Rumors abound that my beloved Boston Red Sox plan to bid vigorously for the services of free agent Mark Teixeira and Japanese pitching phenom Junichi Tazawa. Although I’d like to see the team take the challenge of developing and sustaining a winning team in a major market with a Moneyball philosophy, I’m actually excited by the possibilities of these two signings. I’d rather see the team stay competitive while reducing its overall payroll, but if we’re going to spend money in the free agent market, then we should spend the money to buy premium talent or extremely undervalued and obscure talent. I don’t want to pay fair value for middle tier talent.

I don’t think that John Henry and Theo Epstein really need to find a way to replace Manny Ramirez’s bat, Jason Bay may not crush like Manny, but he is almost as valuable if you factor in statistical and defensive considerations. If instead of cutting payroll, the team is thinking about increasing payroll, then it might as well go for arguably the best hitter available on the market and pay a premium for his services. Mark Teixeira could conceivably break the franchise pay record set by Manny Ramirez. Teixeira is a powerful switch hitter, something we haven’t had in our offensive arsenal for quite a while. Jason Varitek is a switch hitter but few will argue that he’s a masher. Teixeira is entering the prime of his career cycle and should be a safe bet to break even on his salary on a performance basis.

Junichi Tazawa, a 22 year old pitching sensation from Japan, is an interesting validation of the efforts Henry and Epstein have invested into Japan. When they signed Daisuke Matsuzaka and paid a big premium, they established Boston as a desirable destination for talented Japanese players who wanted to test their skills in the much more competitive and lucrative United States market. The sophisticated public relations and marketing campaigns the Boston management team put in action generated tremendous amounts of goodwill in Japan. That has culminated in Tazawa announcing that the Red Sox is his preferred choice despite more lucrative guaranteed contracts offered by the Atlanta Braves, Texas Rangers, and Seattle Mariners.

Both these players will improve the team, but will come with high price tags. Given the paucity of truly top tier free agent talent, now may be the year to buy rather than build from within.

Even the mighty are falling. The last two major independent investment banks on Wall Street, Goldman Sachs (GS) and Morgan Stanley (MS), have received permission from the Federal Reserve to convert from traditional investment banks into commercial banks or bank holding companies. Plenty of ink, digital or otherwise, has been spilled about the disappearance of investment banks so I won’t dwell much on that. We’ve seen the collapse of Lehman Brothers (LEH) and Bear Stearns. Still somehow, I’m sure there were some who sentimentally held out hope that the two shiniest of white shoe firms in investment banking would survive relatively unchanged. Disappointingly, Goldman Sachs and Morgan Stanley will now join the ranks of Bank of America (BAC) and Wachovia (WB) as large commercial money center banks serving the retail masses.

It remains to be seen what will happen to the investment banking businesses of Goldman and Morgan. Other commercial money center banks like Bank of America and Citigroup (C) have been able to operate smaller investment banking divisions within the corporate umbrella. While the market is caught up in short-term financial myopia (worthwhile because some fear a total meltdown), I’m more interested in the long term strategic implications.

Survival – It is clear that the decision to convert to a commercial bank was spurred in part by a need to raise capital and survive. Becoming commercial banks allows Goldman and Morgan to tap the emergency funds that the Fed has made available. Goldman has also reached an agreement to secure private funding as well from Warren Buffett, the head honcho at Berkshire Hathaway (BRK-A). Morgan has agreed to sell a piece of itself to Mitsubishi UFJ Financial Group (MTU), in a move reminiscent of the Japanese shopping spree of the 1980s. In the panicked rush to shore up our faltering financial system and institutions, have we given enough thought to these combinations and their future implications?

Initial Public Offerings – Goldman Sachs and Morgan Stanley consistently topped the league tables as the best bulge bracket firms with the power and reach to handle large IPOs. No one is thinking of going public in this market environment but there will come a time when all is right again and innovative businesses will want to go public. Who will be there to sell the hype and coordinate the logistics?

Pure Investment Banks – Will there be a changing of the guard? The investment banking divisions within commercial bank holding companies have never been able to win more business than the Goldmans and Morgans and Lehmans that focused deeply on investment banking and merchant banking. Is it reasonable to assume that Goldman and Morgan will maintain their dominance of investment banking while converting into commercial banks? I think there is merit in the focus of pure investment banking. It will be interesting to watch if other players like Jefferies Group (JEF), Greenhill & Company (GHL), and Stifel Financial (SF) can aggressively move to fill the void. I think these stocks will perform well over the long term as they jockey to become the next white shoe firm (so long as they haven’t gotten involved with all the toxic financial instruments floating out there).

Talent Exodus – Look to the Yahoo! (YHOO) saga to see that Talent (with a capital T) goes where the opportunity is best and where it can operate with the least restraint. Goldman and Morgan will see their cream of the crop flee to hedge funds or the remaining smaller, albeit pure play, investment banks to ply their trade. Goldman’s proprietary traders generated a majority of the firm’s profits so I expect those guys will find happy homes at hedge funds. Why would any truly good trader want to be a part of Goldman Sachs now? On the other hand, I’ve rarely seen a guy from the sell side of investment banking be able to withstand the ruthless performance pressures of the buy side though so I expect there will be a ton of unemployed investment bankers. My how MBA programs will be flooded with applications. Brush up on those GMATs cause you’re going to be competing against a horde of former ibankers. Why would any truly good trader want to be a part of Goldman Sachs now?

There is a lot of knee-jerk anger and many hyperventilating voices calling for change and placing blame on government, government officials, greedy business executives, mindless consumers, etc. I’m over that already, in fact, I’ve never been there in the first place. I’m only interested in profiting from what the future will bring and what we can learn from history. In that light, let me end by quoting one of the great Founding Fathers.

“All human situations have their inconveniences. We feel those of the present but neither see nor feel those of the future; and hence we often make troublesome changes without amendment, and frequently for the worse.” – Benjamin Franklin (1706 – 1790)

These recent events highlight the lucrative nature of infrastructure investments and the persistent and controversial trend of foreign companies and sovereign wealth funds acquiring huge infrastructure assets in the United States. The political environment grows increasingly hostile as national and local politicians, including the presidential candidates, look to explain Americans’ economic struggles with a cornucopia of reasons including free trade agreements like NAFTA, a “corrupt sitting president,” and globalization generally.

This issue of foreign investment in public infrastructure has been on my radar since late 2006. Below is an essay I wrote for an investment newsletter published in January 2007 distributed to high net worth clients.

Public Infrastructure Sales: Samurais, Jihadists, and Masters of the Universe

“The Japanese are coming!” Remember when modern-day Paul Reveres shouted this refrain in the 1980s? Honda (HMC), and Toyota (TM) earnestly began their conquest of the American driver and, resultantly, Detroit’s mammoth metal benders. Would-be samurais from a nation of diminutive conformists threatened our towering sense of American exceptionalism by snatching up national treasures from our private sector like Pebble Beach, Columbia Pictures, Universal Studios, and Rockefeller Center. Although the apocalyptic visions of Japanese dominance and American indentureship have faded, the “buying of America” continues today.

Only now, the purchasers hail from different shores and their acquisition targets are of a more public flavor. In January 2006, a plan to privatize the Indiana Toll Road came to fruition when the State of Indiana entered into an agreement with Cintra (a Spanish construction firm) and Macquarie Bank (an Australian bank). The Spanish-Australian partnership paid the Indiana State Government $3.85 billion for a 75-year lease to operate and maintain the toll road. The same consortium recently entered into a $1.83 billion lease to operate the Chicago Skyway Toll Bridge. As these foreign entities begin to exact payments from beleaguered commuters, resistance to foreign ownership of public infrastructure grows.

Free trade and free markets be damned. Early this year, public sentiment derailed the proposed Dubai Ports World acquisition of U.S. ports facilities in New York, New Jersey, Philadelphia, Baltimore, New Orleans, and Miami. In a cacophonic display of bipartisan zealousness, Republican and Democratic members of Congress questioned the wisdom of selling strategic infrastructure assets to not only a foreign country, but one which two members of the 9/11 hijackers called home. The overall tone could be summed up by the mordant one-sentence letter Representative Sue Myrick (R-NC) sent to President Bush that read, “Dear Mr. President: In regards to selling American ports to the United Arab Emirates, not just NO – but HELL NO!”

Being neither knee-jerk nationalists nor adherents to Ricardian economic orthodoxy, the editors of this publication acknowledge the merits of both the free market argument and the argument for excluding strategic infrastructure from the free market. One of the tenets of free trade asserts that private industry is more efficient at delivering services than government, and experience has confirmed that theory. But, when does that precious efficiency bump up against national sovereignty and security? Pragmatic protectionists should point out that ports and roads are different species in the genus of public infrastructure; that roads are strategic but ports are more strategic.

Do we as a nation make distinctions between domestic private players and foreign entities? How do we respond to foreign companies that are not entirely private, being controlled by foreign governments? In the case of Dubai Ports World, the United Arab Emirates government owns a stake in the port operator. How do our reactions at home affect the ability of our own private companies to venture abroad and invest in and own foreign assets?

Through all this brouhaha, the editors of this publication see an opportunity for the many domestic leveraged buyout firms within our own borders. With over $175 billion raised in 2006 alone, the industry is flush with liquidity. At the risk of sounding cliché, we echo the industry’s mantra that there is “too much capital chasing too few deals.” With all the largest funds finding themselves in highly contested auction environments for companies suitable for buyouts, even the most sanguine investors admit that future returns will lag past performance. Public infrastructure as an asset class represents a potential opportunity to deploy some of that excess liquidity and to diversify LBO or private equity portfolios.Some questions beg consideration. This asset class will no doubt offer lower returns than traditional private equity investments; does the stability of returns compensate for that shortfall? What are the reasonable exit opportunities? What consequences might arise from shifting concepts of private and public property? How can the public be safeguarded from the specter of crony capitalism?

Questions notwithstanding, infrastructure investments with their super-stable revenue and profit streams offer the possibility of smoothing out the volatility of returns in portfolios otherwise dependent on the ever shifting environment for initial public offerings, mergers, and acquisitions. The promise of stable returns is causing some financial masters-of-the-universe to contemplate establishing investment pools to capture this opportunity. Goldman Sachs (GS), the Carlyle Group and other top institutions are all rumored to be pitching this idea to limited investors. We’re quite sure that hedge funds will want to get into this game too.We suspect there might even be an inefficiency here for domestic buyout firms to exploit. Public sentiment against encroachment by foreign firms might allow for lowball bids by domestic buyout firms. This compromise between public and private could placate the citizenry. The Golden Gate Bridge anyone?

Early tomorrow morning, I’m changing my routine so I can catch the Red Sox open the season against the Oakland Athletics in Japan. ESPN (DIS) will be televising the game at 6am EST, but since I’m in the Mountain states, I will need to get up by 4am MST to catch the first pitch. Can’t complain though since I’ve been in withdrawal since the last out of the World Series in 2007.

The Red Sox better jump out to an insurmountable lead early so I can comfortably get back to preparing for the markets. I am a moderate to long term investor so I usually don’t make very many moves, but it is essential that I stay aware of big picture developments and microeconomic situations. During market hours though, I don’t pay too much attention to the action because I have to manage my technology startups and because I find that not being glued to the screen helps me to keep aloof of the market’s passions. After market close though, I spend a great deal of time doing the deep research that helps me attain an edge.

If the boys from Beantown don’t take an early lead, I’m going to have to say to heck with the market and keep my eyes affixed to the action on the baseball diamond.

Since the Red Sox won a bidding war for the services of Japanese pitcher Daisuke Matsuzaka last year, the fan base in Japan has grown exponentially. This is a strategy an increasingly sophisticated Boston team should expand upon. By scouring the world for the best baseball talent from relatively unknown countries, the team can diversify its fan base and talent base. Brand – build it and they will come. This is a concept that the management of the team should instinctively understand. John Henry, the owner, made his fortune in commodities investments; so I am sure that he can see the parallels between building a great team and a great portfolio.

Go Red Sox!

Tight US immigration forces outsourcing: Bill Gates – Microsoft (MSFT) chairman, and no longer the wealthiest guy in the world, makes some interesting points about our immigration policy regarding skilled workers. At SocialOptimize, we’ve been outsourcing some of our work to Guatemala and the Philippines.

Google could be superseded, says web inventor – Tim Berners-Lee shares some wisdom about the semantic web. He talks about how a new company in the future could exceed everything Google (GOOG) has done up to this point. Wouldn’t Google just buy that company?

Japanese government investigates sparking iPod nano – Apple’s (AAPL) stock does not seem to be hurting too bad from this news today. Let’s see if there is a big recall.

TiVo to bring YouTube videos to TV screens – YouTube, the phenomenal video sharing website that Google owns, with all its inane user generated videos, will now be pumped into your TiVo (TIVO). The convergence of YouTube and the Boob Tube is upon us.

Wiki boss ‘edited for donation’ – Jimmy Wales denies all wrongdoing. Say it ain’t so Jimmy!

Linux Market to Triple by 2012 – We’ve been hearing about the ascendancy of Linux for at least a decade it seems. Red Hat (RHT) shareholders cross your fingers this prediction comes true.

Puretracks DRM-free music store hitting BlackBerry platform in April – Engadget, a very popular blog owned by Time Warner’s (TWX) AOL unit, reports on a new service that should make Blackberry users (RIMM) happy. Those darned iPhone and iPod users keep bragging about their iTunes. What now?