Geez, I can understand Yahoo’s (YHOO) shareholders not being happy about Jerry Yang’s stubbornness, but I’m not entirely sure an unwillingness to do a deal with Microsoft (MSFT) merits a downgrade. I guess Colin Gillis at Canaccord Adams disagrees - he downgraded the stock to a ’sell’ earlier today when it became clear Yahoo wasn’t going to lay down. ThinkPanmure analyst William Morrison made the same decision.

Though it seems as if everyone except Jerry Yang liked the deal, I’m not sure a downgrade at this point is entirely fair. Did these two analysts upgrade YHOO when the potential union was first introduced? Nope. So, what’s actually changed with the company that makes it a ’sell’ now? That’s the point - nothing’s changed.

By now you’re realizing this has less to do with Yahoo and more to do with analysts. More specifically, it’s vented frustration that analysts are far too often lemmings, and/or late to the party. It doesn’t really do any investors any good to downgrade the company to a ’sell’ rating after the stock has plunged 14%.

In any case, I doubt this is anywhere close to being over. Microsoft has tipped their hand; they really can’t go back now, lest Google (GOOG) or Time-Warner/AOL (TWX) could step in. Google I could stomach, but a deal with AOL is a deal nobody’s gonna’ like.

Hostile takeover, here we come? Maybe.

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Normally I’d use my morning market comments to set the tone for the day (and share my thoughts about what the market probably had in store). However, we’ve got a ton of small cap stock news for this evening’s edition, so I’ll save it all for then. Instead, I’ll use this morning to do something I’d like to do more of - answer reader questions about the economy.

Here’s a question we got this morning…

I would appreciate if you can explain to me what the Fed is trying to achieve by lowering the Fed funds rate. My understanding is that if the Fed really want to help the financial sectors, is that they have to lower the discount rate to the same level as the Fed rate so that banks will borrow from the Fed than from each other. As it stands I don’t think most banks are still will to lend money to each other. I believe with these two rates at the same level then we will have more banks borrowing from the Fed than from each other. As it stand I believe the worst is not yet over and no bank is willing to lend to the other. Also the Fed can lower the discount rate to a rate lower than the Fed rate and banks will borrow from them. If there are any implications in doing this can you please inform me.

Thanks for the questions. I’ll try and answer them one at a time in the same order received. Bear in mind I’m not an economist, so I may not be able to address all of them. On the other hand, Ben Bernanke doesn’t seem to be an economist either, and that doesn’t seem to stop him from making big decisions.

1. The Fed is trying to stimulate the economy by making it cheap and easy to spend borrowed money. It’s not working. If a fed Funds rate of 3% didn’t do it, can 2% be much better?
2. I don’t know that the discount rate matching the Fed Funds rate will matter. Banks can choose to borrow where they want to. Like you said, they’re choosing the cheapest source right now. I don’t think banks are fearful of borrowing from one another in this case; they aren’t risky consumer loans. More Fed borrowing won’t stimulate anything more than what we have right now.
3. To my knowledge, there are no long-term implications to borrowing from one source or another. These are only short-term loans.
4. In the bigger picture, the issue still isn’t whether or not banks can acquire money to lend. The Fed has made billions of dollars available, and billions more are available from intra-bank loans. The issue is banks just not wanting to make consumer loans to anybody. That’s ok though - most consumers don’t want to borrow right now anyway.

Back to the key point though….I don’t think Bernanke did anybody any good. He caved to Wall Street by giving us rate cuts we wanted but didn’t need. Inflation surged because of the weak dollar, and the dollar was weak because interest rates were so low. You can’t avoid taking lumps, but the lumps he chose for us hurt more than the alternative.

That said, I think the worst is over, economically speaking. However, it’s not as if Ben had anything to do with it.

That’s just my two cents…or one cent, inflation adjusted.

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I don’t know if they actually needed it, but it never hurts to have it. At the same time, the fact that they could get it at all right now says quite a bit about long-term, third-party opinions of their stock.

What I’m talking about is small cap company Stockgroup Information Systems (SWEB) and funding. They just raised $3 million worth of funding from PEAK6 Investments LP. You may know them better by the name of their website, optionsnews.com.

The terms of the deal are pretty straight forward…Stockgroup is issuing 3000 convertible preferred shares at $1000 each. The conversion rate is 2200 common shares for each preferred share (meaning a total of 6.6 million shares are on the table as part of the deal). The preferred shares have a six-month hold, but will convert to common within two years no matter what. The conversion price is 45 cents per share - a premium to the current price.

The deal also gives PEAK6 the right to use Stockgroup’s content feed - something they create anyway.

I honestly wasn’t aware they were seeking funding. They had $2.8 million in cash as of their last filing, and $5.5 million in current assets. And, the expense of new website and re-launch has already been incurred. So, from my point of view, they didn’t necessarily need it.

On the other hand, the time to raise money is when you don’t need it. How’s that for a bitter irony? If they were in a crunch, they may have a hard time getting it.

My bigger picture take - to get anything at all right now speaks well of the company. Though Citigroup has raised several billion this year, it’s not like a lot of venture capitalists and institutions are jumping on private placements or IPOs in this environment.

Stockgroup, on the other hand, just raised a significant amount of money without upsetting current shareholder equity too much. The conversion rate is above the stock’s current price, the 7% dividend on the preferred is manageable, and the money is going to get parked on the balance sheet for a while.