Out of Fannie frying pan and into the fire

Think the government is spending our money wisely? Check out this CS Monitor article:

http://www.csmonitor.com/2008/0911/p01s05-usec.html

"[T]he Congressional Budget Office (CBO) projects that the nation will add more than $2.3 trillion to the national debt over the next 10 years."

Take Two (TTWO) and EA (ERTS)

To Merge, or Not to Merge, that is the Question

Take-Two Interactive (TTWO) closed at 21.77 today (September 9, 2008), far below EA's earlier offered price of 25.74. The DOJ's anti-trust division already blessed a merger, so the only question is whether the two parties will actually want to complete a deal. With Electronic Art's (ERTS) share price near a 52 week low, a deal may be difficult. Most deals this size require the target to accept an all-stock or partial-stock deal from the acquirer. ERTS does have about two billion dollars in cash, so it can do an all-cash deal if it chooses; however, its shareholders would howl worse than Allen Ginsburg ("I saw the best trades of my generation destroyed by a mad CEO, starving hysterical naked..."). Already, short sellers are taking positions in ERTS stock, dragging it farther down.

I bought 1000 shares of TTWO today, but I am not absolutely sure the risk/reward ratio is still in favor of a long-term TTWO hold. I plan on flipping my shares this week or next week. If I was planning on holding onto my TTWO shares, I would buy puts to be safe. The current option pricing indicates traders expect the stock to fluctuate between 20 and 25 dollars, or 20 and 27.50 dollars. The latest options expire on September 19, 2008, so expect significant volatility over the next ten days.

Update on 9/10/2008: Despite increasing over 3.14% today, ERTS was one of the most sold stocks today on strength. This indicates sellers believe ERTS will buy TTWO, which would most likely cause a decrease in its stock price due to the cash outlay required to purchase TTWO.

Stocks Update, 9/9/2008

Today was a terrible day for the market and for investors in the market. One my major holdings, KOL, declined around 9% today. So much for diversification being the key to stock market gains--gold, oil, tech, and international markets all declined today on a possible Lehman Brothers (LEH) liquidity problem.

Nothing new to report trade-wise, except I sold most of my CCT position, netting a positive gain. I am not including the gain below. Although I still own 75 shares, my holdings are below the required 2,000 dollar threshold for inclusion in this blog.

I picked up 1000 shares of TTWO today and will look to sell this week.

Since June 2007, my retirement accounts moved today from being in the black to slightly in the red. I am not happy, but I keep reminding myself that I am well-diversified and should have a long term investment horizon. I am not sure if we've experienced "capitulation" yet, but it sure feels like it. If I had more available cash in my retirement accounts, I'd be adding to my positions below. At the same time, the market may be extra-skittish with September 11 approaching.

Open Positions
EWM =-12.51%
EWS = -13.23
EZU = -10.72
GLD = -6.17
GXC = -9.16
IF = -17.79
KOL = -21.23
SWZ = -10.19
YHOO = -11.80

[Average of "Open Positions": losing/negative average 12.53%]

Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from average; insignificant movement)
PFE = -5.5
PNK = -16.7%
PPS = -2.8
VNQ = +2.37 [sold 8/7/08]
WFR = +0.9 (approx; based on partial sales week of 8/4/08 in two separate accounts)
WYE = +2.4%

[Overall Record: Lost an average of 2.82%]

Held less than 7 days:
DUK = (0%, excluded from avg) [8/07/08 - 8/14/08]; GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; GRMN (-6.2%) [Sold 8/5/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), NVDA (8.0%) [8/12 to 8/13/08]; PFE (1.3%), SCUR (15%); SO (-0.3%) [Sold 8/5/08]; TTWO (4.3%) [partial sales on 8/5/08, 8/7/08, and 8/8/08]; TTWO (2.2%) [9/9/08 to 9/12/08]

[Overall Record: Gained an average of 1.68%; does not factor in TTWO's recent sale]

Daytrades:
PFE = +0.5%
GE = +0.5% (Updated on July 14, 2008; bought at 27.15, sold at 27.30)
XLF = +4.3% (Updated on July 15, 2008)

[Overall Record: Gained an average of 1.76%]

Compare to S&P 500: losing/negative 11.6%
[from May 30, 2008 (1385.67) to mid-day September 9, 2008 (1224.51)]

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

VMWare (VMW) Special Shareholder Meeting

I have been so busy, I thought today was VMware's (WMW) annual shareholder meeting. I picked up my materials and ran off to the 8AM meeting in Palo Alto, only to realize my mistake. VMware was only holding a special meeting to vote on whether to approve a one-time stock option plan. Basically, the company's stock price has gone down significantly, causing most of its employees' options to be underwater. My understanding is the meeting today was held because VMware wanted to replace existing stock options with newer ones.

CEO Paul Maritz gave a short presentation, and the the stock option plan was approved after confirming a quorum. Mr. Maritz seems honest and smart. He has a British accent, and took questions from the few shareholders present (four of us), even though the format of the special meeting didn't require him to do so. The meeting lasted only 20 minutes, and only coffee was served.

I asked about the tax consequences of the stock option plan. The CFO answered that because the options had not been exercised, there was "no significant impact" tax-wise. Once the employees exercised their new stock options, the company would be able to record a tax deduction, which would actually benefit the company (but of course, dilute existing shareholders).

I asked a question about what the company does. I am not a born techie, so the concept of virtualization and virtual machines is strange to me. (Every time I hear the term, "virtual machines," I think of the Borg and T2's "Rise of the Machines.") Peter Lynch's advice, "Invest in what you know," worked well in the past, but these days, it's hard to follow that simple rule.

The CEO Maritz very politely attempted to answer my question about the company's products. He said the company is a software company involved in "virtualization." VMware software "fools" other software/hardware platforms, allowing greater functionality. Previously, users had to have different machines to run different operating systems, but now they can use just one machine. For example, VMWare's software allows users to run Windows and Apple's Leopard on the same computer. CEO Maritz went further, saying VMware is a "data management/IT company." It manages the computer environment, and the company had "700 third party customers."

Another shareholder mentioned Larry Ellison and how Mr. Ellison had grown Oracle by not selling his software outright, but requiring users to subscribe to it. CEO Maritz indicated VMware has different pricing plans, just like Oracle.

Overall, I left the meeting feeling like I was in the presence of professional, dedicated people. I still don't know what virtual machines are, or how they really work, or how a company can monetize such an asset, but I will ask more questions at the annual meeting next year [see below--I did more research into this issue and have provided an explanation of VMware's benefits].

One interesting item in the special meeting report: beneficial shareholders of VMware include Intel Corporation (18.30%); and Cisco Systems International (6.88%). As mentioned above, due to having greater voting rights, WMware is basically owned by EMC Corporation, which holds 97.17% of the Class B shares and "98% of the voting power of outstanding common stock" (page 48, Form 10-Q).

Another interesting item: VMware gives its partners access to its source code and hypervisor for development purposes, which may create IP issues later on.

The end result of today's meeting for me? I picked up more shares of EMC afterwards. I figure it's a safer bet to invest in the quasi-parent company than in the newer company, at least initially (e.g., buy Cypress Semiconductor rather than Sunpower) , because spin-offs usually saddle the newer company with debt. I am concerned about the market's volatility, but now seems like a good time to slowly add to positions.

Update on 9/10/08 and 9/15/2008: I understand EMC's business, i.e. information storage, but I haven't seen anyone adequately explain "virtualization" and how to monetize it over a long period of time. Here is how EMC explains virtualization: "virtual infrastructure solutions and services [enable] customers to run multiple operating systems simultaneously on the same physical machine." Again, that sounds nifty, but why would a company give x dollars to VMWare for this?

If anyone can explain VMWare's product offerings and whether VMWare can prevent its software or its products from becoming commoditized as more players enter the market, please submit a comment. Thank you.

Update on 9/15/08: I've done more research into what VMware does and spoken with a patent agent and a VMware employee. Basically, an obvious but key piece of information to understand is that the computer industry and the software industry are not homogeneous. As a result, certain software can only run on certain platforms and certain operating systems. Tech companies' failure to homogenize their products provides an opening for a company that can provide one piece of software ("middleware") that allows one machine to run all necessary software and to communicate across different platforms. Think of a fruit drink seller. In the tech world, the fruit drink seller would need one blender for blueberries, another one for strawberries, and another grinder for oranges, and none of them could work together. VMware allows the fruit drink seller to use one blender for all the different fruits. As for continuing to monetize the one blender after its sale, the blender will need upgrades as more and more fruits get introduced, allowing VMware to continue to get paid.

Here are the benefits of VMware in more detail:

1. Virtualization fools a piece or hardware into thinking it can run multiple applications on multiple platforms. So in the past, a company might have needed ten different pieces of software with ten different licenses and ten different IT employees just to maintain different department functions, like payroll, receivables, exports, etc. Now, the company just needs one IT employee, one piece of hardware, and can buy a multi-user license for all the software they need. A multi-user software license is far cheaper than buying each individual software license separately.

2. VMware increases safety while maintaining diversification. Many companies buy different software they need from different vendors, but the vendors don't collaborate, causing incompatibility. This incompatibility sometimes necessitates owning several different pieces of hardware, depending on what the company needs. In addition, companies don't like having all their company functions on one piece of software or relying on a single operating system--if there is a failure (think Windows Me, or the earlier versions of Windows Vista), the entire company might have to shut down or an upgrade might cause company-wide problems. VMware changes all that. It allows the company to have one piece of hardware that can run multiple platforms and software programs. In having one piece of hardware, the failure rate decreases, but without decreasing your options. It's like having a single video game console that can run Nintendo Wii, XBox, and Playstation games.

3. Statistically speaking, VMware reduces risk. VMware requires only one piece of hardware. If a company has 100 different pieces of hardware, it increases the potential failure rate. For example, if you have 100 people walking across a busy street, the potential of having 1 person get hit out of 100 is much higher than if you just have one person walking across a highway. Basically, having 99 other people there means there's 99 extra chances for someone to get hit. (My intuition tells me I haven't given the best (or even the right) example for this concept, but it's the best I can do at this late hour.)

I hope this post helps laypersons and non-geeks understand VMware and its products.

Fannie and Freddie Bailout

The big news yesterday was the U.S. government's takeover of Fannie Mae and Freddie Mac. My response? Ho-hum. The international community holds about 5 trillion (yes, that's a "t") dollars of Fannie Mae debt, according to today's WSJ. Of course we had to bail them out, if we ever wanted to see a single yen or yuan buying American paper.

(For more on this, read http://www.blacklistednews.com/news-1459-0-13-13--.html)

In short, we didn't have a choice. What's really scary is politicians are talking about bailing out GM and Ford. I predicted a Ford and GM bankruptcy months ago, but there is no reason for the government to bail out Ford or GM--they are private companies who decided to focus on manufacturing SUVs right before oil spiked. While taxpayers may have an interest in ensuring their neighbors don't lose their homes--vacant lots of homes are terrible for cities and states--ensuring your neighbor gets service for his Hummer is a different matter entirely.

If the U.S. seriously talks about bailing out GM and Ford, the American dollar will have officially become the world's doormat. (I earlier compared the dollar to the world's prostitute, who kept servicing STD-ridden johns instead of closing the doors to them, but apparently, that analogy was too blunt.) Perhaps we've got a case of financial immaculate conception, where U.S. taxpayers who paid their mortgage bills and taxes on time, still end up with a baby on their hands to support; however, instead of a savior, U.S. taxpayers will apparently be forced to pay for Rosemary's Baby's expenses. Where are three wise men when you need them?

(One of them, Patrick Killelea, is here: http://patrick.net/housing/crash.html)

Fun: German Chocolate, Kinder Happy Hippo

I've just tasted a bit of heaven. I loved the famous Kinder eggs, the chocolate eggs with the toy parts inside of them. But now Kinder has come up with something so good, I was just stunned: Kinder Happy Hippo cacao. It's hazelnut chocolate inside a hippo-shaped wafer.

I can't read German, so I can't tell you what the ingredients are, but I felt like I had tasted ambrosia--the food of the gods. If you like hazelnut, you must check it out.

I have no connection with the following website, nor have I ordered from them, but they appear to be based out of Illinois and they do have Kinder chocolate:

http://www.minosimports.com/

Happy eating, folks. Unleash your inner hippo.

The Green Bag, Summer 2008

I just got my first edition of The Green Bag, Summer 2008, Vol 11, Number 4. The Green Bag calls itself an entertaining journal of law, and it is indeed a fun read. This volume talked about the change from the plural to the singular in "The United States are" to "The United States is" post-Civil War; and Henry R. Selden's must-read June 17, 1873 speech in defense of Susan B. Anthony's right to vote.

Some of my favorite items are here:

page 474: Louis Brandeis: "Equity does not demand that its suitors shall have led blameless lives." Loughran v. Loughran, 292 U.S. 216, 229 (1934)

page 519: Nelson Lund, quoting Gene Healy's book, The Cult of the Presidency:

True political heroism rarely pounds its chest or pounds the pulpit, preaching rainbows and uplift, and promising to redeem the world through military force. A truly heroic president is one who appreciates the virtues of restraint--who is bold enough to act when action is necessary, yet wise enough, humble enough to refuse powers he ought not have. That is the sort of presidency we need, now more than ever. And we won't get that kind of presidency until we demand it.

Restraint? Check. Humility? Check. Act not rashly, but when necessary and prudent? Check. It's this kind of talk that makes my libertarian heart go aflutter.