Wednesday, July 30, 2008

A New Search Engine: Cooler than Cuil

For some reason that I could not comprehend, a new search engine called Cuil (pronounced cool) debuted within the past week to much fanfare. TV and internet news outlets, including, picked up on this non-event.

In my experience, the search engine returned limited, irrelevant results.

However, I stumbled upon another search engine called Scour that I actually like. Scour, like other search websites, compiles results from the Big Three - Google, Yahoo, and MSN - and attempts to combine the results with internal metrics and package them relevantly. Scour combines the engine rankings along with user votes and comments to arrange results in a certain order.

Best of all, Scour pays users (albeit peanuts) to search, comment, and vote. One search results in one point, while commenting or voting can increase the total per search to four points; after 6,500 points, they'll send a $25 Visa. They do provide toolbar plugins for Firefox and IE, so it's easy to earn points without altering your usual routine. To me, the allure of Scour isn't making money, it's getting good search results (and being able to creep my websites' rankings all in one place) while diverting some revenue away from Google into a smaller company's pockets.

At least the people at Scour were able to pick a decent name. Really, Cuil?

Friday, July 25, 2008

Grand Theft... Vista?

My previous post addressed the possibility of another company bidding for Take Two (TTWO), a video game maker that currently has been offered to be bought out by Electronic Arts (ERTS).

Take Two's chairman said (in a press release) that multiple other parties were performing due diligence and TTWO was in early discussions with these potential suitors.

In my previous article, I threw out Viacom, as many pundits often cite them as wishing to become a player in the growing video game industry. However, I think that there's a more likely bidder.

I think that Microsoft is a likely bidder for TTWO. Microsoft already makes a video game platform (Xbox and Xbox 360) and also independently publishes video games. Years ago, they made a video game acquisition when they bought tiny Bungie studios, the company that developed the Halo series. Microsoft had already published the Halo games, but they decided to bring the production in-house to reap the benefits of vertical integration. I can't tell you how many dollars Microsoft has made, but Halo has now produced three best-selling games, and its exclusivity on the Xbox (it's also available on the PC, but no other console) has driven console sales too.

Besides Halo, Grand Theft Auto, TTWO's signature game, is the other dynasty of the video game universe. GTA IV, the most recent addition, released earlier this year, broke sales records that were set by Halo 3 last year.

Halo 3 generated sales of $170 million dollars during its first week last fall. (As previously discussed, virtually every component of creation, production, and distribution is internal, so much of this amount must fall straight to MSFT's bottom line). Compare that to a major blockbuster movie's debut weekend (the numbers are very similar), and the growing value of video games becomes clear.

However, that total, while impressive, is dwarfed by GTA IV's first week, as the game reported $500 million in sales.

For the mere cost of $2.5 billion (25% over ERTS's bid, or about $32/share), MSFT could absorb that massive revenue- and profit-generating game along with the rest of TTWO's portfolio. TTWO does make other games; BioShock was a surprise success this year, and its sports franchises, covering basketball, baseball, hockey, and tennis, are ranked highly and sell well.

Microsoft could become a serious player in the video game industry if they made a console and sold the two best selling games on the planet. Making GTA exclusive to the Xbox (like Halo is) would be a terrible decision, but providing some incentive, like an earlier release date, could drive additional Xbox sales too.

Such a takeover would be so insignificant to MSFT as a whole; unlike an overpriced Yahoo takeover, buying TTWO at $2.5b would only use up about 10% of their cash, in a transaction that's only as big as 1% of their market cap. However, their growing video game department would certainly flourish, growing to a point where it could be spun off if MSFT deemed that most profitable.

Microsoft has the cash, the takeover desire, and the rationale for making such a purchase. The Grand Theft Auto franchise alone is worth more than this current takeover price (which is why many people think that ERTS submitted the bid before the game came out, so that they could cap the share price), and TTWO has many other promising games and franchises that MSFT could continue to build and polish.

I'm long ERTS and now own TTWO calls, so admittedly, I have an interest in a higher bid (especially from someone other than ERTS). But it is in no way ridiculous to conclude that TTWO could, and should, be bought for a price much higher than it's current share price (high $24) and offer price (~$25.75).

Monday, July 21, 2008

Take Two's Takeover

Electronic Arts (ERTS) has been courting Take Two (TTWO for some time now; just yesterday they extended their current offer to buy out TTWO at about $26 per share just as it was set to expire.

Electronic Arts bid for TTWO when the shares were trading in the mid-teens, as TTWO struggled to do much of anything between releases of the different editions of Grand Theft Auto. However, the recent installment has been successful beyond expectations, and TTWO plans to ride that gravy train until its final stop.

In light of the success of GTA IV, TTWO is claiming that ERTS's offer significantly undervalues the business, which may be true. Here's what the chairman of TTWO said today:

"We are fully engaged in a formal process to evaluate strategic alternatives that have the potential to deliver greater value than EA's inadequate offer," said Strauss Zelnick, Take-Two's chairman. "As part of this process, we continue to engage in meaningful discussions with multiple parties, a number of whom have been conducting due diligence."

The chairman hinted, if falling short of explicitly stating, that there are other companies shopping for TTWO. In the golden age of the video game, traditional media companies like Viacom have been previously suggested/speculated upon being interested in such a purchase. Otherwise, ATVI would be the only likely suitor, though they just completed their own merger with another company.

However, since the chairman stated with more-than-hypothetical language that there is the possibility of another offer, I think it's worth it to gamble here. I bought TTWO August 27.5 calls for $.15 today; the shares closed at $24.66, a discount to ERTS's offer. September calls at 27.5 strike went for about $.70.

Certainly, a higher bid is far from certain, and ERTS could get tired of pursuing the stubborn TTWO and let its current offer expire. However, if another company does come in with a bid of, say, $30, owning either options contract will result in windfall profits.

Owning something like the Aug calls might actually be the safest way to play this; the enormous upside potential is preserved, while the downside from a the end of ERTS's extensions won't be too painful. I can't say that I expect a new bid to emerge - and for one to be announced within the next month is even less likely - but I'd rather lose a little money speculating than miss a hugely profitable trade.

(Disclosure and note: I am long TTWO Aug 27.5 Calls. If a new bid is made, I have a crystal ball for sale... but actually, any success predicting such an event is because of common sense and/or dumb luck.)

Tuesday, July 15, 2008

Google: Bad for Me, Good for Them

I'm an entrepreneur at heart, and I like when my little business ventures and investing happen to coincide. Running a business using products by eBay, Amazon, and Google allow me to have some additional insight into the actual usage and application of their tools.

I defended and then berated eBay, who has, through their own actions, distanced, scattered, or simply banned a growing number of important sellers.

I have written good things about multiple times - their Fulfillment by Amazon service allows small, medium, and large merchants to enjoy Amazon's world-class supply chain at a (somewhat) reasonable cost.

Now it's Google's term to get an in-depth, er, superficial analysis based on my experiences with Google's tools.

I've been using Gmail since before it was cool, run Adsense on multiple sites, use Firefox with a Google toolbar, post on Blogspot (which is owned by Google), have used G's free "analytics" service before, have watched way too many YouTube videos, have listed items on Google Base (a sort of online marketplace that they have been trying to promote), have accepted and paid through Google Checkout, and lastly, have advertised using Google Adwords. I'll be dwelling on the last service.

Google Adwords is the half of their advertising enterprises that serves merchants. By now, most heavy internet users probably are somewhat familar with Adwords. (If you didn't know, it's those advertisement boxes containing links strewn all over this, and other, websites). Adwords is used by everyone from lowly cottage-industry merchants like myself to Fortune 500 companies - everyone seems drawn by the promise of ten-cent clicks leading to unfathomable sales.

In my experiences thus far, I haven't been able to discern that Adwords is very effective, at least for my business (Whacks Wax). I earned allotments of Adwords credits as I've signed up and renewed hosting contracts over the past five years, and I'd use them as they trickled in. Clicks on keywords that aren't too sought after, like "hot ski wax," are pretty inexpensive, so I set up some programs and let them run.

Maybe it was a result of my lackluster website or undesirable product, but very few clicks ever resulted in sales. It wasn't until I spiffied up my metatags and did some other SEO tricks, earning my website a spot on the first page of Yahoo and Google searches for many keywords, that sales came flowing in. The organic traffic was much, much more effective than the purchased hits.

I just set up as a means of distributing Tim Horton's, the world's most delicious (but hard to find) coffee. Once again, I have $50 of Adwords credits to play around with; I hoped some free advertising could jump-start sales.

However, the impact of my advertising buck has been wittled away as Google's algorithms keep making my clicks more expensive. The first day, all search terms (from "Tim Horton's" to the more obscure "buy tim hortons coffee" featured minimum bids of ten cents. Some terms had some other advertising competition, but not very many people were competing for most of the terms.

However, the cost of many terms has inexplicably increased in the two days since then. "Tim Hortons" is now requiring a bid of 40 cents per click, even though there are currently no advertisements shown when the term is searched.

My assumption (which may be incorrect) is that Google identifies when advertisers start advertising, and it will then increase the cost as the term becomes demanded (even if only a single advertiser is using it). That way, it can encourage less-searched terms to be paid for cheaply while slowly milking all it can out of more desirable, though uncompetitive, terms.

This strategy is good for Google - in the last quarter, they beat estimates and expectations because they managed to earn more per click. But it's bad for merchants, who are looking to use Adwords to generate sales as margins and demand are squeezed in a tough macroeconomic environment.

But unlike my nasty experiences with eBay, I'll admit that what's bad for me isn't bad for Google at all. Many people and companies believe in the effectiveness of Adwords, and there really aren't many alternatives for little businesses with advertising budgets in the hundreds of dollars. Adwords has now expanded into print advertising (and radio and TV advertising), and it helps advertisers find space in major newspapers for huge discounts (I put an ad for Whacks in the major Salt Lake City paper last winter for like $10, thanks to Google).

As Google's search dominance continues to grow, and as Gmail continues to become the world's premier free email service, the revenues from advertising should continue to grow. Monetizing international markets, especially China, will be essential for Google's onward success. Google ponied up billions for YouTube, but they still haven't been able to figure out how to make money from it; luckily, the cash from their other operations makes the lack of monetization less of a problem for GOOG than it would be for another company. If Google can manage to start making money from these non-core businesses, their furious growth should continue.

Google's earnings are released Friday, and clarity into how revenues hold up during tough economic times will be seen then. On one hand, Adwords is a cheap way to advertise, compared to purchasing hundred- or thousand-dollar advertisements in newspapers or on TV. But there's a chance that the coupling of thriftiness from big companies - like mortgage lenders - or abandonment by many small advertisers (like myself) may pressure growth. I have no prediction to offer.

But as I listed all of the Google services I use, it became clear that Google has built an unrivaled internet kingdom. Its most popular services - Gmail, YouTube, Adsense and Adwords, and of course, the search engine - are the best that the Web has to offer, and they draw users in with little coercing. It's less-popular offerings, like Base and Checkout, are being bankrolled by Google's vaults in an effort to buy market share.

So in the end, my thriftiness may be indicative of one fact about Google - they make a ton of money. Don't hate the player, hate the game.

Monday, July 14, 2008

Shameless Promotion

Just as I have mentioned Whacks Wax (a separate venture of mine) or business of friends or family, I figured I'd post a link to Canada's Coffee sells Tim Horton's (THI) coffee, which is nearly impossible to find outside of Canada or US towns surrounding the country.

Thursday, July 10, 2008

Out with the Old, in with the New

I closed FRE around $12.50 and closed CIT around $7.80, both for ~$1/share gain over my entry points. If I would have held until the end of the day, I would have made about twice as much... but if I was still holding now, I'd be in bad shape.

I bought NTRI $12.5 July call and $7.50 July ODP call (shares had been crushed after advising that sales were very, very sluggish).

I’m playing the dead cat bounce with ODP while NTRI seems to be drunkenly staggering out of oversold territory. USO puts still open, and those have bled a little today.

Also bought CSCO Aug $22 call for $.90 when stock was at $21.60 yesterday, dropping 6% on the day. I figured it was oversold.

Why not try to take advantage of some market volatility?

Wednesday, July 9, 2008

Closing Positions

I sold my little CIT and FRE stakes yesterday into the strength at the end of the day. I don't not believe in their future prospects, but I'll take quick gains in the face of future uncertainty.

As a whole, the rally looked like short-covering to me... The parabolic gains heading into the close are one indicator, as people aren't usually as eager to initiate new long positions at ever-higher prices as they are willing to cover their shorts. Also, the performance seen yesterday from dogs like CROX indicates that many shorts may have thrown in the towel.

I'm still holding USO $104 Jul puts, and I'll see the value of that decline today as oil seems to be recovering modestly. If the inventory report at 10:30 is super bearish, oil should continue its slide; otherwise, it too may be pumped back up.

Monday, July 7, 2008

A Fan of Freddie

I picked up some shares of FRE, the quasi-government federal mortgage company as it was sitting near lows at $11.24. I had been waiting to jump into Freddie or Fannie (FNM) at such a time like this.

My thesis is that they are too intertwined with the government for anything really, really bad to happen, unless doomsday predictions come true. After a 25% intraday pop, I liked this entry point, whether I sell it off after a (potential) rebound or hold it for the long haul.

Thursday, July 3, 2008

PENN: No Deal

Today, Penn National Gaming (PENN) confirmed that its pending deal with Fortress Investment Group (FIG) and others was indeed terminated.

They will receive $200 million in cash (about $2/share) and over $1billion in preferred equity in 2013.

As I had speculated (when the stock was a few dollars higher), failure was priced in - the stock is flat today (at least in the opening minutes). I still like PENN, I like this cash infusion, and I like their prospects in a tough economy - why fly to Vegas when you can lose money close to home?

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When Bubbles Pop (or Lose just a little Hot Air)

Coal stocks, which I have identified as overheated for a while (but thankfully didn't short), all crashed yesterday as spot prices in Europe were less desirable than expected.

Here's a chart of CNX, Consol Energy, a huge coal producer in Appalachia:

Here's JRCC, truly a joke - it's a coal company that's losing money right now. Still, that hasn't stopped it from going from $3 to $60 over the past year:

Lastly, this is KOL, the coal ETF - so when an ETF declines 10%, you know that the industry is getting crushed.
Earlier this week when I had some fresh funds (which I eventually put into CIT for a profitable trade), I was checking out JRCC $50 july puts when the stock was around $57.50... and I talked myself out of them because I didn't expect a move that big. Though nine times out of ten (if not more) that $2 options contract would have been a wasted lottery ticket, it would have panned out nicely this time.

I haven't stayed on top of the coal market enough to speak more specifically than I have just done, but the stocks above demonstrate the power of bubble-deflation. Especially in the case of JRCC, a company with no earnings, it's astronomical price increase has been because of complete fabrication and speculation, and it should all come crashing down. CNX is a solid company, but it too has enjoyed a massive price increase because of tightening worldwide coal supplies.

The thing that makes coal from different from oil is that there's no talk of "peak coal" - we know that we have hundreds of years of supply left. Getting it out of the ground in a timely fashion can be challenging, as big trucks and tires are in short supply, but I'd have to believe that the CEOs, especially of companies like JRCC, know that this heyday will end sometime, probably in the not-too-distant future.

Tuesday, July 1, 2008

Two Trades

In my personal account, I did two things yesterday:

I put in an order at 6AM to buy these nice little illiquid tools called Fixed Return Options, a new derivative (how could that ever be a bad thing?!) invented by the administration of TradeKing, my online broker.

Anyway, how these things work, is that they are all-or-nothing contracts. If your contract finishes above the strike price (when you own a high-finish contract), you get $100 credited into your account. When it finishes below, it's worthless. The put-like options work the opposite way.

I bought Citi (C) high-finish options at the August 17.50 strike price. So, if the price (well, actually, a different metric that measures the average price of every trade that day, but basically price) finishes at $17.51 on expiration, I get $100. If not, it's worthless. The contracts were only $40 each, so the risk/reward was worth it to me. (I don't have a ton of confidence in Citi as a company, but I do think it's oversold, but regular options had premiums too high or were too far out of the money.)

The FROs can be sold before expiration, but since the market is pretty illiquid right now, it's best to hold as long as the trade looks like there's a good chance of success.

I also bought CIT after the bell at $6.88. It was down 15 percent on no real news yesterday; I figured it was just a financial company getting dumped as funds and firms window-dressed. This morning they announced that they are selling the home loan business, their most troublesome one, for some nice cash AND the forgiveness of lots of debt. It's over $8 right now.

As I wrote yesterday, I hope that this new month and quarter mark a turnaround for the market... but that doesn't look to be the case, at least during the opening of this first day. Hold on for the ride.

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