's Dangerous Liaisons

Yahoo! appears to be pushing its luck. On April 10, the struggling Internet portal said it was testing a partnership to allow Google to host a small percentage of its search advertisements for two weeks. On Thursday, a week later, it inched further toward a long-term deal with Google because the companies are pleased with the initial results of the experiment, according to The Wall Street Journal.

The problem, as Microsoft (nasdaq: MSFT - news - people ) pointed out in a statement last week, is that any potential deal between Google (nasdaq: GOOG - news - people ) and Yahoo! (nasdaq: YHOO - news - people ) raises antitrust concerns: Google receives 67% of all searches, and Yahoo! hosts 20%, according to March data from Web traffic analysis firm Hitwise. Combined, the two would represent a near monopoly of the search market.

Sharing its ad space with Google would also mean a quick revenue bump for Yahoo!, thanks to Google's higher percentage of clicks on ads. But just how far can a Yahoo! and Google liaison go?

"I hate to admit it, but Microsoft is right," asserts Robert Lande, a member of the American Antitrust Institute. "The closer Google and Yahoo! get to a deal, the closer they get to some very serious antitrust problems."

At the same time, a lengthy and painstaking antitrust review could be another tactic by Yahoo! to further delay Microsoft's efforts to acquire the company. Microsoft launched its bid for the Internet portal on Feb. 1. Although industry observers continue to bet that Microsoft may prevail in its quest, Yahoo! has been going to great lengths to find an alternative to hooking up with the software giant.

Still, Yahoo!'s board last Friday authorized more talks with Microsoft and News Corp., which is considering joining Microsoft in its bid, indicating that discussions among the companies are taking place this week.

Yahoo! and Google haven't revealed the extent of their proposed ad partnership. A deal to outsource 3% of Yahoo!'s ads for two weeks, says Lande, poses little anti-competitive threat to other search players, including Ask.com or Microsoft. A deal that gives Google full access to Yahoo!'s search results, on the other hand, could be seen as a violation of the Sherman Antitrust Act and so might lead to regulatory penalties, such as the kind issued by the Federal Trade Commission.

For any other fraction of Yahoo!'s ads, regulators would have to weigh whether Yahoo! was still an independent competitor or if its search advertising business was controlled by Google, according to Lande.

In fact, even a 3% takeover of Yahoo!'s ads is likely worth more than 3% of its search advertising revenues. Because search advertising revenue is concentrated in a small fraction of high-value search terms, a Google deal could influence far more Yahoo! revenue than the mere fraction of ads it controls.

"This deal is going to be incredibly challenging for Yahoo! and Google," says David Balto, a lawyer and former policy director for the Federal Trade Commission. "To what extent will Yahoo! remain an independent competitor and a strong rival to Google? That's a critical question."

Partnerships like the one that Google and Yahoo! are proposing aren't often the subject of antitrust scrutiny, but technically fall under the same legal framework. In 2005, a joint venture between MasterCard (nyse: MA - news - people ) and Visa (nyse: V - news - people ) led to an antitrust lawsuit by a group of merchants including Sears (nasdaq: SHLD - news - people ), Wal-Mart (nyse: WMT - news - people ) and Safeway (nyse: SWY - news - people ). The two credit card companies eventually paid a combined $3.4 billion.

Yahoo! and Google may argue that even if their combined ads represent a majority of the search advertising market, they don't pose an anti-competitive threat to the overall on line advertising market, which includes banner ads and video. But Google found itself on the other side of that argument just a few months ago when it acquired on line ad agency DoubleClick.

In hearings before the Federal Trade Commission, Google successfully argued that it should be allowed to acquire DoubleClick, the world's largest display-advertising firm, because search ads and display ads are separate markets with no related competitive forces.

In Google's first-quarter earnings call Thursday afternoon, Chief Executive Eric Schmidt declined to comment on the status of the proposed partnership with Yahoo!. "We are very excited to be participating in this test," he said. "I don't think it's appropriate to speculate beyond that. It's nice to be working with Yahoo!. We like them very much."

Even if Yahoo! and Google forge a partnership, Microsoft might still be able to acquire Yahoo!. It all depends on how the Internet giants structure their ad deal, experts say.

Anant Sundaram, a professor at Dartmouth's Tuck School of Business, also says a Yahoo!-Google tie-up could be just a delay tactic to keep Microsoft at bay. "By the time regulators come out with a ruling [on the Yahoo!-Google partnership], two to three months go by."

David Lisi, a partner at law firm Howrey, agrees that a Yahoo!-Google deal could be a ploy to get Microsoft to increase its offer. In the end, however, Yahoo! will have to answer to investors. "At some point, you have to maximize value to shareholders," Lissi says. "You can't just do things to block a deal if the deal brings value to shareholders."

Google Profit Advances on Overseas Sales; Shares Jump

By Ari Levy

April 17 (Bloomberg) -- Google Inc., owner of the most popular search engine, reported a 30 percent increase in first- quarter profit after international expansion countered a slowdown in U.S. advertising spending. The shares jumped 18 percent.

Profit beat Wall Street estimates by more than 30 cents a share, excluding costs from stock options. Analysts had used industry data that showed slowing growth in the number of clicks on Web advertisements to predict a slump in revenue in the U.S. Instead, the growth in clicks ``remains healthy,'' finance chief George Reyes said, and international sales jumped 55 percent.

``I was expecting them to fall short,'' said Jerome Dodson, a portfolio manager at Parnassus Investments in San Francisco. ``People said, `Google can't keep defying the laws of gravity,' but it looks like Google is flying high again.''

Google, down 35 percent this year amid concern that slower spending by U.S. financial and consumer companies would stifle growth, climbed $79.21 to $528.75 in extended trading after closing at $449.54 on the Nasdaq Stock Market.

Net income rose to $1.31 billion, or $4.12 a share, from $1 billion, or $3.18, a year earlier, the Mountain View, California-based company said today in a statement. Sales, excluding revenue passed on to partner sites, climbed 46 percent to $3.7 billion, beating the average estimate of $3.59 billion in a Bloomberg survey of analysts.

Analysts had predicted net income of $3.96 a share, according to the Bloomberg survey. Excluding costs from stock options, profit was $4.84, topping analysts' average estimate of $4.52.

Currency Boost

A rise in the value of overseas currencies helped boost international sales. Without the change in currency rates, revenue would have been $202 million lower, Google said.

``I don't think that kind of foreign currency benefit was expected,'' said Jane Snorek, who helps manage more than $70 billion in assets at First American Funds in Minneapolis.

Google captured 63 percent of Internet queries worldwide in February, up from 62 percent in December, according to Reston, Virginia-based ComScore Inc. Google accounted for 60 percent of U.S. searches in March.

Turning Point

For the first time, Google got most of its sales from outside the U.S.

``This is the quarter where we're now 51 percent international, and I don't think that number is going to go down,'' Chief Executive Officer Eric Schmidt said on a conference call. Google is seeing ``market share growth and good revenue growth in China,'' he said.

Trying to catch up with Google, Microsoft Corp. has bid $44.6 billion for Yahoo! Inc., a transaction that would combine the second- and third-biggest search engines. While Yahoo rejected the bid in February, analysts and shareholders say the board may eventually agree to the purchase.

ComScore spurred concern that the number of people clicking on Google's text ads -- the four lines of ad copy that run next to search results -- had stalled last quarter. The promotions account for almost all of Google's revenue.

The research firm, which issues monthly reports on ad-click numbers, said the growth had slowed to 1.8 percent in the first quarter. In today's report, Google cited growth of 20 percent.

Different Data

The discrepancy may stem from the way ComScore measures the data. The company only tracks domestic ad clicks and doesn't include results from Google's AdSense service, which places ads on Web sites such as online newspapers and blogs.

ComScore spokesman Andrew Lipsman declined to comment.

In either case, the growth is down from 52 percent in the first quarter of 2007.

``It's a far cry from where it used to be,'' Snorek said.

To expand into new types of advertising, Google bought DoubleClick Inc. in March for $3.24 billion. The company helps customers manage online marketing campaigns. In its biggest round of job cuts ever, Google fired about 10 percent of DoubleClick's workers this month. The company said it added 2,351 employees in the quarter.

Google's operations generated cash of $1.78 billion last quarter, bringing its total cash, equivalents and marketable securities to $12.1 billion.

Douglas Anmuth, an analyst at Lehman Brothers Holdings Inc. in New York, had expected a drop in finance-related searches to curb sales growth. Financial firms cut back spending after the subprime mortgage meltdown spurred the near-collapse of lender Countrywide Financial Corp. and investment bank Bear Stearns Cos.

Finance Crisis

Bear Stearns's ad spending fell 10 percent in the fourth quarter from the third. In March, JPMorgan Chase & Co. agreed to buy the New York-based company amid a run on the securities firm by clients and creditors.

Mortgage lender Countrywide's fourth-quarter ad budget dropped 5 percent. The Calabasas, California-based company agreed to be acquired by Bank of America Corp. in January after mortgage-related losses caused the stock to slump 85 percent in 12 months.

Consumer sentiment in the U.S. fell to its lowest level since 1982 this month, according to a preliminary report from Reuters and the University of Michigan, as employers cut hundreds of thousands of jobs and oil prices climbed to a record.

Google's Schmidt said today that the company remains well positioned because its systems can target ads at specific consumers.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

Stock Futures Off Ahead of Economic Data

NEW YORK -

Wall Street was poised to extend its losses Tuesday as investors awaited readings on inflation and manufacturing and more earnings reports.

The Commerce Department at 8:30 a.m. EDT releases its Producer Price Index. The index is expected to show a 0.5 percent rise for March, and the core index, which strips out food and energy prices, is anticipated to increase 0.2 percent.

High inflation figures could raise worries that the Federal Reserve will hesitate to lower interest rates again, and that consumers will continue paring back their discretionary spending to afford necessities like food, energy and health care.

Meanwhile Tuesday, the New York Fed is expected to report that manufacturing in the region contracted, but at a much milder pace than in March, when the state's manufacturing shrank at a record clip.

And in earnings news, Johnson & Johnson, one of the 30 Dow Jones industrials, releases its first-quarter results. Wall Street is forecasting a rise in profit at the maker of health care and personal products.

After stocks closed Monday moderately lower, Dow futures on Tuesday fell 31, or 0.25, to 12,285. Standard & Poor's 500 index futures fell 2.60, or 0.20 percent, to 1,328.70. Nasdaq 100 index futures fell 3.00, or 0.17 percent, to 1,793.25.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.48 percent from 3.51 percent late Monday.

In dealmaking news, Delta Air Lines Inc. and Northwest Airlines Corp. agreed late Monday to combine in a stock-swap deal, creating the world's biggest airline.

Oil prices traded at record highs. Light, sweet crude rose 88 cents to $112.64 a barrel in premarket electronic trading on the New York Mercantile Exchange.

Gold prices rose, and the dollar was mixed against other major currencies.

Overseas, Japan's Nikkei stock average rose 0.77 percent. Britain's FTSE 100 rose 0.91 percent, Germany's DAX index was flat percent, and France's CAC-40 slipped 0.10 percent.

Volcker: Spendthrift Americans Bred Credit Crisis

President Calvin Coolidge once said, "There is no dignity quite so impressive, and no one independence quite so important, as living within your means." Former Federal Reserve Chairman Paul Volcker agrees--and he wants spendthrift Americans to know they only have themselves to blame.

On Wednesday at a conference at the Harvard Club in New York, Volcker said years of consuming more than it produces is what has gotten the U.S. into the financial trouble that it's in.

"Financial crises do not happen in a vacuum and the current U.S. banking debacle is linked to imbalances in an economy that favored spending at the expense of saving," Volcker said.

"You can't go on forever spending more than you're producing. You have to rely on unorthodox finance to sustain it."

Volcker challenged the reliability of the mathematical models that economists and investors have come to rely on over the past few decades. "There's a fascination with a lot of risk management tools that this situation has demonstrably proved false," Volcker said.

Volcker warned policymakers against inflating their way out of the credit crisis. As chairman of the Fed during the 1980s, he lifted interest rates to record highs in an effort to rein in double-digit inflation. (See: "Greenspan: Fed Chairman Lauds Volcker For Interest Rate Hike" and "Knowing When To Say When")

He did, however, say that Treasury Secretary Henry Paulson's plan to expand the Fed's regulatory authority and lend to investment banks provides a useful longer-term framework, but still doesn't address more immediate problems. (See: "Wall Street Test Drives New Fed Loans")

In contrast to Alan Greenspan's pleas Tuesday for a laissez-faire approach to the credit crisis, Volcker wants policymakers to get involved before the situation worsens.

3 Reasons to Welcome a Recession

Recession. It's a word that strikes fear into the heart of chief executives, economists, and everyday Americans alike.

And for good reason -- recessions bring job losses, falling stock prices, and general economic gloom and doom. But while almost no one is enthusiastic about the thought of a recession knocking on the front door, there are a few good aspects of these periodic downturns.

1. Recessions correct economic imbalances
Like it or not, our economy is not built to go on growing indefinitely without hitting any bumps in the road. Over time, excesses tend to build up in our markets, and these excesses have to be worked out for the economy to get back to a healthy, realistic, and sustainable rate of growth.

In the late 1990s, one area of excess was in the stock market, as shares of technology companies were pushed higher and higher despite underlying fundamentals that didn't justify these new valuations. More recently, the excesses have been in the housing market, fueled by low rate cuts in the early part of the decade and by lenders overextending themselves to make loans to underqualified buyers.

Periods of economic contraction eliminate these sorts of unsustainable bubbles and get the economy back on solid ground. Like a visit to the dentist, recessions can be painful, and they can't be over soon enough, but in the end, they're for your own good.

A stronger and more sound economy will rise from the dust of our present downturn.

2. Stock market drops that accompany recessions provide new opportunities
Since the stock market is one of the primary indicators of the health of the economy, recessionary periods are frequently accompanied by meaningful drops in our stock market. Though most people panic when they see the market heading into the red, what they don't realize is that market downturns constitute a giant fire sale.

During periods of market panic, both good and bad stocks get dragged down for the count. This means that oodles of stocks with great long-term prospects are now available at a discount. Everyone knows that financial stocks have really taken a beating, but other corners of the market are offering fresh, new opportunities.

For example, tech stocks have been relatively oversold in recent weeks, and many companies with incredible long-term growth prospects are now trading at a fraction of their former prices.

Check out former highfliers such as Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL), which are down more than 25% year to date. Other big names such as Dell (Nasdaq: DELL), Oracle (Nasdaq: ORCL), and Microsoft (Nasdaq: MSFT) have fallen anywhere from 9% to 18% so far this year. All of these names possess significant competitive advantages in their niches and represent compelling long-term tech plays. They're also all cheaper than they were a few months ago.

3. It won't last forever
It's true. Recessions don't last forever. The economy has lived through 10 recessions since World War II, and it has rebounded every single time. And although it may seem that there's always another piece of bad news being trumpeted in the media, the average post-WWII recession has lasted a mere 10 months.

In almost all of these cases, the stock market headed down in advance of the onset of a recession and rebounded ahead of the recession's end. This makes sense when you remember that the stock market is a forward-looking device. But this also means that even if we are in for many more months of sour economic news, we may not have to endure as many months of falling stock prices.

Position yourself to profit
Recessions can humble even the most confident investor. When the market is going up and everyone is making money, most folks think they can go it alone. But when things get rough, many formerly steel-willed investors turn to the experts for help.

Microsoft Says 31 Bucks Is Fair

Microsoft isn't going soft, just because Jerry Yang is being a tough guy. Despite all the twists and turns in the "Microhoo" saga, the software company is sticking to its original offer.

On Friday, Microsoft's chief operating officer said at a news conference in Mumbai that his company had made a fair offer to Yahoo! and that no matter what happened with the deal, the company was determined to grow in online advertising capabilities.

Investors weren't partically moved; the Redmond, Wash.-based company fell 0.6%, or 16 cents, to $28.95, on Friday morning in New York. Yahoo! fell 0.5%, 15 cents, to $28.44.

We believe we've made a very fair offer to Yahoo's board of directors," Kevin Turner said. "Currently, it's in their hands to decide the outcome of that offer," he said.

Turner said Microsoft would "continue to drive marketshare from a search standpoint within the consumer space, and that's a strategy we're committed to in the long term."

The Yahoo bid was "a tactic and a strategy" toward that end, Turner said."The rest is now up to their board ... With or without the acquisition we are committed to becoming a world class digital advertising company."

Yahoo's resistance to Microsoft's offer of $31 per Yahoo! share, made on Feb. 1, recently took a turn when Google (nyse: GOOG - news - people ) it announced a 2-week "trial advertising" partnership with Yahoo!. (See: " Yahoo! Gets In Bed With Google")

There were reports Wednesday that Yahoo! may also be close to striking an arrangement that would combine the search engine company with AOL, the struggling Internet division of Time Warner. (nyse: TWX - news - people )

Yahoo! isn't the only one complicating a potentail deal. Microsoft may try teaming up with News Corp. (nyse: NWS - news - people ), which could lighten that financial burden and add the nice touch of a vibrant social-networking site, MySpace. (See "Menage a Yahoo!")

What Microsoft Could Do For Yahoo! Employees

BURLINGAME, CALIF. -

Despite the flurry of activity from background players in the Yahoo!-Microsoft deal saga this week, many industry watchers still believe that the software giant may well prevail in its campaign to acquire Yahoo!. And typically, when one industry titan swallows another, job losses follow.

So should Yahoo! (nasdaq: YHOO - news - people ) employees be working on their résumés?

In this case, maybe not.

To achieve the promised "cost savings" that executives like to forecast when they're acquiring a company, layoffs do often follow. In a late February speech at a Goldman Sachs (nyse: GS - news - people ) investment conference conference, Microsoft (nasdaq: MSFT - news - people ) Executive Craig Mundie conceded that job losses would likely follow a Microsoft-Yahoo! combo. "The reason we think there's synergies, actually, even in the R&D side, is that there's a lot of redundant development going on," Mundie said.

"The search engines are both being developed right next to each other in two different companies, and many other components, the whole advertising system. Every one of these things is being redundantly developed by two groups of very, very smart people. At the end of the day, you don't need both. There may be great components from the two of them, and over time you could smoosh them together, but there's a lot of fungibility in that part of the investment."

But not all those losses are likely to happen in Sunnyvale, say industry watchers.

Microsoft's primary reason for buying Yahoo! is to combine forces and go head-to-head with Google (nasdaq: GOOG - news - people ) in the burgeoning online advertising market. That means Microsoft will have to handle the Sunnyvale, Calif., Internet portal's workers with kid gloves if it wants to keep top talent and ensure a smooth integration of the two companies. "If Microsoft is going to treat Yahoo! people as second-class citizens, a lot of good people will leave," says Kiumarse Zamanian, a former Yahoo! advertising executive.

In Yahoo!, Microsoft is gaining a tremendous asset: the world's premier consumer Internet portal with 500 million visitors a month. "This is not a traditional acquisition. Microsoft needs to tread lightly," says Burton Group analyst Ken Anderson. "They're going after something more valuable than acquiring market share--Yahoo! is considered one of the most successful Internet start-ups."

Indeed, Microsoft's attempts to create blockbuster consumer and media properties through its MSN division have failed. "Microsoft is an engineering company. They don't know how to sell ads," IDC analyst Karsten Weide says. "What drives this business is media, understanding what advertisers and consumers want."

While Yahoo! gives Microsoft a bounty of media and consumer assets, the software giant's aggressive business style can capitalize on them, something Yahoo! couldn't do. "It's a Microsoft-run Yahoo!," Anderson says. "Microsoft is very aggressive in how they run a corporation."

So it's Microsoft's portal employees, not Yahoo! workers, that should be worrying about their jobs. "If I am an MSN online guy I'd be a little nervous," Anderson says.

Jay Bhatti, co-founder of search engine start-up Spock and a former Microsoft product manager, still keeps in touch with workers in Redmond--and more than a few are concerned about their future. "A lot of people who work at MSN are saying, 'What's going to happen to us?' " Bhatti says.

Nevertheless, Microsoft's bid for Yahoo!, announced Feb. 1, has created fear and loathing in the ranks of both companies. Since the announcement, Bhatti says the number of résumés Spock has received from Microsoft and Yahoo! workers has tripled. To shore up lackluster financials, Yahoo! laid off 1,000 of its 14,000 workers in February.

Even though Microsoft has said it will keep the Yahoo! brand after the acquisition, some aren't convinced Chief Executive Steve Ballmer and his gang will stick to their promise. Zamanian, the former Yahoo! ad executive who is now vice president of Glam Media's advertising platform, notes: "There's a joke: What do you get if you merge Microsoft and Yahoo!? Microsoft.' "

Buffett Beats Bernanke

Fed Chairman Ben Bernanke is in a rough spot these days. When he lowers interest rates, the specter of stagflation is raised. When he rescues Bear Stearns (NYSE: BSC) from potential bankruptcy by brokering a sale to JPMorgan Chase (NYSE: JPM), he's chided for guaranteeing billions in private subprime loans with public money.

Of course, if he did nothing, I'm sure he'd be blasted for turning a blind eye as the nation spirals into recession.

Bernanke's problem is that he's tasked with fixing long-term problems with a short-term tool kit. We folks on Main Street leveraged ourselves into homes we couldn't afford while the folks on Wall Street gladly financed us. Greed and irrational exuberance drove both sides for the better part of this decade. Now that the bubble has burst, Bernanke is forced to try to minimize the damage.

Unfortunately for Ben, no one person, even with the strength of the government behind him, has the power to elicit anything more than a temporary shrug from the U.S. economy.

Enter Buffett
Well, there's one more thing we can do: We can learn from Warren Buffett and his stewardship of Berkshire Hathaway (NYSE: BRK-A). Buffett had already learned from the mistakes of others to avoid bubbles in the first place. He was fearful when others were greedy. We should follow his lead.

Back during the Internet bubble, despite charges that he was a dinosaur who couldn't adapt his investing strategy to a new paradigm, Buffett refused to buy into the new economy stocks the rest of us poured money into. He had surely followed the stories of Yahoo! (Nasdaq: YHOO) and Cisco Systems (Nasdaq: CSCO), but, then as now, he refused to buy into companies he couldn't understand or value thoroughly.

To be clear, there's a difference between understanding Yahoo!'s business model and being able to predict the emergence and future dominance of a competitor like Google. Buffett saw hard-to-assess businesses selling for astronomical multiples. He passed. Now, eight years later, both Yahoo! and Cisco trade at less than a third of what they did at the height of the Internet bubble.

Time to feast
Buffett wasn't fooled by the housing bubble, either. Berkshire was largely unscathed by the housing fallout and is trading about 20% higher than it was a year ago. In fact, in this volatile market that has other investors defecting, Buffett is on the prowl. He offered to reinsure -- on very favorable terms -- the municipal bond debt of subprime-stung insurers including Ambac (NYSE: ABK) and MBIA (NYSE: MBI). They didn't accept his offer, but he was being greedy when others were fearful.

No matter. I have a feeling Buffett will soon find a way to deploy at least some of the more than $40 billion of cash on Berkshire's balance sheet. After all, he's been avoiding bubbles and saving up for just such a buying opportunity.

Greed is good ... sometimes
We Foolish investors need to be more Buffett than Bernanke by:

• Taking the long-term view and not grasping at short-term solutions
• Avoiding companies that are simply a ticker and a story
• Finding great companies that have attractive stock prices
• Investing steadily in good times and bad.

Fortunately, there are a lot of great companies with attractive prices now that the market is throwing a fear-driven fire sale. Like Buffett, we should be greedy when others are fearful.

Yahoo! Is A Capital Idea

LONDON -

While Yahoo! Chief Executive Jerry Yang flirts with Google and frustrates Microsoft, one significant investor has quietly doubled its stake in the pioneering Internet portal.

On Thursday, Capital World Investors increased its stake in Yahoo! (nasdaq: YHOO - news - people ) to 10.1% from 5.2% according to its filing with the Securities and Exchange Commission. The company now owns 135.5 million shares of the 1.3 billion Yahoo! shares outstanding.

Yahoo shares rose 2.5%, or 77 cents, to $28.45, during midday trading in New York.

News of the ownership shift follows another twist in the Micro-Hoo! drama with Yahoo! issuing a terse announcement Wednesday that it was launching a two-week "trial advertising" partnership with Google (nasdaq: GOOG - news - people ). The arrangement is a clever way of testing two separate ideas: the financial implications of letting Google's powerful ad-serving engine take over Yahoo!'s search ads, and just how politically explosive a deal between Yahoo! and Google might be. (See: " Yahoo! Gets In Bed With Google")

Although Yahoo! has staunchly asserted it is worth more than the $31 a share cash-and-stock offer made by Microsoft, the Redmond, Wash.-based company has been reluctant to sweeten the deal. Paying more than $40.0 billion for Yahoo! would already force Microsoft to borrow money. But Microsoft may try teaming up with News Corp. (nyse: NWS - news - people ), which could lighten that financial burden andadd the nice touch of a vibrant social-networking site, MySpace. (See "Menage a Yahoo!")

Capital World Investors is a division of Capital Group, which manages a total of $1.5 trillion and has other subsidiaries including the largest U.S. mutual-fund company, American Funds.

Microsoft (nasdaq: MSFT - news - people ) first proposed an offer of $31 per Yahoo! share on Feb. 1, part of a cash-and-shares bid initially valued at $44.6 billion.

Oil Prices Soar, Street Slips Further

Wall Street slipped to a weaker finish on soaring oil prices Wednesday, disappointing for a third-straight session.

The Dow was down 0.4%, to 12,527 Wednesday, while the Nasdaq lost 27 points, or 1.1%, to 2,322.

After closing bell, Internet portal Yahoo! (nasdaq: YHOO - news - people ) said it will begin a limited test of the AdSense for Search service operated by rival Google (nasdaq: GOOG - news - people ). Yahoo! said the two-week test will be limited to no more than 3% of its search queries and apply only to traffic from yahoo.com in the U.S.

Following the Yahoo! news, Microsoft (nasdaq: MSFT - news - people ) fired back Wednesday afternoon, as counsel said a Yahoo!/Google tie-up would conquer 90% of the ad search market and be unfair to competition, according to TradeTheNews.com.

Genentech (nyse: DNA - news - people ) is the biggest name on Thursday's earnings docket, with the biotech firm expected to report first-quarter earnings of 82 cents a share. During the quarter, the company's cancer therapy Avastin received Food and Drug Administration approval as a treatment for breast cancer.

Thursday is light on economic data other than reports on goods and services imports and exports for the month of February and the weekly reading on initial jobless claims.