Stocks Update, 9/17/2008

Sigh. My open positions are tracking the market's decline. The market has humbled us all.

Open Positions
EWM =-19.88%
EWS = -21.60
EZU = -15.38
GLD = +4.83
GXC = -23.81
IF = -31.02
KOL = -23.87
SWZ = -16.29
YHOO = -5.58

[Average of "Open Positions": losing/negative average 16.96%]

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 for 7 day+ trades: 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%), KOL (13.2%) [9/17/08 to 9/19/08]; 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 excludes recent KOL sale]

[Overall Record for ultra short-term 2 to 7 days trades: Gained an avg of 2.36%]

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 for daytrades: Gained an average of 1.76%]

Compare to S&P 500: losing/negative 16.5%
[from May 30, 2008 (1385.67) to mid-day September 9, 2008 (1156.39)]

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.

Capitulation is here...again (Good times to follow)

For anyone who has monies in a 401k, a Roth IRA, or some other retirement account and is under 35 years old, now may be a good to enter the market and use up some of that financial gunpowder.

From Barry Ritholtz: "The criminal enterprise, formerly known as Russia, has decided to halt trading. With its stock market down 57%, Putin & Co. are being even more risk averse than Paulson, Bernanke, et.al. & Co."

You know times are bad when Russia halts trading. But people with a long-term horizon of at least ten to fifteen years may want to add to existing positions. The economy and the stock market go through boom-bust cycles, and you can't enjoy the boom unless you get in on the bust. I've personally seen my retirement funds decline in value by over 10,000 dollars in the last two to three months. I've continued adding to positions, especially in the Asian markets. Barring some cosmic wrath directed at me, I don't need the retirement money now, tomorrow, or even ten years from now.

From Warren Buffett: "We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful."

If this isn't fear in the air I smell, maybe it's eu de depression. Come November, we will have a change, with either candidate bringing fresh ideas to the White House (McCain with less tolerance for pork and corruption, and Obama with, well, Obama). Good times will be here again, because a) we can (or should try harder to) learn from Japan's mistakes bailing out their banks; and b) financial services are still not that vital to an economy, once liquidity is restored.

We had a great economy back when Citigroup, BofA, and WaMa were just small or midsize banks. I still remember Citigroup being "just" 19 dollars during the heyday. Banks were never meant to be growth stocks. When they go back to paying a stable dividend, maintaining good credit profiles, and selling some insurance, the world will be a better place. And if I never have to hear about credit default swaps, I will be a happy man.

Interview with Ultizen's CEO Lan Haiwen

With the EA/Take-Two deal falling through, I had the opportunity to interview Lan Haiwen, CEO of the Chinese game development company, Ultizen:

http://www.ultizen.com/about_leadership.asp

He gives his opinion on what will happen with Take Two and provides a dire assessment of the gaming industry's X-Mas sales targets. While many investors like to say gaming is recession-proof, this X-Mas season may prove them wrong. My interview with Mr. Lan is below.

1. Where is your company headquartered? Please list how many employees you have in each specific country to give readers a better idea of your size and global reach.

Headquartered in Shanghai China. Ultizen has, totally, over 350 employees, 300 in Shanghai China, 50 in Beijing China, and 2 in LA US.

2. Please explain the background behind “Ultizen” as your company’s name.

Ultizen means: Ultimate Zen

3. Does your company have a focus in terms of what kinds of games it makes (i.e.,sports, role playing, action)? If so, why did your company decide to focus on that particular area? What is the name of the new XBOX game your company is making for Microsoft, what kind of game is it, and when is its expected release date?

We focus on casual game development mainly on PC and Mobile phone. We also do game outsourcing work for oversea studios/publishers. We believe the needs of game outsourcing would be huge as the next gen games cost so much money and time on development. We also believe casual game would grow fast as it targets to mass market. The name of our new XBLA title is called Crazy Mouse, it is a family fun game, and will be released in second half of October 08. This is our own IP title, and Microsoft will publish globally.

[My note: see http://games.teamxbox.com/xbox-360/2100/Crazy-Mouse/]

[My note: given what I've heard at Adobe and Yahoo shareholder meetings, Mr. Lan is correct--mobile gaming is projected to be a huge market.]


4. How many total games has Microsoft asked you to make, and how did you manage to get its business?

As I said, it is not [that] Microsoft asked [for a] game, but our own IP title. We do get lots support from Microsoft during the development, as we developed this title at Microsoft incubation center in Chengdu, China. We won the game design contest held by Microsoft, and got the chance to develop at the incubation center. This is the first China developed XBLA title that be published globally.

5. What are your competitive advantages over more established, well-known game companies?

Our competitive advantage is creativity, development process, quality control and low cost.

6. What is your opinion on EA's decision to walk away from Take-Two? Do you believe another company will make an offer for Take-Two? If so, who do you believe is the next most likely suitor?

I think it is a good deal, and Take-Two shall take it. I believe there are other companies will offer to buy Take-Two, [and] I guess those potential buyers would be from big media groups rather than game companies.

7. What developments do you expect to see in the gaming industry over the next six months? Do you believe game makers will reach their X-Mas sales targets? What are the reasons for your belief?

Yes, over the next 6 months, X-Mas would be huge sales season. [But] I believe only 10% will reach their targets, as the economy environment is really bad and people may reduce their shopping budget.

8. In 100 words or less, please tell me anything else you would like to share about your company.

I would like to use much less words: the best game studio in China.

Mr. Lan clearly has enthusiasm for his work. I thank him for the opportunity to interview him over email.

Scott Burns and the Medicare Problem

Scott Burns, formerly with the Dallas Morning News, has an insightful take on an "old" problem. He shows how Medicare will negatively impact not just young children, but 30 year old adults:

http://assetbuilder.com/blogs/scott_burns/archive/2008/09/12/medicare-the-biggest-threat-to-our-retirement-standard-of-living.aspx

Scott Burns, Peter Peterson, David Walker, and Richard Fisher have warned us about the Medicare ticking time-bomb. With apologies to Aldai Stevenson, we need more than just the thinking men to agree that change is necessary. Seniors tend to vote in higher numbers, and it will take a strong, bipartisan effort to fix the broken entitlement system. Someone needs to figure out how to counteract advertisements of grandma not being able to afford her medication, or stories about seniors skipping lunch so they can afford medicine. Such tactics are bound to be used to support the status quo, which is hurting America's younger generations. What can we do when so many Americans spend their working life not saving enough and then end up relying on the government to survive?

This isn't an old-vs.-young issue. The negative savings rate destroys the feasibility of universal healthcare for all Americans, young, middle-aged, and old. Universal healthcare requires more taxation, a surplus, or a weakening of the American dollar, and since we don't have a surplus, I'll give you two guesses as to what the other options are in the absence of a higher savings rate. Meanwhile, here's what the Federal Reserve of San Francisco says about China's savings rate (http://www.frbsf.org/publications/economics/letter/2008/el2008-03.html#5):

China's overall saving rate is now nearly 50%, by far the highest in the world. China's domestic investment rate has also been high, but not as high as saving, resulting in net current account surpluses which rose from 4% of GDP in 2004 to 7% in 2007.

Sadly, America's economy is based on other countries lending us money to spend while America prints more money to sell to the creditor countries, whose citizens save their money. But without Americans spending money, fewer people get to move up the economic ladder, because a nation of savers is terrible for growth and jobs. So the key is for central banks to work together to create timely incentives to spend and to save. Forget about presidents working together--I'd rather see central banks getting chummy first.

Capitulation?

Headline: "Dow Plunges 500 Points on Lehman Bankruptcy, Merrill Sale, AIG Woes"

If I had to venture a guess, I'd say today was the capitulation we've been waiting for. Perennial pessimist Nouriel Roubini said he expected another 20% drop, but to me, his prediction is a good contrarian indicator.

[Note: I also called capitulation on 9/17/08. The next two days, the market went up around 10%.]

Libertarians and Responsibilities

From the WQ (Summer 2008, page 28):

When government takes over the responsibility from citizens, the citizens can't develop their own values anymore. So when you want people to develop their own values in how to cope with social interactions between people, you have to give them freedom.
-- Hans Monderman, Netherlands traffic engineer

This concept is so simple, even a European government worker can understand it. At least the Europeans offer benefits to all citizens, not just government workers, which creates less resistance to increased taxation. These generous benefits, however, create opposition to immigration, because more people entering a country sap the benefits from existing persons, assuming a stable and finite tax base. America, thus far, has been more open to immigrants, which is responsible for much of its success.

Housing's Real Issue: Bigger Ain't Always Better

The Wilson Quarterly (WQ, Summer 2008, Vol. 32, No. 3) published an article by Witold Rybczynski about affordable homes.

What's driving the high cost of houses today is not increased construction costs or higher profits...but the cost of serviced land.

The author refers to "serviced land" in two ways: one, the passing of costs from the government to developers for infrastructure; and two, NIMBY (Not In My BackYard).

Prior to Prop 13, the government would increase taxes on local communities for services that followed increased population growth, such as new roads, new parks, sewers, and general maintenance. Now, many local governments cannot increase property taxes to make up for the increased need for services, so they force developers to pay these costs if they want to build. The developers take the financial infrastructure hit up front and pass those costs onto the homebuyer at the end in the form of higher home prices.

NIMBY is easy to understand in this case. There is "widespread resistance to growth," so locals pass zoning laws and restrict building permits to prevent more houses from being built. These legally mandated slow growth policies lead to pent-up demand and not enough supply of houses, causing artificially inflated values. Anyone who's lived in Northern California and New York knows there isn't a problem with overpopulation and population density in California to justify California's slow growth policies--at least not yet. Rybczynski says,

According to the research of economists Edward Glaeser of Harvard and Joseph Gyourko of the Wharton School, since 1970 the difficulty of getting regulatory approval to build new homes is the chief cause of increases in new house prices. In other words, while demand for houses has been growing, the number of new houses that can actually be built has been shrinking.

One tactic cities use to stall new homes is zoning for large lots, like one acre. This forces larger houses and higher prices. In the past, many individual homes would be only 1/6 of an acre. Rybczynski states,

Smaller houses on smaller lots are the logical solution to the problem of affordability, yet density--and less affluent neighbors--are precisely what most communities fear most.

I would love to see a return to smaller houses. One advantage of not having a lot of space is people will consume less if they know there isn't so much space to hold their new purchases.

Follow-up from Mankiw's blog: Assar Lindbeck once called rent control "the best way to destroy a city, other than bombing." Rent control is another regulation that discourages new real estate development by providing an incentive for renters not to move. At the same time, it discourages new developers from investing in new buildings because the owners will be unable to charge higher market prices. I am conflicted about rent control, because there must be some cap on rent increases that will satisfy both renters and developers. Leaving renters to the pure whims of landlords doesn't seem ideal. Of course, in trying to establish an ideal cap on rent increases, we could end up with the problem of the cap actually inflating rents. For instance, if we enact a 5% annual cap, all landlords will probably raise the rent 5% a year when they might have kept the rent unchanged without the law.