UV Market Blogs

Tuesday, June 05, 2007

Global Dollars

Travelling around the world used to require many changes in currencies at each foreign stop, but since the end of World War two, one currency has reigned supreme.  The US dollar.  Its hard to find a country that hasn’t already added large amounts of dollars to their treasury or moved large sums in and out of the currency.

The dollar is the most widely held foreign exchange bill.  Officially, the dollar makes up 66% of the worlds foreign reserves.  That’s two-thirds of every currency in a treasury is USD.

The actual term for the proliferation of the US dollar is Dollarization.  There are three main types of dollarization:

Official Dollarization:  There is no local legal tender and thus the US dollar is legal tender.  This happens in places such as Panama, El Salvador and Ecuador.  The US government does not have the power to provide approval for countries to use the US currency.  Thus, the US dollar is a perfect treasury note for a growing country.  The citizens of the three countries above also enjoy the ability to exchange the currency quickly and easily, a privilege they may not have if their countries created their own currency.  The use of the dollar also helps market products to US consumers, who we all know have deep pockets but debt to their eyeballs.

Semi Dollarization:  The use of a local currency and also wide acceptance of the US Dollar.  These countries have their own established currencies but will also accept the US Dollar readily, without exchanging.  Both Lebanon and Cambodia are two countries that operate under this system.

Unofficial Dollarization:  Many developing countries use and accept the US dollar as a form of payment but it is not officially on the books.  Small countries with a lot of US foreign investors would be more accepting of a foreign currency for large payments or from foreign investors. 

But why the USD?

The US dollar is one of the most stable currencies because of the governmental unit behind it.  The government of the United States cannot purposely devalue the Dollar to make it more appealing to foreigners, nor to benefit itself from higher exchange rates.  US inflation is on par with many of the superpowers of the world and certainly better than developing nations, thus the US dollar also provides a sense of security to smaller, lesser developed nations.

In problematic or war torn nations, unofficial dollarization has become normal.  In some cases, the value of US dollars in circulation becomes greater than the official currency.  This restricts the power of these nations in economic policy as they cannot control the production or destruction of the value of US Dollars. 

It is estimated that 40-60% of all US dollar bills circulate outside of US borders.  This brings even more problems due to overseas counterfeiting.  The US government is without jurisdiction to catch counterfeiters, ultimately creating a higher inflation statistic.  The US Dollar allows some anonymity as it is not tracked well outside of US Borders.  Because of its value, liquidity and acceptance worldwide, it is the currency of choice for illegal operations.

Tuesday, May 22, 2007

Blackstone IPO

Stay away I say,

The first few weeks of this IPO will probably be the glory days of the internet trading boom but I’m calling bust shortly after the gates are opened.  Unfortunately, I believe this deal involves far too much political tension to draw the investors BlackStone needs to raise capital.  After China’s interesting bid, I think some financiers may stay away from the once private equity firm.

There is such an idea attached to BlackStone much like a stigma to American Express charge cards and Rolls Royce automobiles.  BlackStone is all about the wealth and luxury of the world’s newly rich.

BlackStone is running into the same problems of companies such as Berkshire Hathaway or even mutual funds such as Vanguard and Fidelity Funds.  Too much money, not enough worthy investments.  BlackStone, in reality, does not need the additional capital.  I believe that an input of capital will only make the close of the group come sooner as the company stockpiles private investment dollars.

If you want in on the private equity craze, look no farther than the original.  Berkshire Hathaway is waiting for your capital.

Monday, May 21, 2007

Chinese Getting in on Blackstone

Dum dum dum.  Finally a free market?!

Quite simply, China is a cash cow and they’ve got too much cash.  More complex, China’s currency was long undervalued causing a high deficit between China and its trading partners.  Now China possesses a $1.2Trillion basket of foreign currencies.

The Chinese have always been foreign cash rich, but now it seems like the People’s Republic is finally getting down to making these cash reserves work and generate more cash.  Traditionally, the Chinese have had high dollar amounts in T-Bills but T-bills are very uninteresting, low paying, savings bongs.  Who cares?  We want real returns!

Insert Blackstone.  One of the most prestigious private equity companies in the world is going public.  It planned to raise $4 billion dollars through its IPO and might now raise twice that amount when the Chinese amounts get figured into the overall sales numbers.

There were rather strict investment criteria for the deal.  China agrees to hold its investment for at least four years so that the nation doesn’t cripple stock prices from a heavy sell off.  China may sell after holding the company four years but only at a rate of $1 billion per year.  Also, China gave up all of its voting rights that were tied to the shares in order to stay away from US Government intervention.  Surprisingly, China has been very co-operative with Blackstone and the US government regarding this investment. 

Blackstone believes this may pave the way for further investment possibilities primarily in China where Blackstone has been the weakest.  Generally Blackstone is thought to be a US Private equity company.

The deal not only caused a ruckus on the street but also politically.  American and Chinese officials just might now meet at a round table to discussing tariffs and currency valuations -good news for US consumers. 

Chinas reserves grow at a whopping $20 billion per month.  If this money were pushed into the US markets, we’d see a huge boom.  Look forward to only good news with this deal.

Wednesday, May 16, 2007

The Enhanced fund

Enhanced index funds are just that, your typical index fund such as an S&P model that is then reallocated to provide the best risk to reward ratio possible. 

The Index fund is relatively new in the history of the marketplace.  In 1975 the first index fund sprung from the earth led by John Bogle; better known for his involvement with Vanguard funds as Vanguard now has a large portion of the world’s assets.  Indices are regarded as some of the best ways to enter the market with minimal returns and decent risk factors.

Index Funds are quite simple in that they are built to model after a particular index.  The fund is dispersed just as the index is and performs all the same.  Through minimal trading and the ability to contain a large amount of investor funds, these have become a staple at mutual fund companies.

Index funds are meant to track the market as a whole.  Moving on pace with the market is the best way to curb inflation but still save enough for all of life’s large expenses.

Index funds, because of their low turnover rates, require less work to keep open.  Ultimately this low overhead leads to lower fees charged on the fund, and higher returns.  Because the fund is not flipped over that often, the management plays little role in its performance.  Also, limited volume keeps the fund in check.  A fund manager cannot so readily move the assets around. 

The enhanced index fund wishes to change all this.  Essentially, a fund manager will modify the portfolio to include stocks of the index, but reallocate the investment dollars so the fund achieves the best return possible.  These funds also speak of lowered risk, but a measurement for this figure is hardly exact.

See, the S&P money is distributed by market cap.  The largest 20 of the S&P companies account for over one third of the value of the entire index. As you can see, money in these index funds is often heavily shifted to the largest corporations which cannot sustain the strong growth rates of smaller businesses.  Index funds are rather straightforward and easy to understand from the perspective of any investor as he or she knows exactly what is being bought and sold in the fund.  This takes a lot of strain off the fund’s call centers when the fund/market has a bad year. 

In the year 2000 when the market experienced its most recent crash, the average index fund got crushed.  As you can see, the index fund is weighted by market cap.  Those stocks that had moved up 500% plus the year before were now the most heavily purchased stocks in the index funds.  A mix for disaster you might argue.  As with all market rebirths, the smallest of companies are often the quickest to show improvement.  This just happens to be a double edge sword for index funds.

One thing, as an investor, that we do not want from an enhanced fund is more active management.  In my opinion, it is more important to me that the mutual fund has lower turnover rather than an active index fund.  An active index fund is oxymoronic as indices are built for longer time periods.  Too be quite simple, with an enhanced index fund, the operator prefers to have the core strategy of an index then modify the capital allocation in order to provide the best returns.  Even simpler is the manager takes money from the largest of corporations and places it in the smaller corporations. 

Thursday, May 10, 2007

FED comforts the market

FED comforts the market

The FED does as expected and keeps interest rates at 5.25%.

The FED announced that it is really starting to keep an eye on inflation with a slowing economy but rising prices.  It is important that the committee keep rates at the current peak to ward off any inflation threats.  With Dow 13000 in full force, the government can’t risk another recession.  Moreover, policy makers can’t afford a recession.  House democrats might not mind however.

A move to raise interest rates would threaten the Dow’s record highs as more expensive capital often ties up the markets.  Even worse is that the summer slump only compounds those effects.  Raising rates slows down borrowing, and big business, operations that are profitable at a 5.25% rate may not be so profitable at 5.5%.

I still expect that interest rates will be dropped during the summer months to keep the market at its highs.  I think around July the FED may take a breather and drop the prime rate a near insignificant .10% just to gauge the market response.  This drop may come sooner though, although June seems out of the target.

Another barrier for analysts is the price of oil, which affects the cost of every product sold.  Although the price of oil always goes up in the summer, it is not really inflation but rather market sentiment.  The FED may find it tough to make a decision on rising prices that aren’t connected to high inflation.

Wednesday, May 09, 2007

The most coveted job in the world

The most coveted job in the world

No job is as prestigious, as big, nor as important as the person who will ultimately take over the reigns of Berkshire Hathaway, which Warren Buffett has taken from $20 a share to $108,000.  An investment of just $20 in the 1960s nets you an average home in the Midwest. Not a bad investment eh?

All investors, from those who just got out of “for dummies” university or the top of the top fund managers know who Warren Buffett is.  His fundamentalist investment approach has led him to become the second richest man in the world, second only to Bill Gates who happens to be one of Buffett’s good friends. 

Buffett essentially pilots one of the largest investment funds the world has seen.  After ending his partnership back in the 60s, Buffett took controlling stake in Berkshire company which at the time produced textiles.  He leveraged the abundant cash flow and onhand cash into an insurance empire.  His investments have been predominantly in the United States but as of late Buffett has sparked an interest in foreign companies.

Now, after 76 years of smart business decisions, Buffett has decided to step down as CEO and 30% owner of Berkshire Hathaway.  Unlike most CEOs on the street though, Buffett made is money through corporate ownership rather than freebie stock options.  He makes just $100,000 per year as the CEO of Berkshire Hathaway, a salary that hardly puts him in the highest paid list.  The fact is, with 30% ownership, he doesn’t need much enticement other than his own capital gain when his investments do well.

Theres still time to apply though, just 700 have applied.  More info to come soon, I expect an announcement to be made regarding his choices.

Monday, May 07, 2007

The Sharpe Ratio

The Sharpe Ratio

The Sharpe Ratio was created by William Sharpe in 1966 to find standard deviation of certain investments. His work was some of the most important in economics even today. Actually in 1990 he won a Nobel Peace prize for his work in economics. How’s that for credibility?

This is one of the most coveted ratios for those who want to protect assets and get the best return possible. Trendlines, PE ratios and overall market thinking are one way to gauge market returns but you need to figure some chance of loss into your investment mindset.

The Sharpe ratio allows investors to factor in risk to their portfolios. This is a little known ratio that really isn’t used much but my more mathematical investors. While you cannot truly apply this formula to one specific stock, it will work on a broader index or mutual fund. Anything but the highest of speculative investments will conform to the formula to give you a risk to reward ratio.

The ratio is best used when comparing two separate investments with differing returns. One investment vehicle may carry a higher risk, but you don’t know which investment pays the most, risk adjusted of course.

The Sharpe Ratio is:

(The investment)=(The average rate of return- the best return provided by risk free investments)/(the standard deviation of the return of the investment)

In words, the sharpe ratio is the average rate of return of your chosen investment minus the best return you can get risk free (IE savings accounts) divided by the standard deviation of the return of the investment.

About the variables:

Return

The return of the investment you wish to investigate can be from any time period. A day or a decade makes no difference as it can always be annualized. As long as the returns are normally distributed there is no difference. The kicker is, most returns aren’t for any set periods of time.

Risk free ROI

This one is often disputed. Should an investor put the amount INGDirect pays for savings accounts which is 5% or should they put the amount that T-bills are currently offering. At this point in time it makes sense to put the amount ING pays but in times or places of lower interest, T-bills might pay more but be inaccessible. In my opinion, money market accounts can also be included in the risk free genre even though they really aren’t. If a money market would collapse, you’d have more problems than just your lost money. So, I throw in MM accounts too, just for comparison.

After computing the Sharpe ratio for your investment you should end up with a number from 0-3. One being decent and 3 being amazing. You might be hard pressed to find a Sharpe ratio of three or higher just because its just too high. The ratio is easy to use and gives you a good idea of when it might be smarter to take the guaranteed money rather than gamble for a few extra percent.

The Sharpe ratio is best when used with investments that can be purchased on margin. With margin, the ratio can tell you how much more capital you should be willing to borrow to buy the investment.

The Sharpe ratio is just another way to pick investments. You don’t need to use it to pick the best of the best investments, its merely a comparison tool. Some do great with it, some do great without it.

Wednesday, May 02, 2007

Bonds

I see that bonds, more and more, are becoming a part of every mutual fund out there.  In my opinion, if you are under the age of 30 or currently have a mortgage on one or many properties, you should not have any amount of money tied up in bond funds or in bonds period.

I am finding that people unknowingly buy into a growth stock fund to find 7% bonds and 2-3% cash.  With the low rate of returns associated with bonds and cash, you really aren’t getting anywhere with the 10% of your capital that is tied up in these subpar investments.

Most mortgages out there right now are at 6-7% with good credit standing.  At an early age, or with a mortgage, investing in bonds that earn 6-8% per year and are subject to taxes is utterly ridiculous.  After taxes are taken out, you’ve got a 5-6% return, just barely beating inflation.  Plus with a bond you’ve go some unavoidable risk of company collapse.

This is just a reminder to check your funds often.  Rather than throw money into bonds, pay off that mortgage sooner.  You’ll save a lot more money for retirement and still have that dream home.

Monday, April 30, 2007

A quick look back at the oil picks

In my March 9th and 13th postings Oil is Hot and The Other Oilers I outlined a few companies that I thought would hit it big during the summer driving season. 

Its only April right now and I plan to do another follow up around June and then into late summer as oil prices peak each year.  Over the last few years, disregarding disasters like Katrina, June has been the true peak for oil prices on the commodity markest.

Nonetheless, increased prices and favorable company positioning has led my three picks, DO, NE and RDC up 14, 16, and 24% respectively.  Not a bad return for just 45 days.

This is just a short follow-up to the picks. I am still holding onto all three. My options are up considerably but I think these stocks will continue the surge up until the summer demand ceases in June.  I’d look to hold on throughout the summer, you won’t find a better yield anywhere else.

Wednesday, April 25, 2007

I knew I liked Washington Mutual

Besides the recent upward movement to $43 per share from a recommended price of $39.50 I have a new reason for liking WM. 

The contact less card!

First I should start this blog by saying I am a huge fan of consumer credit cards.  I have many cards which give me 2% on everything I buy.  Plus, for using plastic I get essentially a 55 day, interest free loan while the billing cycle is calculated.  Along with the credit also comes 0% offers that add up to the tune of hundreds of dollars in free interest on their money.  That said, I am a huge fan of credit if used correctly.  Poor use can get you into trouble and that’s never a good thing.  I would highly encourage stores to accept this new form of payment because I think it’s a gateway into the future.

This new card offered by both Visa and Mastercard has the ability to change the credit scene forever.  The contact less card offers consumers a way to pay for goods via credit or debit accounts without ever handing the card over to a sales associate.  The card which has been shown attached to car keys or in places such as Europe, imbedded in cell phones, offers more security than traditional cards.  The card is simply “swiped” or “placed” within two inches of the high tech payment terminal which reads the information wirelessly then records a transaction on an account.  The sales associate never handles the card nor needs to see ID for the transaction.  While the sales terminal will be completely wireless, it will be just as, if not more, secured than tradition Point Of Sale machines.

I expect the terminals to become a new favorite of high volume, high trafficked businesses such as large retailers and even gas stations.  Due to the card remaining in the customers hand at all times, a few seconds can be taken off each transaction just for the handling of money.  Figure also that the machine requires no changed to be tendered back to the consumer and no signature is needed for purchases under $25 this machine should be a great timesaver.

Even today we have machines such as automatic change counters that deliver change to the customer while the clerk administers the bills.  This interface alone saves time for the companies employing such machines and I can foresee this new payment system shaving even more time off each transaction.  The time may only amount to a few seconds, but for businesses such as WalMart, that is valuable time. 

Washington Mutual is the first bank I have seen to work with the new payment type which I think will make it a market leader.  Eventually, all cards will probably go contact less which puts WaMu in an outstanding position to capitalize in the beginning. 

Washington Mutual has no small credit base either.  The company reports $23.5 Billion dollars in bank card assets which makes it the fifth largest in the nation.  WaMu serves over 11 million accounts with generally decent credit.  In the consumer credit scene, WaMu is considered a prime lender. 

Not just added security will make this program a success.  I think the largest selling point is the time savings in tendering the cards and change to consumers.  Ideally, WaMu should pick up many more credit accounts from its acceptance of the new terminals.  I would expect that if Washington Mutual does follow through with the program that it probably doubles the amount of current cardholders it holds now. 

WaMu is a buy here.

Merger Mania

It eats corporations whole!  It’s the new trend.  The new pet rock, the new chia pet or the new coach purse for all the female readers.  What is it?

It’s the merger. 

The last two years have been, on the Chinese Calendar, the year of the merger.  Its not over yet, and it really is benefiting you as an investor and as a consumer.  First though we’ll cover the best part of mergers from an investment standpoint, its more important to us.

Mergers, as defined by Webster’s Dictionary are: a statutory combination of two or more corporations by the transfer of the properties to one surviving corporation.  The combination creates one remaining corporation with the assets of all the previous corporations included.

How does this help your portfolio?

First, mergers generate a lot of money on the street.  When one company buys out another, often a high premium is paid for the assets of the corporation.  Typically the purchaser gives you 10-20% added to the current value of the stock but sometimes the cuts can go up to 50%.  In one day you could make what most portfolios make in years.

After the companies fuse together, the new company can cut jobs in the production of its product.  A cut in expenses drives down the PE multiple you initially paid for the company, even with its inflated price.  The new corporation can create products more cheaply, expanding its market presence.

Typically in a merger you will receive stock of the newly combined company, but sometimes you may receive cash for your investment.  Post-merger I would suggest selling your shares that you have received regardless of the percentage gain you have collected.  Generally the stock drops off after the news of the merger settles and business goes on as usual.  Granted you now own shares of a better positioned company, but your returns will most likely lag the overall market, and as we’ve learned earlier, lagging the market is the best way to work until your 85 and wrinkly. 

The consumer ultimately benefits the most from decreased costs of the product due to lower production expenses.  After a merger, a layoff usually occurs of a significant amount of laborers which is terrible for the employed.  Those costs are usually sent to the consumer to gain a greater market share so all is not lost.

Mergers are good, not bad news.  They boost your returns, lower prices of goods and make shopping decisions easier.  Mergers aren’t corporation monsters. 

Monday, April 16, 2007

Value play

I’m not much for fundamentals when looking for stocks to buy but I just can resist this play for all the buy and holder’s out there.  The stock is Washington Mutual or the ticker symbol WM.  The stock price has been toasted by the recent “sub-prime” fallout that is expected to ruin the markets forever.  Whatever.

There are many reasons why I think WM should be a part of your long term/retirement portfolio:

First:  Dividends
The current dividend yield is 5.6%.  This is reason enough to buy a company like this.  For a company with the status of Washington Mutual I would expect a 2-3% dividend yield at the most.  Luckily the current yield is 5.6%, a couple decimals higher than you could get with a Washington Mutual CD.  And like a CD, I’d say that a large bank is a relatively safe investment.  Not foolproof but the possible returns on stock are much greater than Cds.  I’ll take the stock at these levels.

Second:  Price to Earnings
Compared to earnings, this stock is dirt cheap.  The stock trades at just 9.25 times 2008 expected earnings and 10.83 times the expected 2007 earnings.  I think WM is worth 12 times the earnings, or $48 per share. 

Third: Sub Prime isn’t happening
Washington Mutual, because of its status as a lender, fell with all of the truly junk corporations who made bad loans to people who couldn’t pay them.  WM has very little, if anything, to do with the subprime industry.  Because of the unrelated news, investors discounted WM stock even more, now to $39.50 per share. 

In my opinion, WM is a stock to hold for a long time to come.  The 5.6% dividend yield, if reinvested is a great way to boost your returns instantly.  The 5.6% essentially negates taxes and inflation while the remainder of the stock gain exists as pure profit.  Don’t miss this one, its too cheap to ignore.

Tuesday, April 10, 2007

Dow, this is Earth calling

The last two months of trading has been noted by turmoil.  Absolute fear in the sub-prime market.  A sneeze in China sent US securities for a spin.  The carry trade was ruined!  It could have been the end.

But it wasn’t.

We’re coming back to earth.  The Dow was an extreme out-performer in 2006 and I think 2007 will be the year the Dow gets back to its bearings.  I hate to be a downer, but 11400 might not be out of range. 

The chart below may help you understand where I am coming from.  Prior to the amazing year we experienced last year, the Dow followed a moderate advancement upward in a near perfect channel.  In 2006 we saw a touch of the top of the channel then a notable drop to the bottom of the channel where it would later double touch and send the index out of the channel all together.  Now I believe the index is headed back into its previous path. 

As you can see, the index had a perfectly carved path.  In 2006 with the May sell off, the index hit a low for the year and then later touched the same low again.  I think it was this double bottom that sent us to some of the best 6 months in the last half of the year.  As a technical analyst, anything I see outside of the “norm” is bogus.  The part of the graph outside of the channel is unjustified territory and unsafe ground for your investment dollars.  The volatility inside the channel is nothing compared to what could happen outside. 

Ideally, the Dow would come to rest again at the bottom of the trend only to continue in its usual path.  I hate to say that 2007 is going to be a consolidation year and be a drag but I think it is actually what is best for today’s market.  A consolidation to 11400 would be best for the market to continue moving forward.  This would leave 2008 and onward to bring financial prosperity in the markets.  I think the change of presidency could also have an effect.

More evidence that suggests a consolidation is the breakdown of the smaller trend I have outlined.  The 500 point drop day cuts clear through that trend.  When there is a huge movement through a trend, the movement confirms the trend was recognized as support/resistance. 

Don’t go crazy over all the sub-prime news, let that storm blow by.  If we experience some kind of drop this year in the Dow, its not the reasons you hear on TV, its just a consolidation or rebuilding year. 

Friday, March 16, 2007

Subprime yada yada

Subprime yada yada

Look, this whole sub-prime loan crisis is just a bunch of junk.  Lenders were dumb enough to give money to people who statistically don’t plan to pay it back, sure these are moral individuals but their history speaks volumes for the financial past. 

Here’s my take on the mess:

Sub-prime borrowers are less than the top quality of borrowers known as prime borrowers.  Usually a sub-prime borrower has many credit blemishes such as bankruptcy, late payments or previous defaults on mortgages.  The banks who take these loans assign incredibly high interest in order to cover any potential risk generated from accepting the loan.  First mistake, issuing a high rate to someone who has problems paying.

The financial industry is backwards.  See, a person who makes $100,000 a year with a prime credit score could get a home loan with a 5.77% rate.  Someone who makes $30,000 a year with a bad score could get a home loan but would expect to pay 8.5% plus.  This represents a difference of nearly $300 per month on a loan of $150,000.  Granted, income does not affect your credit score but typically those who make less have a lower credit score due to lack of money to make payments.  Loans to sub-prime lenders have much higher default rates as well.

See how the sub-prime market is destined to collapse?  The worse some one’s ability to pay, the higher the monthly payment.  That makes no sense mathematically, of course their will be a higher default rate, especially when interest rates are that high. I think this sub-prime mess was long overdue.  It simply cannot sustain itself when those who can’t pay, pay the most. 

The thinking was that if home prices continue to rise, people with bad credit would be able to refinance and get a better rate after making payments on time, or sell the home for a profit.  These lenders weren’t investing in future homeowners!  More or less they were making a direct play on the future of home prices! 

This sub-prime stuff is just out there to make investors jump.  Its just an excuse for the hedge funds to dump shares, really.  There was no reason that the dow should have dropped 500 points other than profit taking.  Lets not try to cover up what really happened, we just wanted to cash in our earnings.

I don’t want to get far from the point that the sub-prime investment arena is junk.  Trust me, its junk and you don’t want any exposure to it, but it wasn’t the reason for the drop.  Don’t invest in any sub-prime lenders, just stick to what you know.  Value plays in a cheap market.

Wednesday, March 14, 2007

First big one for Google

After its acquisition, Google was expecting to receive some sort of criticism for the content provided on YouTube’s webpage.  The site is notorious for offering all kinds of videos ranging from copyrighted TV shows to full movies for free to visitors.  The company was negligent of copyright and allows anything under the sun to be uploaded to its servers without checking the ownership.

Viacom, owner of VH1, MTV and Comedy Central has filed a $1 Billion dollar lawsuit against YouTube for publishing copyrighted materials and distributing them freely to their millions of daily visitors.  This marks the biggest “fight” between the two media outlets regarding content.  Prior to the lawsuit, Viacom requested that 100,000 videos be removed due to copyright infringements and since that request was sent last month, Viacom has reportedly found 50,000 more videos it wishes to be removed. 

The lawsuit says that YouTube is ignorant of copyright and allows too many videos to be added without first checking the ownership.  The duty to check copyright should be in the hands of Youtube, Viacom argues, but since YouTube has done a poor job to weed through the videos, the responsibility has been placed into the media publisher’s hands.  YouTube argues it is protected under the 1998 Digital Millennium Copyright Act the act takes responsibility from online publishers as long as content is deleted as asked by the copyright holders.  YouTube has so far been slow in deleting the 150,000 videos requested from Viacom. 

Google purchased YouTube for $1.76 Billion back in November.  I just wonder now if Google might have just purchased another liability.  When the transaction was made, $220 Million was set aside to cover future lawsuits regarding the content published on YouTube.  It seems evident that YouTube might become another Lawsuit Magnet.

Viacom is now the first, and certainly not the last company that will attack YouTube’s policy.  Pending the result of this lawsuit, we may see every cable company or content producer coming on to attack YouTube.  These companies have a right, and a duty to protect their content, and really, their futures. 

YouTube, prior to the Google acquisition was virtually worthless.  The company had very little cash, and that it had was from its venture capital funding.  The websites visitor stats certainly are impressive, although the traffic generated is certainly less than quality.  YouTube suffers from high bandwith costs due to servicing large files to visitors.  Each few can realistically cost YouTube pennies and yeild tenths of pennies in income.  The viewers want to watch their movies, they don’t want to view advertisements.

I think the result of this lawsuit will be that YouTube has within X timeframe to remove the material in question or face a heavy penalty.  In my opinion, both companies will win.  Viacom will protect its media and YouTube will avoid heavy copyright infringement penalties.  As far as I am concerned, Google’s purchase of YouTube was just them throwing money away.  Google has a lot of cash on hand, but I think there are better investments than company’s that lose money. 

Yahoo for the win!