The U.S. economy may be headed into a recession, but e-commerce sales are estimated to grow 17% to $204 billion this year. The Forrester Research report sees a continued increase in e-commerce spending as value-shoppers go bargain hunting and affluent investors seeking the comfort and convenience of shopping from home. This is great news for many online retailers as well as online marketing companies.

"From higher shipping costs to changes in consumer shopping habits, online retailers are not immune to the current economic climate," said Scott Silverman, executive director of Shop.org. "But the fact that online sales will increase substantially this year demonstrates the resilience of the channel and is a testament to the value and convenience most customers find when shopping online."

Companies like Amazon.com Inc. (NDAQ: AMZN) and eBay Inc. (NDAQ: EBAY) stand to benefit the most from the increased online spending given their market leadership positions. Unfortunately, much of this growth is already priced into the stocks. Amazon.com trades at 68x earnings with a P/E to growth ratio of 2.19, which means that the stock may be overvalued given its most recent growth. Meanwhile, eBay is trading at 125x earnings with a P/E to growth ratio of 1.25, which makes it a little more affordable.

The Forrester Research report also indicated that search engine marketing continues to be the most effective way to reach new customers. In fact, 90% of all online retailers use pay-for-performance search placement and 79% said they will make such tactics an even greater priority this year. Currently, the survey found that around 35% of all sales comes from search engine marketing venues.

These increases should help boost stocks like Google Inc. (NDAQ: GOOG) who rely on search engine marketing for much of their income. Other potential benefactors include Yahoo Inc. (NDAQ: YHOO) and Microsoft (NDAQ: MSFT), who both have their own online ad platforms that many online retailers use to advertise their services in an increasingly competitive market.

"What’s spearheading online retail sales growth is a tale of two shoppers that visit the web for very different reasons," said Sucharita Mulpuru, Forrester Research principal analyst and lead author of the report. "The casual shopper goes online to look for the best price, leveraging the transparency of the Internet to save money. However, more affluent customers appreciate the convenience of shopping online and are not necessarily looking for the best deal. Retailers would be wise to recognize there are significant opportunities within both audiences and should market to them accordingly."

In the end, this is great news for the only positive segment of the retailing market.

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Washington Mutual's (NYSE: WM) dreams came true today after it announced a $7 billion capital infusion from an investment syndicate led by private-equity firm TPG. Unfortunately, shares dropped after the bank then announced a higher-than-expected $1.4 billion preliminary write-off for the first quarter and a move to slash its dividend to shore up capital. In the end, the good news offset the bad and shares gave back their earlier gains.

Washington Mutual, like many other banks, has found itself under substantial pressure amid rising defaults. The firm's loan loss provisions for the first quarter alone will run $3.5 billion with a net write-off expected to come in at around $1.4 billion. So, while the $7 billion in additional liquidity is good news, the bank may yet face substantial capital concerns going forward. That's not to mention the significant dilution that shareholders will experience.

Fortunately, Washtington Mutual has a series of plans in place to improve its financial situation after this latest capital injection. The bank will significantly reduce its leverage once the new capital is in place, which makes it a far less risky institution. Additional, the planned elimination of its wholesale lending and home-loan centers will help it refocus on the much more stable retail banking sector that isn't completely reliant on real estate for success.

In the end, this is good and bad news for shareholders. The additional capital will enable the bank to reduce its exposure to loans and ensure its going concern. However, the additional capital also comes at a cost - share dilution. Overall, the move should be good for the long-term but difficult for the short-term.

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Tobacco companies may face an uphill battle against regulators after new legislation was proposed that would give the U.S. Food and Drug Administration (FDA) authority of tobacco products. The House Energy and Commerce Committee voted 38-12 in favor of the proposal that is now ready to be passed on to the U.S. Senate before becoming effective. Shareholders of tobacco companies are divided as the legislation may benefit some while hurting others.

The new legislation is expected to impose significant restrictions on marketing as well as require larger warning labels. These are developments that are more likely to hurt smaller tobacco companies rather than the nationally-recognized and established brand names. This means that big companies like Philip Morris International (NYSE: PM), which recently spun off from Altria Group (NYSE: MO), stand to benefit at the expense of other smaller players like Carolina Group (NYSE: CG) and Reynolds American (NYSE: RAI).

This may sound great for larger companies, but there is a big downside. The FDA will also likely require manufacturers and importers of tobacco to pay user fees to fund the new regulatory responsibilities under the bill. These fees are expected to net $90 million this year, but increase to $755 million by 2018. These fees would be assessed based on market share, which means that the lion's share of the fees will be levied on companies like Philip Morris.

The best options for shareholders may be those tobacco companies with greater international exposure. Companies like Imperial Tobacco Group (NYSE: ITY) with particular strengths in the United Kingdom, Germany, The Netherlands, Belgium, the Republic of Ireland, France, Spain, Greece, Poland, Ukraine, Russia, Australia, Taiwan and sub-Saharan Africa are of particular interest. Strong international brands may become more important than strong domestic brands if the measures pass.

In the end, tobacco companies are likely to suffer from these new measures. Reduced marketing will put pressure on top-line growth by limiting their ability to attract new customers. Meanwhile, the fees associated with the new regulation will put pressure on margins and negatively impact the bottom-line. Combined, this is bad news for tobacco companies if the bill is passed in its current state.

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Bassett Furniture Industries Inc. (NDAQ: BSET) management was caught sitting around on the job, according to at least one activist hedge fund. Costa Brava, which owns just over five percent of the company, recently expressed its disappointment with the furniture business and initiated a proxy contest in order to install its own board members to enforce change. So, should shareholders support these new board candidates?

Costa Brava believes that the board of directors should put a plan in place to reduce the capital needs of Bassett's furniture business and to maximize the value of Bassett's investment and real estate assets. The hedge fund argues that the furniture business has been contracting for several years as Asian imports have severely undercut domestic pricing. Meanwhile, the housing market turmoil has reduced fundamental demand for furniture.

The real value in Bassett is apparent in its balance sheet. Perhaps the most interesting highlight is Bassett's 47% ownership stake in a 3 million square foot exhibition space in High Point, NC. Net operating income from this property are around $30 million, which (capped at 10%) carry an implied valuation of $300 million. Subtracting the $105 million in debt yields $195 million in equity, which means Bassett's stake is worth around $91 million.

Bassett also has cash and investments of over $80 million, hedge fund investments of $51 million, marketable securities of $25 million, and a profitable International Home Furnishings Center (IHFC) division. The IHFC and hedge funds have been subsidizing the furniture business for years. In fact, the "core" furniture business hasn't been able to generate a stable cash flow for nearly 10 years with over $85 million being wasted since 2001.

Costa Brava recommended that Bassett focus on the value in these less risky assets and scale back or eliminate its risky and unprofitable furniture business. The hedge fund's board nominees have vast experience in many different businesses, including real estate and hedge funds. Costa Brava insists that substantial value can be unlocked by monetizing these assets and returning the cash to shareholders.

Bassett responded Monday by issuing a special dividend for shareholders while recanting its prior dedication to unlocking value through its past dividend hikes. However, many believe that these measures may be too little too late. The special dividend was only $1.25 per share and the dividend hike was only 12%. The reality is that these numbers pale in comparison to the amount of value that could be unlocked by the hedge fund.

In the end, this is all great news for shareholders who stand to benefit from such measures to unlock value. It will be interesting to see just how much support Costa Brava receives from shareholders. Combined, these factors make BSET a stock worth watching closely into the April 18th annual meeting!

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Motorola Inc. (NYSE: MOT) will be calling upon two of Carl Icahn's nominees for election to its board as part of a truce with the activist shareholder. Let's just hope their using Motorola phones: The cellphone-maker's shares have fallen nearly 50% over the past year thanks slowing sales. The decline prompted Mr. Icahn to recommend a spin-off of the company's Mobile Devices unit in order to unlock value and enhance both businesses.

"We are pleased to have reached this agreement with Carl Icahn," said Greg Brown, president and chief executive officer. "We look forward to continuing the process we announced on March 26 to create two independent publicly-traded companies and we are pleased to avoid a costly and distracting proxy contest."

Carl Icahn lost a proxy contest last year, but management's failures in 2007 increased the odds this time around. Management fought briefly with the activist, but ended up implementing his plan for a spin-off of the Mobile Devices unit. However, the activist was still concerned with the speed and manner in which a new management team is selected for the mobile division. As a result, he insisted that his own directors be elected to the board to oversee the process.

Motorola finally agreed today and the two announced a truce that will enable Icahn to implement his activist agenda while allowing Motorola to avoid an expensive proxy contest. The cell phone maker also agreed to seek input from the activist investor in connection with significant matters regarding the separation of the Mobile Devices business.

"This is a very positive step for Motorola in that shareholder representatives will have strong input into board decisions affecting the future of our company," said Carl Icahn. "In addition, the Motorola Board has also taken an important step forward for corporate governance in that the separated company which includes Mobile Devices will be essentially free from poison pills and staggered boards, both of which, in my opinion, serve to make democracy a travesty in corporate America."

In the end, this is great news for shareholders as they will finally have their own represented on the board. Meanwhile, a successfully spin-off should help both companies focus on their core competencies and improve their bottom-line. This has made MOT a stock worth watching over the next few months!

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Microsoft Corporation (NDAQ: MSFT) is starting to put more pressure on Yahoo Inc.'s (NDAQ: YHOO) board to take action with regards to its $41 billion buyout bid. Microsoft chief Steve Balmer criticized Yahoo's board for its failure to take quick and decisive action and decision to implement costly anti-takeover provisions. Meanwhile, he insisted that the deterioration of the equity markets and decline in internet traffic has made this transaction even more necessary to conclude very quickly. As a result, Microsoft threatened a proxy contest if the board did not work towards a definitive merger agreement within three weeks.

Yahoo replied in what is the lengthiest letter to date regarding the bid. Chief executive Jerry Yang and Chairman Roy Bostock wrote that the current offer is not in the best interests of shareholders, but the company would be open to a bid at a fair price. The two also insisted that the two parties have already held meaningful discussions and that any hiccups were primarily due to Microsoft's hesitation to ask or provide regulatory information on the deal. Finally, Yahoo insisted that the majority of its shareholders still believe that Microsoft's bid substantially undervalues the company.

Here is a copy of both letters in full:

Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Members of the Board:

It has now been more than two months since we made our proposal to acquire Yahoo! at a 62% premium to its closing price on January 31, 2008, the day prior to our announcement. Our goal in making such a generous offer was to create the basis for a speedy and ultimately friendly transaction. Despite this, the pace of the last two months has been anything but speedy.

While there has been some limited interaction between management of our two companies, there has been no meaningful negotiation to conclude an agreement. We understand that you have been meeting to consider and assess your alternatives, including alternative transactions with others in the industry, but we've seen no indication that you have authorized Yahoo! management to negotiate with Microsoft. This is despite the fact that our proposal is the only alternative put forward that offers your shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers.

During these two months of inactivity, the Internet has continued to march on, while the public equity markets and overall economic conditions have weakened considerably, both in general and for other Internet-focused companies in particular. At the same time, public indicators suggest that Yahoo!'s search and page view shares have declined. Finally, you have adopted new plans at the company that have made any change of control more costly.

By any fair measure, the large premium we offered in January is even more significant today. We believe that the majority of your shareholders share this assessment, even after reviewing your public disclosures relating to your future prospects.

Given these developments, we believe now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement on a combination of our companies that will deliver superior value to our respective shareholders, creating a more efficient and competitive company that will provide greater value and service to our customers. If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.

It is unfortunate that by choosing not to enter into substantive negotiations with us, you have failed to give due consideration to a transaction that has tremendous benefits for Yahoo!'s shareholders and employees. We think it is critically important not to let this window of opportunity pass.

Sincerely yours

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation

Dear Steve:

Our Board has reviewed your most recent letter with regard to the unsolicited proposal you made to acquire Yahoo! on January 31, 2008.

Our Board carefully considered your unsolicited proposal, unanimously concluded that it was not in the best interests of Yahoo! and our stockholders, and rejected it publicly on February 11, 2008. Our Board cited Yahoo!'s global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as its substantial unconsolidated investments, as factors in its decision.

At the same time, we have continued to make clear that we are not opposed to a transaction with Microsoft if it is in the best interests of our stockholders. Our position is simply that any transaction must be at a value that fully reflects the value of Yahoo!, including any strategic benefits to Microsoft, and on terms that provide certainty to our stockholders.

Since disclosing our Board's position with respect to your proposal, we have presented our three-year financial and strategic plan to our stockholders, which supports our Board's determination that your unsolicited proposal substantially undervalues Yahoo!. Those meetings with our stockholders have also provided us an opportunity to hear their views.

We have continued to launch new products and to take actions which leverage our scale, technology, people and platforms as we execute on the strategy we publicly articulated. Today, in fact, we are announcing AMP! from Yahoo!, a new advertising management platform designed to dramatically simplify the process of buying and selling ads online.

Finally, our Board has been actively and expeditiously exploring our strategic alternatives to maximize stockholder value, a process which is ongoing. All of these actions have been driven by our overarching commitment to maximize stockholder value.

Our Board's view of your proposal has not changed. We continue to believe that your proposal is not in the best interests of Yahoo! and our stockholders. Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo!. Furthermore, as a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal.

In contrast to your assertions about the effect of general economic conditions on our business, Yahoo!'s business forecasts are consistent with what we outlined in our last earnings call. As you know, we recently reaffirmed our Q1 and full year guidance, which is a testament to our ability to perform in line with our expectations despite the current economic environment. In addition, our three-year financial and strategic plan which we have made public demonstrates significant potential upside not previously communicated to the financial markets. This plan has received positive feedback from our stockholders, further strengthening the view that Yahoo! is worth well more as a standalone company than the value offered in your proposal, and would be even more valuable to Microsoft. Your own statements have made clear the strategic importance of Yahoo!'s substantial assets and capabilities to Microsoft.

We regret to say that your letter mischaracterizes the nature of our discussions with you. We have had constructive conversations together regarding a variety of topics, including integration and regulatory issues. Your comment that we have refused to enter into negotiations to conclude an agreement are particularly curious given we have already rejected your initial proposal, nominally $31 per share at the time, for substantially undervaluing Yahoo! and your suggestions in your letter and the media that you are considering lowering the value of your proposal. Moreover, Steve, you personally attended two of these meetings and could have advanced discussions in any way you saw fit.

As to antitrust, we have discussed with you our concerns. Any transaction between us would result in a thorough regulatory review in multiple jurisdictions. As a follow up to a recent meeting among our respective legal advisors we had on this topic, and at your request, we provided to you on March 28 a list of additional information we would need to further our understanding of the regulatory issues associated with any transaction. To date, you have still not provided any of the requested information.

We consider your threat to commence an unsolicited offer and proxy contest to displace our independent Board members to be counterproductive and inconsistent with your stated objective of a friendly transaction. We are confident that our stockholders understand that our independent Board is best positioned to objectively and knowledgeably evaluate our Company's alternatives and to maximize value.

In conclusion, please allow us to restate our position, so there can be no confusion. We are open to all alternatives that maximize stockholder value. To be clear, this includes a transaction with Microsoft if it represents a price that fully recognizes the value of Yahoo! on a standalone basis and to Microsoft, is superior to our other alternatives, and provides certainty of value and certainty of closing. Lastly, we are steadfast in our commitment to choosing a path that maximizes stockholder value and we will not allow you or anyone else to acquire the company for anything less than its full value.

Yours very truly,

Jerry Yang

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Select Comfort Corporation (NDAQ: SCSS) shares may be well off of their $19/share 52-week highs, but at several professional investors are giving this stock a second look. The depressed levels have led to several analyst upgrades as well as at least one activist hedge fund that has taken a positive stance. The Clinton Group not only commended management, but also increased its stake to 6.1% in recent days.

The Clinton Group previously expressed disappointment with Select Comfort in a series of letters, but is now convinced that the company is moving in the right direction. The activist hedge fund met with Chairman Ervin Shames and CEO William McLaughlin regarding the prospects and strategy of the company and liked what they saw. In particular, the two executives told the hedge fund that the company was improving operating practices by focusing on driving sales through new marketing strategies and implementing appropriate cost reductions where necessary.

The two parties also discussed implementing changes that the Clinton Group proposed during their last letter to the board, which included:

1. Revise marketing strategy to refocus on direct marketing.
2. Disband the "Quality of Life Advisory Board" as a wasteful use of company resources.
3. Review its store portfolio to eliminate underperforming stores.
4. Immediately cease all new store openings and spending on unnecessary capital expenditures until sales results improve.
5. Eliminate stores in regions where the Company does not have the critical mass to justify its advertising and the overhead for that region, and then eliminate the excess regional and corporate overhead.
6. Freeze spending on the SAP system installation until it is evaluated by an independent consultant.
7. Consider subleasing or disposing of the costly new corporate headquarters and conduct a study on the future needs of the Company in light of its anticipated growth.
8. Revise new Chief Executive Officer performance metrics to earn 2008 base salary to align with shareholders interests.
9. Consider outsourcing its call center operations.

It is clear that Select Comfort has been experiencing difficulty due to a weak macroeconomic environment, but the Clinton Group now believes management and the board is now cognizant of its previous missteps and focused on improving the company's performance in 2008 and beyond. Even assuming a difficult environment for consumer spending, the company is trading at historically low multiples and at a valuation discount to its comparable peers.

The Clinton Group believes that this valuation gap between Select Comfort and its peers will close as its new initiatives begin to bear fruit and the company will soon return to historical levels of profitability and valuation. As a result, their conviction is stronger than ever that the company has exceptional long-term growth prospects. In fact, they even recently purchased 461,244 more shares in a vote of confidence.

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Apple Inc. (NDAQ: AAPL) has reportedly surpassed Wal-Mart Stores Inc. (NYSE: WMT) to become America's largest music store by sales.

According to market research firm NPD Group, Apple's iTunes digital store sold more albums in the first two months of this year than any other music retailer. Though consumers still buy more physical music in the form of CDs than the digital song files that iTunes sells, iTunes has been able to vault ahead of Wal-Mart because it dominates the music download market – even though the music download pie is smaller, iTunes has such a big slice that it has overtaken all individual CD sellers.

This announcement is not so much immediately important for Apple's or Wal-Mart's profitability as it is symbolic – the fact that the biggest music retailer doesn't sell CDs or have physical stores signifies the transformation the music industry has undergone in the past decade.

Port Washington, NY based NPD Group computed the figures by counting every 12 individual songs sold as one album, which is absolutely key to the claim that iTunes sold more albums than any other retailer because in reality few iTunes customers purchase complete albums.

In the long-run, this news is much more significant for Apple than Wal-Mart because Apple's results are far more dependent on iTunes and its complimentary digital music players, iPods, than Wal-Mart's results are dependent on CD sales. Though Apple doesn't release specific results for iTunes – probably part of a strategy to prevent music companies from complaining about its profitability – if downloading music is now officially the standard, Apple could not be in a better position to capitalize on it.

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Honeywell International Inc. (NYSE: HON) announced an agreement to purchase personal protective equipment manufacturer Norcross Safety Products LLC for $1.2 billion from Odyssey Investment Partners.

Honeywell is the world's largest manufacturer of cockpit displays but also provides products ranging from security technologies for buildings to specialty chemicals. Last year, the company had net income of $2.4 billion on revenue of nearly $35 billion.

Norcross makes safety equipment for "the fire service, utility and general industrial worker segments" and had approximately $609 million in revenue last year according to the press release on the deal.

"With more than 100 years of industry experience, best-in-class solutions and trusted brands, and a strong management team with exceptional talent and depth, Norcross is a globally recognized industry leader that will bolster our offerings to our customers in key Life Safety segments," Honeywell CEO Roger Fradin said.

President of Honeywell Life Safety Mark Levy highlighted the logic of the deal, "This acquisition creates an exciting adjacency for Honeywell Life Safety -- especially our Fire Systems and Gas Detection businesses, which share common distribution channels with Norcross. We expect strong sales synergies across Honeywell businesses and opportunities to add value to Norcross products with Honeywell electronic gas sensors, fire detection and advanced fiber material technologies."

The obvious question, given that Norcross seems an excellent fit, is did Honeywell pay a good price for the company? Norcross is currently held primarily by Odyssey Investment Partners, a private equity firm, which frankly means almost no material financial data for Norcross is publicly available to analyze. Private equity firms can invest in companies traded on stock exchanges – which means they have to file legally required financial documents – but often instead purchase equity stakes in private companies or take public companies private.

This strategy allows private equity firms to be freed from answering to Boards of Directors and company shareholders in the management decisions of companies they own but it also makes private equity firm performance, and the performance of their respective companies, very difficult to track. Honeywell certainly had access to Norcross' financial data while formulating this deal, but for now all that can be said for certain is the synergies of the purchase are obvious but the fairness of the price is not.

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Airlines are struggling to get any lift amid record oil prices and a weakening economy. ATA Airlines and Aloha Airlines both shut down operations and filed for bankruptcy this week alone while larger carriers like Northwest Airlines (NYSE: NWA) are raising prices and cutting routes to stay alive. In fact, the only airline eking out a profit seems to be Southwest Airlines (NYSE: LUV).

Southwest Airlines revealed $111 million in net income during the fourth quarter after it was able to lock in lower fuel prices using derivative hedges. These contracts enable companies to pay a small fee in order to lock in prices for fuel years later. As a result, the airline was able to save over $300 million in fuel costs and post a 95 percent increase in net income. Just how long Southwest can protect its 67 quarters of consecutive profit, however, will surely be tested in the coming year amid soaring expenses.

Many other airlines haven't been so lucky in facing these rising costs. Those that were in bankruptcy a few years ago did not have the financial flexibility to make the fuel hedges that Southwest made and are now completely exposed. As a result, many airlines are being forced to take other actions to raise revenues and cut expenses. Analysts remain concerned, however, that these could revive the industry's past trouble.

Northwest Airlines announced that it would raise its fairs, fuel surcharges and baggage fees and cut its domestic flight schedule by 5 percent in order to help its bottom line. The airline also said it had suspended plans to hire more pilots and flight attendants while cutting capital spending that doesn't involve airlines by $100 million this year. Meanwhile, fuel prices are now seen as being $1.7 billion higher than it projected in May when it exited bankruptcy, which could put the company back at risk.

Other airlines have also taken similar actions. UAL Corporation's (NYSE: UAUA) United Airlines announced that it will begin charging fliers that wish to take a second piece of luggage beginning in May. Delta Airlines (NYSE: DAL) is also imposing new or higher fees on many travelers including frequent fliers, passengers traveling with pets and people booking their ticket over the phone.

All of the problems can also be traced back to soaring fuel expenses. Delta saw its fuel bill jump 28 percent to $1.36 billion during the third quarter while United Airlines saw a 43 percent jump. Oil prices have reached speculative highs after OPEC promised that it would not raise production levels for the remainder of the year. Meanwhile, the declining dollar has also contributed to the speculation since all commodities are now more expensive.

In the end, the airlines are now in the "perfect storm" of problems with declining consumer spending and quickly rising expenses. Even the best airline in the industry is seen as at risk of losing its profitability. These problems may not disappear until the slowdown in the U.S. economy is over and that could take awhile. Whether or not these airlines will survive that time remains to be seen.

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