Backing up the Take-Two Truck

I closed my last post, which was about Take-Two and Electronic Arts entering into a confidentiality agreement, with a cautious sentiment. I said that I was planning on maintaining my disclosed position, TTWO Sept $27.5 and $30 calls, or selling contracts as premiums rose.

There was little spike in the stock price or options premium, so I decided to load up on more calls. TTWO has now set September 4th as the date of their earnings report and conference call for the quarter ended July 31st.

TTWO made $1.52 per share in during the quarter ended in April; much of that money was made during the few days that Grand Theft Auto IV was sold during the end of that quarter. However, sales continued to be strong during this quarter and TTWO's results should reflect this. The consensus estimate for this quarter is only $.55/share, which could easily be beaten; in fact, TTWO has beaten estimates handily each of the past four quarters. Full-year predicictions (currently $1.85) also may be revised upward; so far this year, TTWO has tallied -$.41 and $1.52, for a total of +$1.11. The estimes for the next two quarters, $.55 and $.19 could be easily crushed. TTWO is releasing GTA IV in Japan in early October and on the PC in November (which falls under the next fiscal year), so sales should continue to trickle down to TTWO's bottom line.

As long as TTWO comes in at least in-line this quarter, ERTS will have to re-bid at a much higher price or admit that TTWO is too expensive for them. If ERTS does make the $1.52/share that they're expecting to tally this year, the stock trades at about a 32 P/E. ERTS's asking price of $26/share for TTWO assigns a 14 P/E. Activision-Blizzard trades at a P/E in the high 20's. ERTS cannot expect TTWO to sell out at such a discount to itself and the industry.

So I am indeed speculating as this tango proceeds. If TTWO's management has presented its material to ERTS's board already, they could forseeably make an offer before earnings to minimize the influence of the investor community's reaction on a takeover price. If TTWO reports in-line or surprises positively, shares should jump for many reasons - TTWO's shares are deeply undervalued compared to its competitors, and investors like me may think that ERTS will pony up more for the company.

Shares currently seem to be hugging the $25 level, but I'd be surprised if they stayed there for long. It's time for ERTS to sack up and make a reasonable bid, or leave TTWO alone. The lead-lined takeover cloud capped TTWO's share price as it released the best-selling media release of all time and subsequently reported unbelievable earnings. It's time for the sun to shine on TTWO.

Disclosure: Long TTWO Sept. $27.5 and $30 calls.

Four in a Row?!

I'm knocking on wood, crossing my fingers, and picking four-leaf clovers as I write that title... I don't want to do anything to jinx an unbelievable four-day rally that it looks like we'll continue today.

The US markets look set to move after good earnings from here and abroad. Toyko markets moved up 3+%, the most since 2002, after Japan's economy grew much more than expected. The rest of Asia followed upward.

Europe is up more moderately, but that's fine with me... UBS reported a huge, terrible loss because of subprime writedowns. For them to report that and for the market to still be up.... I like that.

US futures are trending higher for all three major indexes. Comcast just released excellent earnings, and the NASDAQ should have some positive reaction after (so-called) good earnings from Baidu.com (BIDU) after the bell yesterday. (On a side note, I think that BIDU is a high-PE "pig" that needs to be slaughtered... but if it's gonna pull up my tech stocks today, i'll be ok with that.)

A nice move today will be very beneficial to my trading account here and my longer-term Ameritrade account... between the two accounts, I have February ATVI and SNDK calls that, as of yesterdays close, were about $.30 away from the strike price.... if the positive market momentum can push them above the strike prices in early trading, then I'll be able to break even (or maybe even sell profitably!) in trades I had written off as losses.

Looking forward, the MSFT options that I wrote a trade note about buying look like they'll work out well (still knocking on wood). MSFT closed a tad under $29 yesterday (the option's strike price) with an entire month left. As I stated before, as clarity increases concerning the Yahoo deal (and just as the market goes up), MSFT has a lot of ground to make up towards its high of $37. I also bought some $30 SNDK calls yesterday as the stock appears to be picking up some momentum.

So, if the market opens up big, I plan on profit taking on a few trades, just because I'm not sure about the sustainability of a weeklong rally. But the market is still dirt cheap, and if economic conditions continue to stabilize/improve, this could prove to be the beginning of the end of the best buying opportunity for years to come.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

ATVI Followup; More Earnings Next Week

Well, Activision did report a truly outstanding quarter yesterday, firmed guidance for this quarter, and had lots of good forward-looking commentary during the call.

However, the stock didn't move much after hours last night. Interestingly, for having released earnings, very few shares traded after-market; with a daily volume of about 6 million, less than half a million shares traded after hours.

In the pre-market this morning, ATVI shares are changing hands closer to $27, which is good. Hopefully when the market opens, the shares will continue higher. It's nonsense that companies with excellent earnings and guidance like ATVI aren't being rewarded in this tough market.

Next week, I think I'm going to do something with Chiptole's earnings in the latter half of the week. I don't expect them to blow out numbers; however, the stock has fallen from $150 to $105 (while I was unfortunately on the sidelines, after predicting declines in multiple posts on this blog), so it's already coming down to earth. I'm hoping it bounces before earnings so that I can short. Another method may be selling-to-open some out-of-the-money calls; however, that's dangerous, because if they somehow blow away it could be disastrous. However, the implied volatility is through the roof, so options are fetching a premium now that will evaporate the morning after earnings.

Another stock I've lately been turned onto is MadCatz (MCZ). They are a tiny video-game accessory maker. I think that they're going to benefit from the great holiday quarter that every other video company has enjoyed; plus, they recently inked a long-term deal to produce all of the instruments for EA's Rock Band. The downside is that the stock is at 80 cents and volitile; a disappointment and the penny stock could plummet.






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Buying ATVI into Earnings

I initiated a small position in ATVI a few weeks ago when the share price dropped below the price that Vivendi (the company buying ATVI) is offering - $27.50.

As the markets have pulled back a little over the past week, Activision has dipped again. As of this morning, it was a little under $26.

So, in anticipation of good earnings today, I bought some Activision calls. The February 27.5 calls were only at 30 cents/contract, so though the time frame is pretty short, I pulled the trigger.

I anticipate great earnings today; Activision led holiday sales on many systems with Call of Duty 4 and Guitar Hero 3. I believe that they'll beat (or at least not disappoint), people will remember that they'll be getting at least $27.50 for their shares in a few months, and the price will pop up a few dollars within the next few sessions.




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Terrible Tuesday

After US Index Futures trading on global markets had priced in a 5% plunge when the markets open today, the Fed decided to try to salvage the situation by cutting rates by 75 basis points.


Immediately, futures gained lots of lost ground, as Nasdaq 100 ETF is only pricing in a mere 2% decline. (QQQQ quote taken 8:30 AM).

But was this the right thing to do?

I'm not so sure.

First, let me establish that I don't want stocks to fall. I own an Ultrashort Oil & Gas Fund (DIG), which can be seen as a hedge against oil (and the entire economy), but I am very, very long, which is clearly not the place to be right now. I'd like nothing better than to see the market go up 20% tomorrow, but for logical, meaningful, substantial reasons.

The Fed's early cut is purely symbolic, not something that will actually have an effect on the financial situation in America. Since the policy (rate cuts) take many months for their effects to be felt in the economy, realistically, waiting until the meeting to cut 75 points would have provided the same stimulus in the second half of this year. If anything, I think it may have been better to cut then - if things got even worse, then they could cut a full point without making it seem like the sky is falling.

I can't say that a decline of "only" 5% isn't bad (especially since some stocks I own, like Countrywide (an arbitrage, at this point)) were set to open down 10% or more. But global markets have faired even worse over the past two days - Indian and Chinese markets are down 10-20% since last week.

It's hard and unreasonable to tell people to do this, but if people could just act rationally, and avoid clicking "close" next to all of their positions, we'd be a lot better off. For example, I follow Activision (ATVI) and Electronic Arts (ERTS), two stocks who should have shot up after news of an absolute blowout of video game sales numbers during the holiday season. However, both were flat (or down) last week after the announcement was made, and both were/are pricing in a 5% dip today. Clearly, if we're in a recession, people are still buying Guitar Hero and Call of Duty; if anything, investors should be buying up shares of a seemingly-stable niche.

Now that the day's news (BAC's awful earnings and the Fed cut) are on the table, it looks like markets will open down about 3%. What they do during the day is anyone's guess - We could finish positive, or we could lose 10%. According to WSJ articles over the weekend, markets have priced in 80% of the impact of a recession - this potential decline today should increase that figure further. I truly believe that a recession is fully priced in; there's clearly some stocks that are still overvalued (I think that tech like Apple, RIM and Amazon are still grossly overvalued), financials seem to be fully discounted.

Barrons wrote an article about the bond issuer MBIA this weekend; they stated that the company's liquidation value is at least $30, while the stock currently trades around 8. Countrywide is being merged into BAC; the terms of the deal, which can be broken but are generally unconditional, priced CFC around $7; now, when CFC converts into BAC at .1822 shares, you're essentially buying BAC stock for $25 (instead of the market's $33) if you buy Countrywide today.


If you can stomach a short term loss, in five years, they should identify early 2008 as the best buying opportunity in years. Yes, the economy may not be great. Yes, the subprime problems are not over yet. But companies (and the entire market) are heavily, irrationally discounted, and an investor with a strong stomach will thank his nerves a year or two from now.



"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Oil and Video Games

Two quick, unrelated thoughts:

Normal people would be asleep at this hour, but I was finishing up an assignment, when I got an email news alert about an oil pipeline explosion in the USA. Crude future bounced up $3 immediately after declining significantly over the past two days, and regular trading on the NYMEX tomorrow, once all details are out, could have an even more severe result.

Right now I still own some Marathon Oil shares, but no longer have any options positions in Conoco. I was actually thinking about buying both calls and puts as a play on volatility, but the money hadn't transferred into the account as of yesterday, and I'm sure oil companies are going to move a couple percent in either direction tomorrow based on this news.

If things ARE flat, I was going to buy Conoco 80 calls and 75 puts (stock is around 77). With inventory news and a big OPEC meeting coming up, I think it's going to be a volitile couple weeks for oil. (Plus, it's forecasted that the eastern US is going to get its first taste of winter, which may boost the price of heating oil and natural gas).

By the way, not to toot my own horn, but even without a significant drop in the price of oil, the major oil companies have pulled back around the levels seen during the previous price correction. Conoco fell from almost 90 to 75; Chevron and Exxon have not declined quite as significantly, but they have corrected. If oil goes down to $75/barrel... I don't know what's going to happen to the stock price. (Expensive oil isn't great for the big oil companies, but sometimes they trade as if it is).

Second thought:

Right now I own Electronic Arts stock in one portfolio and some Activision options in my smaller, riskier portfolio. I actually purchased the ATVI options before their earnings release, after which the stock dropped from around $23 to as low as 19. However, they revised their numbers upward (after guiding low in the conference call - go figure) due to strong sales of Guitar Hero 3. I own the December $25 calls, so the stock still has to move about 10% to be ATM, but with two hot games (Guitar Hero 3 and Medal of Honor: Modern Warfare) I think it's going to be a fantastic holiday season for Activision.

EA is the 800-pound gorilla of video games, but they don't have a clear-cut winner this holiday season. They did release Rock Band, a competitor to Guitar Hero, but its success cannot be predicted. However, I think that this Christmas season is going to be better than expected, so I plan to ride the (predicted) wave of good news and higher share prices through the holiday season.

So in conclusion:

• Watch the price of oil and oil stocks
• Activation will be GREAT this holiday season
• EA, Take-Two might tag along for the ride
• if Rock Band is a hit, EA could have a very nice pop, while ATVI would suffer.

That's all for now, but I'll update again this week.

SHORT!

I want capitalize on the current volatility.

Right now, my real-money portfolio is nearly 90% invested; I have some SPY puts, and then about 8 different stocks. I'm happy with all my positions right now, so I'm not really looking to actively trade that portfolio soon.

However, I just entered a trading competition sponsored by my university. Finally, I get to employ lots of risky strategies that I wouldn't do with my real money.

The competition opened today, and my first move was to short, short, short.

I shorted:
Apple
Bidu
AIG
Amazon.com
Google
RIMM
QQQQ
Petrochina
SPY
F

If the market continues to be sour (after the 3% loss on Nov. 7), the returns will be lucrative. All of the above stocks (except for the exchanges, F, and AIG) are high-growth momentum plays. If momentum stops, there's no telling where the floor will be.

Of course, I'm long stocks too (I'm about 1m more short than long in a $5m portfolio). I own:

BWLD
ANF
ATVI
TM
JAVA
and a few others that I'll update later.

Literally every stock, both long and short positions, fell today, but the shorted ones fell more, so I'm currently in the lead.... after the first day of trading.

As for my general take on the market:

It seems like there's a lot of reasons why there could be a correction now. The dollar is crashing, oil is still high, Morgan Stanley just wrote down $4B, WMU, Freddie Mac and Fannie Mae are under review for lending policies, and the market has just been strong lately.

Could the market rebound nicely tomorrow? Sure.
Could it fall 10% over the next two weeks? Believe it.

Predicting the market movement on a day-to-day basis is impossible and fruitless, so I cannot and will not say if the market will be up, down, or flat tomorrow.

But keep in mind that stocks like Apple, Google, and Baidu have P/Es that are 2 or more times higher than there rest of the market. When momentum runs out, it's a recipe for disaster stocks like those above. Google is itself a big enough entity to drag down the entire market; just keep an eye out for the potentially-dangerous situation that this can create.