The Federal Open Market Committee (FOMC) raised the Federal Reserve's overnight interest rate, or Fed funds rate, another quarter of a percent today, to 1.75% from 1.5%. It was the third straight meeting the FOMC raised rates by 25 basis points.

The Fed funds rate is what banks charge each other for overnight loans to meet the Fed's reserve requirements. Market watchers expected today's rate increase, and while economists debate whether or not the economy is strong enough for more rate hikes, most anticipate we are likely to see them in the coming months.

For more on the Fed and its impact on the economy, see this Motley Fool special. For more on how Alan Greenspan's grooming habits affect interest rates, talk to NBC News' Andrea Mitchell (his wife).

In today's Motley Fool Take:

Why Napster Rocks


Rick Aristotle Munarriz (TMF Edible)

I'm really rooting for Roxio(Nasdaq: ROXI), but if you'll allow me a moment of skepticism, I'm still not sure what was behind Roxio's shares soaring by 12% on a day when the market as a whole was turning it down a notch.

Yes, Roxio announced that it was probably going to post a narrower loss during the current quarter. Yes, the upstart that wants to be known as The Digital Media Company announced that its Napster subscription service was positioned to produce $9 million in revenues over its projected $8 million. It also inched up its top-line forecast for its software division -- from $17 million to $18 million here in its fiscal second quarter -- but you can pretty much dismiss that last piece of news. Roxio agreed to sell its software side to Sonic Solutions(Nasdaq: SNIC) last month in an $80 million deal that is expected to close by the end of the fiscal year.

After Sonic's swallow, it will leave Roxio changing its corporate nameplates to Napster. So why did the stock tack on $17 million in market cap on what is really just a $1 million upgrade in its eventual organic business?

I agree that it may seem overdone. I hate it when what appears to be a marginal forecast nudge moves a stock wildly. But go ahead and do a little balance sheet crunching, and take a good hard look at the recent events in the digital music space. You might be ready to embrace Roxio -- or Napster -- or The Digital Media Company.

Assuming the transaction with Sonic closes as planned -- and that's why the upgrade on the software front makes it even more likely for it to close quickly -- Roxio will be sporting a net cash balance of roughly $3 a share.

Roxio started the week trading at just $3.96. As a potential Green Gene with the company trading for essentially pocket change above its greenery, this wouldn't amount to much if there weren't much of a catalyst.

With Roxio the catalyst is obvious. When Apple's(Nasdaq: AAPL) iTunes Store managed to sell 100 million downloads, the cash-rich heavies wanted in. For Microsoft(Nasdaq: MSFT) it was simply a matter of building out its latest installment of Windows Media Player to serve as a digital track storefront while Yahoo!(Nasdaq: YHOO)scooped up MusicMatch.

As in life, when the rich realize that to go to a sold-out concert they have to hit up a scalper for choice front-row seats, I'm not so sure that other wired bellwethers such as Google and Amazon will sit idle.

Roxio's Napster and RealNetworks'(Nasdaq: RNWK) Rhapsody will make both of those companies tempting acquisition targets. While neither one is making a profit peddling digital tunes right now, they are established brands, and the fact that their ample cash balances whittle down the enterprise values to chump change will make it easier to justify the buyouts.

So I'll go out on a limb and predict that as long as each stock remains depressed, that one -- if not both -- may wind up as buyout bait over the next year. So, in retrospect, maybe Monday's pop wasn't so outlandish after all.

Longtime Fool contributor Rick Aristotle Munarriz can set this Take to a song if you would like. He does not own shares in any of the companies mentioned in this story.

Wanted: Foolish Writers

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A Red Hat Rebound


Seth Jayson (TMFBent)

Linux provider Red Hat Software(Nasdaq: RHAT) has been crumpled a bit of late. In addition to bruising ad campaigns from behemoth competitor Microsoft(Nasdaq: MSFT) and uncertainty over the fate of the open-source OS due to SCO Group's(Nasdaq: SCOX)lawsuits, the firm had some accounting changes and a CFO departure that gave investors a few bouts of the willies.

Yesterday's second-quarter results show continued strength in the business, which does little to explain today's 13% haircut. Revenues of $46 million were up 60% over the prior-year quarter, and the recent trend is for accelerating sales growth -- a very good sign. At the bottom line, $0.06 per share tripled last year's showing.

Another noteworthy improvement is the growth in gross margin to 79% from 73%. It's still a long way from the standard achieved by the likes of Adobe Systems(Nasdaq: ADBE), but, to look at that a bit more optimistically, it means there's plenty of room for increased profitability.

Linux is still in its infancy. With the major players like IBM(NYSE: IBM), Sun Microsystems(Nasdaq: SUNW), Novell(Nasdaq: NOVL), Hewlett-Packard(NYSE: HPQ), and others both competing and playing nicely with each other, the question will be whether Linux can gain enough market share for everyone to rake in the bucks.

Given Red Hat's leadership in the field, it looks ideally positioned to take the lion's share of growth. But it will be a bumpy road. Even after its continuing slide, it can get scarier, as investors dump it today in response to guidance that was lower than analysts had hoped. But therein lies opportunity.

The balance sheets are strong: With $1 billion in cash and little in the way of long-term red ink, the $1.4 billion-dollar enterprise has put up $54 million in free cash flow in the first half of the year. That makes it look pretty cheap for a software leader putting up double-digit revenue growth and triple-digit earnings uptakes.

For related Foolishness, read:

Seth Jayson has no position in any company mentioned in this article.

Discussion Board of the Day: Words, Words, Words

What are the words for when no one listens anymore? When's the last time you read a good book by a flame that wasn't part of a book burning? Is book reading becoming a lost art? All this and more in the Words, Words, Words discussion board.

Don't Pass on iPass


Rich Smith

Last week, The Wall Street Journal took serious issue with the actions of management at Internet connector-for-travelers iPass(Nasdaq: IPAS). Among other charges, the Journal laid out the following troubling chronology of events:

April 22: iPass told investors it had "significant momentum going into the second quarter."

Late April: The company noticed it was losing customers because of an ill-considered reduction in the number of local access numbers it offered.

April 27-May 3: Several company insiders began selling large blocks of shares and informing the Securities and Exchange Commission of plans to sell even more shares.

May 13: iPass filed its first-quarter 10-Q with the SEC, making no mention that anything was amiss.

June 30: iPass warned shareholders of a second-quarter revenue shortfall.

Now, click here to see what the share price was doing along that timeline. It certainly looks suspicious, and the Journal was right to call iPass on this.

Still, there's a contrarian argument to be made here. Yes, the circumstantial evidence stinks to high heaven. But at the same time, it provides Foolish investors with a chance to buy into iPass at a seriously discounted price -- if they dare. Consider the company's most recent 10-Q for the first six months of 2004. Revenues increased 22% over the first half of 2003; GAAP profits rose 52%. More important, free cash flow rose from $6.6 million in the first half of 2003 to $14.3 million in the first half of 2004 for a 117% increase. That implies a free cash flow run rate of $28.6 million -- an improvement over Yahoo!(Nasdaq: YHOO) Finance's trailing 12-months number for iPass: $25.7 million.

Compare that to the company's $220 million enterprise value, and you get an EV/FCF ratio of about 7.7. In a company growing earnings no faster than revenues (22%) that would be a bargain price. And if iPass can continue to increase earnings at rates many times faster than its revenue gains, that makes the company's current stock price of $6.18 an absolute steal.

Granted, iPass bears serious "management risk." However good the business is, management may decide to keep all the profits for itself and shut out minority shareholders. But that's a risk that Fools are sometimes willing to take, given a sufficient discount to intrinsic value. Hidden Gems Watch List stock DHB Industries(AMEX: DHB) has similar management risk, but investors in DHB have been well rewarded for undertaking that risk, reaping gains of 60% in the seven months since it appeared on the Hidden Gems Watch List. In this Fool's view, iPass offers a similar opportunity.

Fool contributor Rich Smith owns no shares in any company mentioned in this article.

Quote of Note

"Defining and analyzing humor is a pastime of humorless people." -- Robert Benchley

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