What are you typing into telnet? My session works just fine.
If you can get this far into the process, then everything should work out. What are you seeing?
robglinka@Azrael:~$ telnet 18.104.22.168 587 Trying 22.214.171.124... Connected to 126.96.36.199. Escape character is '^]'. 220 smtp106-mob.biz.mail.ac4.yahoo.com ESMTP auth plain AHJvYmdsFAKEHASHINFORMATIONmdsaW5rYQ== 235 OK, go ahead