Microsoft today at long last got a deal done with Yahoo! to partner on Search. This is the piece that has been most needed by Microsoft in its ongoing war with Google. Yahoo! has lost relevance on the Internet and needed a partner to take on the Google goliath (which as detailed earlier on Wealth-Ed is arrogant and deserves to be knocked down).  Microsoft will benefit and now becomes a more formidable opponent with almost 30% share in Search.

Bing, the new Internet Browser, was announced a few months ago and Windows OS7 is on the horizon for Microsoft, so don't write this computing pioneer off. The details of the partnership are not yet fully understood, but here is an early report from CNBC:

Microsoft  is not expected to pay an upfront fee to Yahoo , and the focus of the deal is on sharing revenue between the two companies.

Under the expected deal, Microsoft's new Bing search engine will power Yahoo's searches, according to Advertising Age, while Yahoo will handle the advertising sales, using Microsoft technology.

The deal should give Bing a giant boost in competing with Google's search engine. Google's search engine dominates the marketplace with 65 percent of U.S. Internet searches, according to figures provided by research firm ComScore. Last month, Microsoft had only 8.4 percent of the market and Yahoo 19.6 percent.

There is a chance a deal combining the powers of the second and third-ranked search engine companies would be blocked by antitrust regulators. Google and Yahoo dropped plans for an advertising partnership last year under opposition from the U.S. Department of Justice.

All of this should hurt Google and help Microsoft as will be seen in the stock value. I am a buyer of MSFT at this level and have recently doubled down by stake. $30 a share is possible by year end based on new growth prospects, existing market dominance in Office software suite and its tremendous cash hoard of $30B (which not so incidentally, is untouched by this deal, which at one time to purchase Yahoo! would have cost MSFT $47B).

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Here is a provocative take on an internet juggernaut: Google is nothing but a giant Ponzi scheme that is coming undone as I write.

This is not an accusation, but more a hypothesis.  What gives this hypothesis legs is a recent discovery that Google is aggressively cracking down on so-called “violators” of the terms and conditions of its "Adsense" program.  My own website recently fell victim to this ruthless and mindless activity.  We have been gradually building our readership and hence our traffic through the combined effort of good, original content of the financial kind, and a parallel effort to monetize our traffic so we can continue offering this commentary at no cost to the reader.  

As measured by various metrics tools for the internet, we were succeeding at Wealth-Ed.com and were just beginning to gain some traction with readers.  Our writings are picked up now by SeekingAlpha.com  and our insights and observations are available to many.  Our well-timed pieces on General Growth Properties and more recently on the prospects for natural gas ETF, UNG, caused our views to spike.  It was not through any illicit effort to create fictional traffic that our page views increased, but through hard and time consuming work combined with good luck and timing.  Naturally, as our traffic increased, so did the balance in our Google Adsense account. 

Then, without warning two weeks ago, our account was not suspended, but was permanently canceled by Google, apparently for all time.  And our Adsense revenues were absconded by Google.  Not just this website, but any other website we should ever develop is also barred from any relationship with the Adsense program.  Again, there was no warning, no real chance to appeal (only a token automated email appeal form that returned a computer generated rejection).  I was floored.  How can a company that claims it wants to “do no Evil” justify this malevolence?  Google is no longer the white knight, but has become Darth Vader.

We at “Wealth-Ed.com” could not believe that we were somehow singled out from the millions of similar websites that have been created and that utilize Adsense to help pay for the effort in some small way.  We had done nothing wrong that we knew of that violated Google’s rules.  The relationship between small website or blog developer and Google is supposed to be symbiotic.  Small websites like ours put Google on the map. 

Google attracts advertisers because it has such great reach and exposure through millions of small websites.  It needs the billions of webpages to provide the internet real estate and associated “eyeballs” to sell to its advertisers.  Google depends on small businesses and entrepreneurs more than any other internet or computer based software company.  Microsoft , SAP and Oracle all rely on large business customers for the bulk of their revenues.  But Google is almost entirely dependent on its ad-based business model that is dispensed through a myriad of startup websites.  “Wealth-Ed.com” and all other similar small, entrepreneurial webpages on the “net” allow Google to exist.

So, how does Google figure to go forward by biting the hand that feeds it?  This is a question that must be asked by any investor.  My only answer is that Google is in big financial trouble that is not yet revealed by their published financial statements.  This trouble comes from the same place that has exposed many other Ponzi schemes recently, most notably, Bernie Madoff’s.  As the economy falters and advertising revenues dry up, Google is losing its primary source of income.  It is no longer able to take money from one source, advertisers, and give it to another, Adsense ad posters, to keep the pyramid upright.

A good Ponzi requires a very convincing story which generates substantial public interest.  The Ponzi sponsor then monetizes this public interest by collecting funds with a promise of great returns.  The returns are generated by money brought in from other participants, not from any specific benefit created by the Ponzi artist.  The Google Ponzi speculation is a little more subtle, which also makes it a little harder to uncover.  Its scheme is supposedly made legitimate by a multi-paged, “fine print” contract that gives it the ability to shut down any website for just about any reason imaginable, or no reason at all except at the whim of Google.  But is this contract really legal and enforceable?

As we started researching the crackdown on small businesses, we uncovered that there are thousands of others in the same situation.  Many of our fellow small website developers have written about their own experience and loss of Adsense revenues.  Many describe that it happened to them just as it happened to us:  with no warning, no real chance of appeal, no one at Google to talk to, and unilateral confiscation of all their earned Adsense revenue.  One such participant, Aaron Greenspan's "Think Computer", was officed in the same county in California as Google, Santa Clara. Greenspan took Google to small claims court…and won!  (and then lost on appeal to a bevy of Google lawyers). I am sure Google knows that most web owners are not in a position to sue and wanted to drive the fruitlessness of litigation home by the appeal.  Once again, Google demonstrated its utter contempt of the same customers and business partners who have made it what it is.

As Google continues to cut off its advertising partners reducing the number of ad page views what will the advertisers think?  Google’s viewership will be greatly reduced and so will their ad traffic.  The advertisers will respond by cutting back even further on their advertising.  Google revenue will subsequently fall as will its profits, which may turn to losses given the enormous overhead created by the recent reckless moves by the management of Google. 

The Google stock has a lofty price and multiple to earnings.  It is valued as though it will continue to grow at 20% a year well into the future. But, if ad revenues and profits drop as we think they might, Google stock should be sold or shorted.  Google's latest attempt to remake itself into a full-featured business software company will cost it a king's ransom. Taking on Microsoft, Oracle and SAP on their own turf could be the demise of Google. Hubris has its costs. Shorting Google stock is how we plan to recoup our losses of Google Adsense revenue.

As a long time lover of Microsoft (MSFT) and its terrific cash flow and accumulated cash, finally, there is something for "M" fans to crow about: BING.  Check out the video on CNBC today.  I will write a complete analysis of MSFT this weekend.

As Friday's "Prudent Speculator" newsletter suggests, I have bought more Microsoft on Friday (already held some sold puts on Jan 09 at $35), as one of the best values today and also sold some Daylight Energy to capture profits.

The case for Microsoft is very compelling. This is a company with an ROE that is through the roof at over 45% (one of the highest of any stock). The gross margin is also through the roof at 80% (as it has maintained for 20 years). It is a cash machine with revenue growth of 17% YOY. Earnings growth is 25%. Yet, the P/E at today's closing price of 29.83 is only 17.3

This is the best price on Microsoft since the mid 80s, before the launch of Windows, in my estimate. And there is a catalyst in the Yahoo deal. You have to love the way that CEO, Steve Ballmer, is playing his hand with Yahoo directors (and founder Jerry Yang). He is refusing to overpay and throw investor money (Bill Gates' and mine) at Yang. He will get Yahoo for a fair price and that will help MS in its competition with Google. In fact, I won't be surprised if after Yahoo, Ballmer goes after AOL, which Time Warner has on the block (I also own TWX betting AOL gets sold). I think MS will go over $40 by year end as the tech cycle leads us out of recession.

I also have trimmed a little on energy, just to lock in profits. I still think energy is the place to be for the next 10 years, (and have added solar to broaden exposure), but there should be a little pullback as the dollar turns around the next couple months. I will buy back the Daylight I sold when it is around $8. I am not selling any PennWest or PGH at these prices, as they should get back to $40 and $25 respectively, before I consider trimming some.

From April 26 Prudent Speculator: ...The fact that an early decline, one that accelerated after the price of oil spiked following news that U.S. war ships had fired on Iranian vessels in the Persian Gulf, gave way to a broad-based advance that closed near the highs of the day and that the S&P; 500 finished above the apparently technically significant 1395 level have to be viewed positively.

The market also had to overcome word that the University of Michigan's consumer confidence survey fell to its lowest level in 26 years. Interestingly, the expectations index component of the Michigan report hit its worst reading since November 1990, while the current conditions gauge plunged to levels last seen in November 1982. Of course, as we have discussed in recent Hotlines and Buckingham Reports, the release of extremely weak economic statistics often marks a major market bottom. Such was certainly the case in 1982 and 1990, as Al Frank's TPS Portfolio gained 123% in 1983 and 55% in 1991.