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Update: The Wall Street Journal reports that Yahoo and Google are going to work together on an experiment that might lead to big things. In other words, a two-week test that is limited to Yahoo’s U.S. traffic will carry Google ads. These ads will be limited to “no more than 3% of Yahoo’s Web search queries.” If all goes well, then a broader search outsourcing arrangement could be struck by the two companies.

Loose translation: With its bid for Yahoo, Microsoft made a checkmate move. Yahoo is out of suitors. Its shareholders don’t give it a prayer of a chance, and further more, the company is still as listless as it was six months ago. So what does it do? It goes and sleeps with the enemy!

Just a reminder of Yahoo’s cluelessness: In 2000, it outsourced its search queries to Google. It renewed the deal in 2002, and has become a minor player in the search business. Anyway, about this new-found friendship, I wonder if the U.S. government is going to let this one through. I mean, this is one instance in which antitrust concerns could actually hold some merit.

Microsoft is pretty clear about its position. As Brad Smith, Microsoft’s General Counsel, told the WSJ:

“Any definitive agreement between Yahoo! and Google would consolidate over 90% of the search advertising market in Google’s hands. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo!”

Either way, in this deal, heads or tails, Google comes away a winner. If Yahoo goes to Microsoft, the ensuing chaos is going to benefit Google. If Yahoo gives away its search ad business, Google is a winner.

Update: The Wall Street Journal is reporting that Yahoo and Time Warner are planning on putting together a deal where Yahoo will get AOL which is being valued at $10 billion. In exchange Time Warner will get 20% of the combined company (Yahoo) and will make a cash investment. Google will be the search-ad-partner. Yahoo would spend the money it gets from Time Warner $10 billion buying back its own stock and beating down Microsoft. With Legg Mason, 7% owner of Yahoo opposing the Microsoft offer, the new plan could work. To make this plan come apart at seams unravel, Microsoft has to up the offer by a few dollars per share. I say this again, Yahoo has some serious problems. Buying AOL, already troubled in its own right, is only going to compound problems.

• Yahoo Press Release (link)
• Microsoft’s Response in a press release. (link)

Just when you’d think Google’s financial discombobulation would give Yahoo some rest comes this heartfelt bullet from Microsoft. On the PR newswire this morning runs this incredibly respectful yet dispiritingly asexual love letter from Steve Ballmer to Jerry Yang. And, oh how Mr. Ballmer loves to dish, to wit:

In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that ‘now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.’ According to that letter, the principal reason for this view was the Yahoo! Board’s confidence in the ‘potential upside’ if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.

Man, you have to hand it to sweaty old “Give It Up to Me!!!” Ballmer.

He corralled Yahoo’s proscribed empire into his greasy fist while preserving that silly artifice of the exclamation point in Yahoo!’s name. Nicely done, Steve. More than that, he finally called Yahoo on the Oz-like illusion it’s been fostering for a couple of years: “You had a year. You lost. All your base belong to us.”

I can’t shake this feeling Ray Ozzie has a hand in all this, but oh well. Yahoo shares finished Thursday at $19.18, but Ballmer & Co.’s bid of $31 a share for the web portal turned…umm, Microsoft property has driven the stock up 50 percent to $28.68 Friday morning.

Microsoft, which has $37.8 billion in cash and short-term investments, was to put out $44.6 billion in cash and stock to buy an Internet pioneer that until a year or so ago was so revered by investors and affiliates that everyone would have laughed aloud at the idea of the ticker MSFT swallowing YHOO.

Now it’s February 2008, and is anyone laughing?…Ben Stein…Beuller…anyone??

Having spent my share of last-calls at bars, I can only applaud Microsoft’s ambition in its 3 a.m. bid at corporate copulation — while snickering privately at the 62 percent premium over what everyone else thought Yahoo was worth until this deal was proffered.

Let’s sit down a minute and think about what a Microsoft-owned Yahoo will mean.

Yahoo has been admirably laissez-faire with Flickr and del.icio.us. Will they be preserved or folded into to services we’ve all eschewed? How will Yahoo mail accounts be reconciled with Hotmail accounts? Will those of us who use Yahoo Finance and all its features adapt to MSN Finance? What is MSN Finance?

A 62 percent premium, hmmm –- we Yahoo users have a new choice: Learn to love life under Ballmer, or migrate to Google.

Predictions — like a fatty snack at a New Year’s Eve party, or that last glass of champagne in the wee hours of the morning, you are almost sure to regret them, yet sometimes you just can’t help yourself.

So although I can do without the trans-fat and am willing to forgo the bubbly, this year I can’t pass up a few lingering minutes at the crystal ball. To that end, I’ve taken seven of the more interesting stocks of 2007 and ranked them according to how I think they’ll perform in 2008. They are all stocks that inspired a good deal of passionate discussion and, for the most part, a good deal of capital gains.

First, listed in order of their 2007 price gains, the seven stocks I’ll look at are:

• Research In Motion (RIMM), up 166.3 percent
• Amazon.com (AMZN), up 134.8 percent
• Apple (AAPL), up 134.7 percent
• Google (GOOG), up 50.2 percent
• Microsoft (MSFT), up 20.9 percent
• eBay (EBAY), up 10.4 percent
• Yahoo (YHOO), down 8.9 percent

Before I make my forecast, the usual disclosure: As investment advice, this list is worth exactly as much as the money I’m putting in them: zero dollars and zero cents. The only advice implied here is not to confuse a year-end parlor game with trading ideas. And as always, feel free to leave your own list or your thoughts in the comments.

1. Google. Time and again, it’s been a mistake to bet against this stock. It may have an off quarter now and then and it may draw bad press, but the company still rules search. A slow economy would dry up ad dollars in general, but search ads might benefit as advertisers seek out the cheapest way to get their message to consumers. And if Google Apps make an impact, 2008 could be the year when Google brings in non-search revenue.

2. Yahoo. Yes, good ole black-and-blue Yahoo. 2008 will be a make-or-break year for the company, but 2007 was so hard on the stock that even a moderate recovery in profits could propel it higher. Like Google, it could benefit if weakness in print and television ads end up driving more ad dollars online.

3. Apple. The only thing standing in the way of this company’s path to even more fortune are its own potential missteps. Notably, William Safire predicted today a “pod push-back” that could damage Apple. I don’t see it, but it is interesting to note the meme of an Apple backlash is drawing mainstream mention.

4. Amazon.com. The stock has always been on a rollercoaster: $5 in 2002, $60 in 2003, $25 in 2006 and $95 just last week. The pendulum-like pattern suggests a selloff in 2008, but I think it’s more likely to see a merely moderate year. For a compelling longer-term argument in favor of Amazon, see this post from Fred Wilson.

5. eBay. Another flat-ish year for the company, I suspect, with growing investor impatience if it continues to merely tread water. Bears have been grumbling for some time that eBay would be better off split into three. That idea could gain steam if earnings start to disappoint.

6. Research In Motion. I don’t have anything against the company or its outlook, but I think this is a case of solid financials distorted by speculative enthusiasm. The stock’s 3 percent drop on the last day of the year could signal that investors are ready for a pullback.

7. Microsoft. Despite Steve Ballmer’s success in turning around this battleship, Microsoft remains most vulnerable to a slowdown in corporate IT spending. Beyond 2008, the company will do fine, but I think there’s a risk of a setback before then.

The wild card in all this is the overall economic forecast, which is as uncertain and hard to call as it’s been in a long time. Still, even though nobody knows how bad or how long the credit crunch will hurt, so far it hasn’t come close to curbing consumer appetite for innovative tech gadgets, which is good news for companies like Apple. And as long as it doesn’t slow overseas growth, that’s good news for companies like Google.

So there’s my list. Now to make it even more interesting, I created an entirely random list to compare to my own. Similar to tossing darts at a newspaper’s stock pages, I assigned each of these seven stocks a random integer, then ranked them (as I did the two lists above) in descending order. Here’s the outcome:

1. eBay
2. Research In Motion
3. Yahoo
4. Apple
5. Google
6. Microsoft
7. Amazon.com

As much thought as I put into my own list, I have to say the contrarian in me is rooting for the randomizer.

Back in the 1990s, searching for something on the web was like looking for a needle in a haystack. Then Google (GOOG) came along, and it was as if someone had handed us a magnet with which finding the good (and the relevant) became downright easy.

The post-bust social media boom, however, is bringing an end to the good times. The explosion of content on the Internet is making searching for information difficult once again. It is one of the reason we are seeing a sharp increase in the number of companies — vertical search engines and wiki-based collaborations, for example — that want to help us find the information for which we’re looking. This trend – lets call it smart content aggregation – is something I wrote about back in March for Business 2.0.

These companies are trying to insert themselves into the proverbial three-page paradigm that has been popularized by Google: page one is the search box; page two, the search results page; and finally, page three, the final destination that holds the coveted information. It’s the “second page” that’s getting crowded, and it’s forcing average web surfers to look for simpler options.

One option is Jason Calacanis’ Mahalo, which uses wiki-software to create specialized topic pages, aggregated by editors, that quickly point searchers to the best web resources available. (Of course, from an advertiser perspective these topics are also amongst the most sought-after “keywords”) He isn’t alone in trying to insert his company in between the searcher and the original content source; Yahoo (YHOO) has been experimenting with aggregation mashups as well.

Earlier this week, Kosmix, a Mountain View, Calif.-based startup that is taking an algorithmic approach to aggregating content, launched two beta versions of specialized topic-based pages, RightAutos and RightTrips; it also formally launched its health-focused property, RightHealth. The company builds specialized start pages on topics within topics, (such as osteoarthritis in its health section), that include everything from videos to news to special reports, all supported by advertising. Kosmix claims its beta version of RightHealth currently gets more than 2.5 million visits and generates 9 million searches a month.

Wikia, another company that is aggregating content, is now doing about 250 million page views. Wikipedia, the biggest such operation (and a not-for-profit org) had become the 9th-largest site on the web in terms of unique visitors, according to comScore.

These traffic trends reflect a desire on the part of web surfers to find information smartly aggregated for them. But those surfers still want to start with Google. Hitwise tells us that in August, 47.2 percent of Wikipedia’s traffic came from Google, up 8 percent over the same month last year. Meanwhile, Mahalo, which launched in May, saw 53.3 percent of its traffic come from Google in August, a 49-percent jump from July. For the same month-to-month timeframe, Google sent over 8.37 percent of Wikia’s traffic.

While the jury is out on the success of the aforementioned startups, the need for smart aggregators is only going to increase as more content starts to come online. As I wrote in the March issue of Business 2.0:

Hyperaggregation is simply a way to do in the new-media world what old media has done for centuries: neatly package information. The value of a newspaper, after all, is not the information inside as much as the carefully considered layout of the front page. At a glance you can see what’s important. Smart new companies are finally figuring out how to do this online, where there’s too much content and not enough packaging.

The aggregation is going to pose a challenge for some of the traditional content sources. A lack of finely tuned information sources is one of the reasons content publishers get “wasted” clicks. The aggregators can take away some of that sloth by making seek-and-search more efficient. Wikipedia’s pages, for example, are incredibly detailed and often include enough information that obviate the need to search any further. That should be a scarier prospect than Google adding news wires to Google News and subsequently taking a bite out of newspapers’ online traffic.