Earnings Estimates

Bloomberg is reporting that earnings estimates are finally being lowered:

Bloomberg Story

Once analysts reduce earnings per share, we will still have problems with predicting earnings from financial companies, but stocks themselves will be more attractive. People will still buy prescription medication, Coca-Cola, TVs, and McDonald's, and a host of other products even if their debt levels increase or if their houses are not worth as much.

Economic Plans

For the lawyers and policy geeks out there, I present to you the following:

Here is the Paulson plan (TARP Capital Plan), which was not passed:

http://paul.kedrosky.com/archives/2008/09/20/text_of_paulson.html

Here is what ultimately passed--the Emergency Economic Stabilization Act of 2008 (EESA):

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/28/AR2008092800900.html

More to come from our government, I bet. One question--if Sarbanes-Oxley didn't solve the problem of lying CEOs, what makes anyone think more regulation is going to fix our current problems? I don't know how to fix our economy, but I am surprised more condo/townhouse complexes aren't renting rather than trying to sell vacant units. I am also surprised that government officials are not talking more about assisting apartment complex owners and renters. If rents fall low enough, people can walk away from their houses and rent at reasonable prices. Then, the housing crisis becomes a matter of banks lowering housing prices to a level where it makes sense for prospective homeowners to buy. Perhaps I am missing something, but if I were Congress, I'd pass a $5,000 rental tax credit for families whose houses were underwater. I bet the banks would quickly start negotiating better terms for the current homeowners to convince them to stay or would keep the houses on their own books and start renting them to the current residents.

"Yes We Can"

President-elect Barack Obama won the election and delivered an inspirational speech that left Oprah and Jesse Jackson in tears. Prior to Obama, John McCain delivered a speech that confirmed he's one of the most honest ("The American people have spoken...and they have spoken clearly.") and dignified politicians in American history.

98% of the results have been tallied, and the popular vote breakdown is as follows:

Obama 53%/ McCain 46% / Other Parties 1%

I predicted 53% / 44% / 3%, so I wasn't too far off. I overestimated the support the Green Party, Libertarians and Ron Paul write-ins would receive.

McCain's choice of Palin may be viewed as a poor decision by future historians; however, the theory in picking her was sound. Republicans have two competing strains--one is libertarian-ish, wanting lower taxes, fewer earmarks, less government spending, and smaller government; the other is Christian, wanting religion and their version of family values to be recognized. McCain believed he could attract the libertarian side by himself, so he chose Palin because he thought she could steer the Christian side to his camp. Theoretically, it might have worked, but he was left with what many people thought was more of a political Frankenstein than a perfect compromise.

If Palin really does get enough money to run for election in 2012, I predict another eight years of Democrats in the White House. The road to the American presidency goes through California, New York, Texas, Pennsylvania, Florida, and/or Illinois. It decidedly does not go through Alaska, Arizona, Oklahoma, Kentucky, or Alabama, most of which are losing residents while the less religious states gain residents. Using this electoral vote angle, Hillary Clinton supporters might admit that choosing Barack Obama over Senator Clinton was a wise choice--New Yorkers would vote Democrat anyway, and Obama would guarantee Illinois. The Republicans are now in a poor position--Jeb Bush is political kryptonite because of his family name, and there are few Republican politicians other than Senator McCain and Ron Paul who inspire Americans.

Let this be a lesson to the Republican party: you have to choose sides. Either you return to the prestige and integrity of Eisenhower, Goldwater, or Jefferson, or you take the American people into a religious era in a country that has wisely favored separation of church and state since its inception. In short, does the Republican party want to be the party of freedom and fiscal responsibility, or a conservative Christian party? It is time to choose.

Update on November 6, 2008: Greg Mankiw has similar thoughts on where the Republican Party should go:

http://gregmankiw.blogspot.com/2008/11/youth-vote-and-gop.html
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Obama's victory speech:

CNN Transcript (Obama)

McCain's concession speech:

CNN Transcript (McCain)

http://www.cnn.com/ELECTION/2008/results/president/allcandidates/

92 Yr Old Woman Votes in Ambulance

This voting story just about sums up the intensity of this election--click on the link to read more:

AP Story

The line that stood out the most?

"She cast a straight Democratic ballot Tuesday."

2008 will go down in history as one of the most turbulent times in America. We had a stock market collapse, more deaths in Iraq, a sitting President who lost respect domestically and abroad, Russia's invasion of Georgia, crude oil reaching $120/barrel, and a nationwide housing crisis. I don't know about you, but I will be so happy on January 1, 2009.

Vote Today

It feels exciting to be a part of an election where both candidates are competent and respectable. I can barely remember the last time I felt genuinely happy about our presidential choices. Usually, we joke that our choices are between Tweedledee and Tweedledum, but this time, we have two honorable, dignified men in the race.

Based on my own informal survey, many young people (18 to 25 yrs) have not voted. One reason is because young people are more transient than the general population--they move for a job, for college, etc. As a result of this transience, it's harder for them to pro-actively register to vote. Without registering, a citizen cannot vote.

I predict a popular vote of 53% to 44%, with 3% voting independent/libertarian/Constitution/Green, in favor of Obama. If Obama wins, I will be very interested in whether the Democrats gain enough Congressional seats to prevent the Republicans from filibustering. As much as I like Obama, I don't want the Democrats to have unchecked power in Congress and two branches of government.

Stocks Update (November 4, 2008)

I haven't done a "Stocks Update" in a long time. To save time, I am going to list only the individual stocks I own in retirement accounts that exceed 2,000 dollars. As of today, November 4, 2008, here is the list:

Dominion Resources, Inc. (D)
EMC Corporation (EMC)
Swiss Francs ETF (FXF)
Intel Corporation (INTC)
U.S. Preferred Stock Index (PFF)
Swiss Helvetia Fund Inc. (SWZ)
Vanguard Pacific Stock ETF (VPL)
Utilities Select SPDR (XLU)
Yahoo, Inc. (YHOO)

I wish I owned more General Electric (GE) and Johnson and Johnson (JNJ). My strategy in my retirement accounts is to own stocks or ETFs with high dividend yields. So far, my biggest loser is Yahoo (YHOO). I am losing around $1,100 dollars on the stock, which isn't terrible, but certainly not ideal. I just saw a prominent Microsoft (MSFT) ad on Yahoo's front page, so perhaps Microsoft and Yahoo are on more cordial terms these days, which may lead to some form of a buyout.

Traditional Gaming Companies in Trouble

You want to know why Take Two Entertainment (TTWO) and Electronic Arts (ERTS) are going to have a harder time making money? Because smaller, more nimble companies like Zynga are moving on their turf. Here's an old TechCrunch post of Zynga--note that Bing Gordon, EA's former CEO, is involved in Zynga: Zynga Profile

Zynga is the creator of the new hit, YoVille, which is attracting fans not only worldwide, but also from more diverse groups, like college-age women. With its YoVille game attracting over 2.5 million active users on Facebook, Zynga is perfectly positioned to capture the growth in gaming, which is shifting away from major franchise hits to social networking and games that are able to get to the market faster, like Ultizen-style games: Interview with Ultizen CEO Lan Haiwen

Unfortunately, EA's and TTWO's problem lies within their business model. More specifically, their revenue projections rely on having hit franchises, like Madden NFL--meaning that revenue is dependent on very few sources--or on franchises that require large licensing fees. When you factor in the licensing fees a company like EA has to pay Hollywood studios (e.g. for EA's Harry Potter and Batman games), the NFL, and the NBA, you begin to see that EA is almost working to make money for other companies, while bearing most of the risk and the costs of failure.

I realize my assessment may be overly pessimistic; after all, most companies would kill to have exclusive rights to the only official Batman game, which will be a guaranteed hit. At the same time, relying on one-time hits has its own problems. For instance, EA/TTWO's business model must assume a major dropoff in sales after an initial release, because almost no game creates a major source of consistent revenue three years after its release. History has shown that a new franchise, like Spore, will do very well in an initial release, but sales will dramatically decrease afterwards, absent unusual circumstances. Thus, the larger gaming companies, despite creating blockbuster gaming hits once every few years, know they cannot rely on those hits for very long. Of course, certain games, like Grand Theft Auto, may be exceptions to this rule, but there is no guarantee of consistent success, and like most retailers, Take Two probably isn't looking forward to the 2008 X-Mas season.

Now, compare gaming software with Microsoft's Office software, which most analysts assume will attract new users and have old users upgrading for another ten years or more (despite arguably better products on the market, like Corel's Wordperfect Suite). A skeptic might look at the difficulty in creating gaming software that will attract users five to ten years from an initial release and say that even if a gaming company establishes a major hit, "So what?" The competition and costs in continuing to establish blockbuster hits will continue to be fierce and never-ending, while also being based in part on luck and consumer fickleness. It's now more apparent why the X-Box, even with Microsoft's money behind it and an in-house gaming development team, has had such difficulty making a net profit. Indeed, Microsoft recently lowered the price of its console to take market share from rivals--showing that it recognizes consumers have become more cost-conscious, exposing the gaming market's reliance on discretionary consumer income: X-Box Price Cut

If social networking games and mobile gaming are the future, then smaller, more nimble companies will be more competitive because of their smaller size, which leads to lower overhead, and their focus on bringing less complex games to market, which allows games to be introduced to the public faster and with less potentially devastating financial consequences. In contrast, if EA spends two years perfecting its new Batman game, and sales are flat, it will lose millions of dollars.

When I began analyzing the gaming market in light of the aforementioned issues, I came to the conclusion that the best way for EA and TTWO to continue growing would be to use their substantial cash reserves to acquire smaller companies; in other words, to choose the route Larry Ellison took Oracle (ORCL): Oracle's Acquisitions. Despite Oracle's proven software business model of smaller acquisitions and generating (not paying) licensing fees, most large gaming companies are trying to merge or buy out other major companies, which reveals a much different business strategy--one that may be completely out of touch with the future of gaming.