Well, Alcoa (NYSE:AA) managed to meet on earnings, and beat on revenue. All in all, I’d say that’s pretty good. I’ll also say it’s a darned good thing Alcoa came in good. After a day like yesterday, investors needed some good news, or at least some "not bad" news.

The S&P 500 dropped below support at 1,320, though only by a point. Volume wasn’t particularly heavy, so we shouldn’t read too much into the 1,319 close. In fact, yesterday had all the makings of a bear trap: negative headlines, a drop through support, right at the outset of earnings season.

Of course, we will need to get some more positive earnings news to turn the tide. And we will have to wait for Thursday when JP Morgan (NYSE:JPM) and Google (Nasdaq:GOOG) report.

Now, here’s some reader mail.

Joseph L. nominated AOL (NYSE:AOL) – Time Warner (NYSE:TWX) merger: The AOL/Time Warner merger was by far the worse transaction in the history of the human race. It led to an impairment charge of over $90 Billion, reflecting the decreased value in AOL’s goodwill. In effect, this was the report card for the acquisition. AOL was valued at $200 billion dollars at the time to the Time Warner merger (Time Warner was valued at $160 Billion), and, ten years later, AOL was spun off from Time Warner at a value of about $2 Billion. Today, AOL’s market cap remains at about $2 billion, but it is continuing to take impairment charges against its goodwill (and as a result, has a loss of $7 per share for its last fiscal year).

While the BOA/Countrywide acquisition is, for sure, one of the worse acquisitions in history, it doesn’t come close the Time Warner/AOL acquisition.

Yes, AOL/Time Warner was pretty bad. As Joseph points out, at the time the merger was announced in January of 2000, total market cap for both was well over $300 billion. I would point out that this was close to the absolute top of the Internet bubble — valuations across the board were extreme. A year later, in 2001, the combined value had already fallen over $100 billion.

Still, in terms of shareholder value, I will argue that Bank of America/Countrywide is at least as bad, if not worse…

At the time of the Countrywide acquisition was announced in 2007, Bank of America stock traded for $39 a share. Not counting dilution, the market cap was approximately $400 billion.

So, just from a market cap perspective, Bank of America has lost $300 billion in shareholder value since the Countrywide acquisition. Of course, that loss isn’t all due to Countrywide…

In 2007, Countrywide had $408 billion in mortgage originations and has a servicing portfolio of about $1.5 trillion with 9 million loans. Bank of America reportedly had $1.5 trillion in assets as well. We could conclude from this that roughly half of the damage to BofA shares is due to Countrywide.

I would also point out that the AOL/Time Warner was a merger of equals, more or less. The loss of value was almost all due to the ridiculous valuation of AOL.

BofA bought Countrywide for just $4 billion. But the acquisition has cost BofA shareholders at least $150 billion, if not more.

Ron M. nominated this merger/acquisition: Dow Chemical purchase of Rohm and Haas for over 15 billion.

Dow Chemical (NYSE:DOW) completed the Rohm Haas acquisition in April of 2009. Considering that was essentially the very bottom of the financial crisis bear market, I’d have to say that Dow actually made a good deal. Dow stock has recovered substantially from those lows.

Stephen offered this one: Microsoft’s recent acquisition of Skype, may not be the best idea.

Microsoft (Nasdaq:MSFT) buying Skype might seem like a disconnect, but I actually like the move. Microsoft needs to do more to keep with innovation, especially in the social media arena. Skype can do this for them. Facebook is already offering Skype service.

Plus, Microsoft CEO Steve Ballmer revealed this morning that Skype will be integrated with Microsoft’s business communication software, Lync. I can also imagine some video conferencing applications using the Skype platform.

Even at Wyatt Investment Research, we’ve implemented Skype as a more direct alternative to email.

Richard L. asked: If the European bailout fund isn’t big enough to save Italy, how will it be able to save Greece + Italy + Spain?

Put simply, it’s not. Greece alone will use up around 30% of the $1 trillion fund. There have been discussions about expanding the size of the fund.

But that doesn’t address the bigger picture. Europe still hasn’t come up with a real strategy for dealing with debt problems. And I’m not convinced that simply providing loans and demanding spending cuts takes care of the problem. Major restructuring of economies is needed. And that will bring a level of frustration that could end with the EU simply dissolving.

Dale S. offers another economic indicator for us: I enjoy your news letters and insight. In the matter of a "soft patch" I thought I’d add a little anecdotal experience this weekend. We made our way for our annual outing with friends at the Stratford Shakespearean Festival in Stratford, Ontario. This is a lovely little town of about 32,000 maybe two hours from the US border.

We were a little surprised as we entered the town to see that most of the manufacturing facilities were vacant and for sale. As you drive in there are vacant buildings that formerly housed Cooper Automotive plants, a Crane Plumbing plant and a few other similar enterprises. Most of them empty and never to reopen according to the locals. As to the Festival itself although it survives I was told that ticket sales are down substantially and you can see the empty seats where previously SRO conditions applied. Some lovely restaurants, for which the town is known, are gone and reservations in the remaining eatery’s are much easier to come by for the most part. Parking, previously at a premium, is easy peasy, as they say.

I was under the impression that Canada was essentially untouched by the recession but to me it looked and felt surprising like my home state of Michigan.

Thanks for the commentary. It seems the U.S. isn’t the only country that’s lost manufacturing. Still, I see this as a pendulum swing. I won’t be surprised to see manufacturing return to the U.S. as emerging market labor gets more expensive and unions get more realistic. The concessions the UAW made were instrumental in the rebound for U.S. automakers.

Jim B. wrote: The job number is absolutely awful. This would seem to mean companies do not need more employees. They don’t need more employees because they are not selling more product, or the current employees are producing more product so they do not need more employees?
The stock market keeps going up. I thought the stock market went up because companies are worth more. I thought companies are worth more because of acquisitions (net worth), or because their profits are increasing.

If employees buy products, and we are not hiring more employees, who is buying? Is the value of stocks going up because of sales in other countries?

Is the stock market going up now, like it did in 1997-2000, because of some fiction (like the price of a tech stock has nothing to do with making a making profit) that we thought was the truth?

Yes, productivity is up. And yes, much of the profit growth we’ve seen has come from sales in foreign markets. In fact, profits are reaching record levels, so it’s appropriate that that the stock market has risen.

It’s important to remember that the stock market isn’t a direct reflection of the economy. Though we should note that the seemingly low valuations at a time when profits are booming is a reflection of the economic pessimism. That’s the direct opposite of what happened during the internet bubble, when a strong economy made it seem like the future was wide open.

Still, it’s always wise to have a handle on what’s real and what’s fiction. So what’s real and what’s fiction these days? I have to think the idea that we will be stuck in this endless cycle of high unemployment and high debt forever should be viewed with some skepticism. Deficits looked pretty bad in the 80s too, and 10 years later we had a surplus.

The bad part is, Congress and the administration is so concerned with cutting spending that they’re missing opportunities to invest in future growth.

Richard B. wrote: Like your piece on the Bank of America. Having worked for Citigroup’s Investment Bank and Bank Boston/Fleet later to be BoA my thoughts are the following. You will not find a single person at Citi or BoA who does not believe that Chuck Prince or Ken Lewis does not belong in jail for looting the world financial system. You look at Dennis Koslowski who is rotting away in jail for supposedly looting Tyco versus these Bank Robers. No comparison.

Now they want to replace a tax cheat at the Treasury with the architect of the financial crisis-Jamie Dimon. This is after Henry Paulson saved Goldman and killed off Lehman Brothers. Until the US purges this current group of criminals from the Banking system nothing will change.

This current group of criminals has destroyed the stock and Real Estate portfolios of the masses.

Totally agree. I’d love to see the revolving door between government and Wall Street close. But on the bright side, with Jamie Dimon as Treasury Secretary, at least we’ve broken from always having a Goldman Sachs (NYSE:GS) executive in that job. Baby steps, people! (I hope you get my sarcasm here.)

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