Macro Tsimmis

intelligently hedged investment

Archive for February, 2010

Activision Blizzard (ATVI) update #11—Starcraft II beta test begins

Posted by intelledgement on Thu, 18 Feb 10

Our game publishing company, Activision Blizzard (ATVI), announced yesterday that beta testing for the long-awaited sequel to the 1998 real-time strategy game Starcraft has begun. With over 11 million copies sold world-wide, Starcraft is the third most successful game ever for personal computers after The Sims (29 million) and World of Warcraft (12 million subscriptions), and is particularly popular in South Korea, where there are big-money tournaments, two television channels dedicated to broadcasting matches, and top players can achieve fame and make a living as professionals.

There have been several successful gaming franchises—e.g., Mario Brothers, Final Fantasy, Grand Theft Auto—that had multi-year success thanks to well-received sequels with materially ramped up features and enhanced gameplay. But with the exception of one expansion kit that added a few minor wrinkles, Starcraft is essentially the same game it was 12 years ago. This is a singularity in video gaming, given the speed at which the underlying technology morphs, and very few individual games are commercially viable for more than a year or two.

Although the game is billed as a “strategy” game, it is more tactical in nature, with each player typically just a few dozen troops/vehicles. However, there is an underlying logistics framework, as each player needs to gather scarce resources to afford to build new units and conduct research to enhance their capabilities. The staying power of the game is a testament to its meticulously developed playbalance, as well as to the robustness of Blizzard’s online game adjudication network, access to which is free to anyone who purchases a licensed copy of the game. (A major upgrade of—which will support the subscription game World of Warcraft also—is being released coincidentally with Starcraft II.)

Work on Starcraft II began in 2003 and the game was officially announced in 2007, but its release has been delayed several times. According to yesterday’s press release, the game “is currently slated to ship in the first half of 2010.” The game is very popular among the staff here at Intelledgement, but being Mac users, we are locked out of the beta test which presently only supports Wintel computers.  😦  Hopefully, life will improve and we will be able to report first hand on the quality of this major ATVI release.

Previous ATVI-related posts:

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Volatility declines again in 4Q09

Posted by intelledgement on Fri, 12 Feb 10

Here is a link to our 4Q09 update on volatility, “So Far, It’s Not Like the 1930s,” published on The Motley Fool website. Of course, volatility has picked up considerably in 1Q10…it will be interesting to revisit this analysis in April.

In the meantime, here are a couple of pertinent charts that did not make the final cut. The first one shows the volatility level of the S&P 500 from inception through 2009.

The second one compares the patterns of volatility of the 1929 crash with the 2008 crash:

These charts present the same data included in the article, but there—for technical editorial reasons—it is in tabular form.

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Activision Blizzard (ATVI) update #10—4Q09 results beat old guidance; new guidance so-so

Posted by intelledgement on Wed, 10 Feb 10

Our game publishing company, Activision Blizzard (ATVI), announced 4Q09 results today that generally matched management’s guidance. The guidance had called for revenues of $1.33 billion and a loss of four cents per share in the quarter and the actual results included revenues of $1.56 billion and a loss of 23 cents per share including a 19-cent reduction in the valuation of intangible assets reflecting the impact of a weaker market on the casual and music genres…exclusive of that non-cash charge, the loss would have been four cents per share. For the full year, the company had revenues of $4.28 billion and earnings of nine cents per share including the 19-cent charge (28 cents/share excluding the charge) as compared with guidance of $4.05 billion and earnings of 26 cents per share.

CEO Bobby Kotick stated, “We generated approximately $1.2 billion in operating cash flow and ended the year with approximately $3.3 billion in cash and investments. For the calendar year, in the U.S. and Europe, Call of Duty: Modern Warfare 2 was the #1 best-selling title overall and DJ Hero was the highest grossing new IP launched in 2009. Additionally, through Blizzard Entertainment’s World of Warcraft we remain #1 in the subscription-based massively multiplayer online role-playing game category worldwide…. Despite these challenging times, in 2010 we remain focused on expanding operating margins by growing our high-margin digital/online revenues, directing our resources to the largest and most profitable opportunities and realizing operational efficiencies globally. On a non-GAAP basis, we expect to deliver a year of record net earnings and operating margins and are taking another step towards our long-term objective of operating margins of 30% or more. In calendar year 2010, we expect our net earnings and operating margin growth will be driven by our product slate that includes Blizzard Entertainment’s Starcraft II and the World of Warcraft expansion pack, Cataclysm, as well as a diversified lineup based on Activision Publishing’s best-selling franchises including Call of Duty, Guitar Hero and Tony Hawk, together with other well-known titles such as True Crime, Spider-Man, and Bakugan.”

Management also announced a fresh $1 billion worth of share buybacks—the $1.25 billion program initiated in 2008 (originally as $1 billion and subsequently enhanced) was completed during 4Q09 with 115 million shares of common stock purchased at an average price of $10.87—as well as the first dividend in company in company history: 15¢/share payable to shareholders of record on 22 February. This amounts to a 1.5% payout based on today’s close of $9.96; they plan to pay an annual dividend going forward. Guidance for 2010 calls for revenues of $4.2 billion—$1.1 of that in 1Q10—and 47¢/share of earnings (20¢ in 1Q010)…basically flat revenues with improved profitability.

Fourth quarter highlights included:

  • For 2009, an overall 16% market share in the U.S. and Europe, an increase of 1.8 points
  • For 2009, two of the top-five best-selling franchises on the consoles across all platforms in the U.S. and Europe: Call of Duty and Guitar Hero
  • For 2009, #1 U.S. publisher overall for the PlayStation® 3 computer entertainment system from Sony (SNE) and the Xbox 360™ video game system from Microsoft (MSFT) and the #1 third-party publisher for the Nintendo Wii™
  • For 2009, highest share point gain of any publisher in Europe from 11.9% to 13.9%
  • For 2009, Guitar Hero was a top-four franchise overall and the #1 music franchise in the U.S. and Europe
  • For 2009, highest grossing new intellectual property launched in 2009 in the U.S. and Europe: DJ Hero
  • For 2009, two of the top five best-selling PC titles in dollars in the U.S. and Europe: Call of Duty: Modern Warfare 2 and World of Warcraft: Wrath of the Lich King
  • For 4Q09, 20.1% market share across all platforms in the U.S. and Europe—up 1.7 points over 4Q08—and #1 publisher overall
  • For 4Q09, Call of Duty: Modern Warfare 2 was the #1 best-selling console title in dollars and the Call of Duty franchise was the #1 franchise overall in the U.S. and Europe
  • 20 October—Bakugan Battle Brawlers video game, licensed by Corus Entertainment Inc.’s (CJR’s) Nelvana and based on the top-rated television series and Spin Master’s best-selling toy, was released for Nintendo DS, the Wii, the Xbox 360, and the PlayStation(R)3 and PlayStation(R)2
  • 26 October—Guitar Hero became the first game to surpass a million fans on Facebook
  • 27 October—DJ Hero released
  • 3 November—Band Hero released
  • 10 November—Call of Duty: Modern Warfare 2 released; on 15 November, it became the first video game ever to surpass $550 million in retail sales in its first five days of release and the game has sold more than $1 billion in retail sales worldwide to date
  • 17 November—Tony Hawk: RIDE released featuring a skateboard controller
  • 14 December—A new open world True Crime game inspired by classic Hollywood and Asian cinema-style action thrillers announced to be released in 2010

In China, WoW operations are semi-suspended again, but this time it appears to be good news. Months of wrangling between the Ministry of Culture and the General Administration of Press and Publications (GAPP) have evidently yielded an agreement whereby Blizzard’s WoW licensee NetEase (NTES) submitted an application to the GAPP for the approval of The Burning Crusade, the first expansion released for WoW back in January 2007. This is consistent with the Ministry of Culture’s position that the GAPP has jurisdiction only over packaged software “publications,” and not changes to online games. Nevermind that The Burning Crusade was released in China by Blizzard’s previous licensee, The9 (NCTY), back in September 2007 and the GAPP did not raise any objection at that time, or anytime since…until mid-2009. The agreement calls for NetEase to suspend new registrations for a week starting 8 February, during which time WoW servers will remain active and players will be allowed three hour/day of free access; presumably the GAPP approval will be forthcoming at that point. No word yet on the oft-delayed Wrath of the Lich King expansion, which Chinese WoW players have been awaiting—excepting those who have “defected” to Taiwan-based servers—for 15 months now. Overall, as of 31 Dcember 2009, there are approximately 11.5 million WoW subscribers worldwide, according to Blizzard.

In 1Q10, one Activision Blizzard title is scheduled for release: How To Train Your Dragon, which is based on DreamWorks Animation’s (DWA’s) upcoming 3D movie. The game will be published for the PlayStation 3, Xbox 360, Nintendo Wii, and Nintendo DS.

Previous ATVI-related posts:

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SELL SPDR Gold Shares ETF (GLD) & iShares Silver Trust ETF (SLV)

Posted by intelledgement on Tue, 09 Feb 10

“When the facts change, I change my mind. What do you do, Sir?”—John Maynard Keynes, in response to criticism that his position on monetary policy was inconsistent.

We have held these positions since the inception of the IMSIP, and GLD and SLV have been very, very good to us. As of the close yesterday, GLD is up 64% for us (+17% on a compounded annual growth rate basis) while SLV is up 20% (+6% CAGR)…all this during three years and five weeks when the stock market overall declined 25% (-9% CAGR).

Our thesis for taking these positions has been that they constitute a hedge against the inevitable decline and possible collapse of fiat currency in general and the dollar in particular. And again this has worked well for us; since 29 December 2007, the dollar is down 4% (-1% CAGR) and is only that high on the heels of a furious rally since December 2009. Thus, we do not see precious metals as a good long term investment, but essentially as short-to-medium term insurance against exogenous macro events that may result in economic decline and concomitant value destruction in stocks and bonds. When the risk of such macro events grows, capital preservation is a higher priority than growth because it’s hard to recover from losses: if your portfolio drops by 50%, you need a return-on-investment of 100% just to get even!

So are we liquidating these positions because we believe that the risk of Bad Things has been reduced here? Absolutely not! We stand by the concerns we expressed last month in our 4Q09 portfolio report analysis. In fact, if you physically possess gold or silver, don’t sell it. (And if you don’t, you should seriously consider acquiring some as a prudent measure to protect yourself and your family in the event things get really bad.)

So why are we abandoning these positions which have served us so well, particularly when we don’t believe the danger of a dollar meltdown has abated? Well, in the long run, it is hard to see how the USA avoids default other than by inflating the dollar—and the dollar-denominated debt and a lot of folks’ savings—into oblivion. But that is the climate, and just now we are concerned with the weather. There are two particular conditions that—in the short run—tend to lend strength to the dollar. The first is when the USA’s political leaders fall into one of their episodic fits of austerity. These don’t generally last long and ultimately amount to exceptions that prove the rule, but in the rare circumstance where the Federal government cuts spending and maintains interest rates at a reasonable level, the dollar has performed relatively well.

We believe that the recent ascendance of Paul Volcker—hero of the 1980s fight against inflation—in the Obama administration over the previously dominant Keynesians Timothy Geithner—architect of the bailout—and Larry Summers along with Barack Obama’s new quest for “bipartisanship” signals an increased possibility that we are in for a move in the direction of austerity heading into the mid-term elections. This flies in the face of conventional Democratic-Liberal cant, but it is consistent with the experience of the Clinton administration after their attempt at health care reform fell short in the 90s, so we consider it a bona fide risk.

The second condition that lends strength to the dollar is increased systemic risk. This seems ironic—if the dollar is ultimately doomed, who would consider it a safe haven?—but there is a dynamic at work that, in the short run, trumps longer-term concerns about the viability of the greenback. With the prevalence of leverage in our financial system, the volatility attendant to increased systemic risk—when a number of normally unlikely scenarios come into play in which the range of contingent valuations of assets can vary greatly (that is, perhaps your Greek government bonds are worth 100 cents on the dollar or perhaps they are worth 25 cents on the dollar…or anywhere inbetween)—can expand violently. This was the case during the Great Depression and it was the case again during the 2007-09 meltdown. When banks and other heavy hitter investors make highly leveraged bets, it doesn’t take all that much of a move by the market to create a dangerous situation for them. And with everyone so tightly linked (and often betting the same way), there is the potential for a cascade effect, where losses—or even potential losses that are suddenly more likely—by one entity create or exacerbate the risk for several others. And if you are a proprietary trading operation with margined investments—meaning you have put up less than face value and borrowed the rest of the cost of buying the security and that underlying security is serving as your collateral—and those equities are suddenly worth a lot less, then you get a margin call, and you need to come up with cash to make up for the loss of value of your collateral. You probably don’t want to sell the security that declined in value and thus irretrievably suffer the loss, so instead you sell something that you’re ahead in—blue chips or emerging market equities or gold—to raise cash.

Now imagine a whole lot of folks experiencing that situation simultaneously. What happens to the price of Wal-Mart (WMT) or Petrobras (PZE) or gold? During the 2008 meltdown, the price of gold fell sharply.

And, of course, weakness is relative. If Germany has to bail out Greece—and potentially, Portugal, Ireland, Italy, Spain, et al—would you rather be holding Euros or dollars?

We fully expect to be back in GLD and SLV when the weather conditions return to being more congruent with the long term climate. But for now, we are standing aside here.

Previous GLD- and SLV-related posts:

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SELL ProShares Short Financials ETF (SEF)

Posted by intelledgement on Fri, 05 Feb 10

While we are happy with the performance of this ETF as a hedge for us, we have decided to redeploy these funds into an inverse index short fund (most likely DOW, PSQ, or SH). The volume (fewer than 100,000 shares/day) and capitalization ($113 million) of this fund are not robust enough for our comfort zone.

Previous SEF-related posts:

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