ESB Brain Wave

The Detached Modern Jackass

2010-12-09T18:26:00.000-08:00

While watching Wife Swap & the Real House Wives of (insert city here) with coworkers during lunch, I tried to inject some meaningful banter while noting that Obama had just caved to the GOP by extending tax-breaks to the top 2% & lowering estate taxes for >$5m (which affect 99.8% of Americans. You can probably guess which ones.).

Instead a coworker impatiently snarked, “...so what does this mean for me?” (translation: this is long & boring. Get to the punch line already!)

This was the perfect response to represent our country's current attitude. We have stopped acting like citizens & instead behave as selfish animals. This detached attitude is allowing Earth's destruction to continue, health care inequities to persist, and the largest wealth gap in history to widen without any personal culpability. Where is the anger besides Tea Partiers who flaunt this narcissism?

I'm as guilty as any. We no longer like to read the news, but would rather skim headlines & have extremists like Rush & Olbermann confirm our views. Smartphones & Twitter have sapped our patience for finishing & reflecting on entire articles (has anyone made is this far?). We're creating an army of the "Modern Jackass": one that talks expertly about something he/she knows nothing about.

Politics has become so polarized that I think we have simply withdrawn from these difficult topics. Wife Swap & the Real House Wives doesn't hurt our conscience.

2007-08-21T06:13:00.000-07:00

Phantom's Scam Artist Resigns

2007-07-10T06:28:00.000-07:00

Finally some good news from Phantom Entertainment: Timothy Roberts has resigned from the board of directors to "pursue new business opportunities". Judging by his employment history, this means creating a new startup to bilk more naive investors. But if the SEC has their say, he will never get that chance as this resignation may mean the SEC is close to charging Mr. Roberts with securities fraud.

The SEC has an open case against Mr. Roberts for the infamous fax scam back in 2004 when Roberts profited over $400,000 in a few short trading days after Infinium Labs stock soared >10,000%. Michael Pickens, who was hired to send out these faxes promoting the now-defunct Phantom console, has since been jailed for other similar penny stock scams.

The stock is down 99.97% to $0.0005 since Timothy Roberts committed the crime.

Although this news may have come 3 years too late, it's the first step in becoming a legitimate company.

Also today, Phantom Entertainment announced a small funding deal that will aid in October's Lapboard launch. Back in April, Ione teamed up with PHEI to manufacture & distribute these gaming keyboards. This puts the launch in the hands of a more competent partner, which is great news considering PHEI's 0.000% batting average.

Could the future actually look promising for Phantom Entertainment? They have funding for the Lapboards, they have a competent manufacturing partner who is driving the launch, they have a pending Alienware order, and they no longer have the dark cloud overhead in the form of Timothy Roberts.

Buying Your Way Into Heaven

2007-05-31T14:06:00.000-07:00

Interesting parallel from today's energy policy to 16th century Catholicism from Economist Dennis Gartman:

"CATECHISM CLASS: Raised as good Lutherans back in Ohio, we always understood how the selling of Indulgences helped bring the Catholic Church low in the 16th Century. Indulgences were the pieces of paper sold by the Pope that allowed 'sinners' to pay down their debts they had incurred through sinning. One could sin, buy an Indulgence from the Church, and go about one's life with a sense of having done something worthwhile for the building of more churches AND in curtailing one's time in purgatory or actually buying one's way into heaven. Indeed, we learned that one of the Popes of the age, Leo X, actually sold such large Indulgences, costing such large sums of money, that he was able to finance the rebuilding of St. Peter's Basilica. Having been to St. Peter's, in retrospect, perhaps this was not such a bad idea given the stunning beauty of the church.

"But the whole notion of Indulgences is being revisited these days by the new religion of global warming, for if we consider what Mr. Gore has recently done by buying carbon offsets from those who plant trees to offset his enormous carbon footprint, or knowing what Sen. Edwards has done by buying offsets to the electricity and energy needed to power his enormous home in Chapel Hill, N. Carolina, we are hard pressed to see where this practice differs from the 16th century selling of Indulgences.

"Parishioners in the 16th century bought their way out of Purgatory and/or Hell; 21st century tree-hugging energy users can buy their conscience clear by buying offsets. We look for arguments from our global warming friends out there."

Time to Double Short the Dow?

2007-05-15T18:09:00.000-07:00

The stock market continued its fantastic run in April finishing up 8.6% with the Dow industrials & Russell 3000 reaching all-time highs. Consider that it took seven years to move the 1,000 points from Dow 11,000 to 12,000. By comparison, the index required just over six months to run the next 1,000 points from Dow 12,000 to 13,000.

Turning bearish during this prolonged rally may sound foolish, but the market appears oblivious to the bevy of economic woes. Remember Warren Buffet’s mantra: “be fearful when others are greedy and to be greedy only when others are fearful.”

Just take a look at this week’s economic data:

Housing starts at 7-year low
Existing home sales largest one-month drop in 18 years
GDP growth slowest in 4 years
US Dollar at all-time low versus the Euro
Consumer spending weakest in 6 months
Consumer sentiment fallen 3 straight months to 9-month low

We haven’t experienced this much blind optimism since President Bush hung the “Mission Accomplished” banner on the USS Abraham Lincoln 4 years ago. Indices have continued to reach new highs on solid 1^st quarter earnings & expectations of a Fed rate cut. But the lack of catalysts in May should hurt the markets while investors take profits.

Evidence is starting to show that Smart Money is beginning to watch from the sidelines. “Sell in May and go away'' is a well-known Wall Street strategy as the month historically struggles. Inflationary pressures & $4 gasoline may keep the streak alive.

Call me crazy, but I entered a large position in the ProShares UltraShort Dow30 ETF (DXD). It is essentially the double inverse of the Dow Index. In other words if the DOW falls 5%, the ETF gains 10%. You can see how risky this position is! I also purchased oil futures (USO) last month with the expectation of a return to $70. And increased my holdings in First Trust’s 9% Yield ETF (FHI).

I still hold roughly half of my portfolio in equities, but all of them are from the cheaper Nasdaq. While the S&P, Russell & DOW all are at or near all-time highs, the Nasdaq still remains 50% off its 2000 highs. So if this rally continues, I should stay even.

Join the Poker Player Alliance

2007-04-30T13:41:00.000-07:00

Dear Eric,

This is Mike Sexton, and I want you to get involved to help support the great game of poker. I am sure that it isn't news to you that the federal government passed a law last year to restrict online poker sites from offering real money play. I believe it is possible to change the legal landscape. That's where the Poker Players Alliance (PPA) comes in. I have been personally involved with the Poker Players Alliance, and believe you should too.

The PPA is a grassroots movement, consisting of poker players like us, who would like to change the law. Our goal is simple - to change the ban, and allow us to play poker on-line, on licensed and regulated sites. I believe that poker is a game of skill, and a game that is part of the American fabric, and that licensed and regulated online sites can offer fair and secure online poker. I support the efforts of the Poker Players Alliance and I have arranged to sponsor a free PPA membership for you. Please CLICK HERE to join me and add your voice to millions of other poker players who will be heard by Congress.

Your part in this is simple. Just sign up now for this free offer (if you clicked in the above paragraph, you have joined), and the PPA will be sending you regular newsletters to keep you informed of what you can do to help bring back poker. The PPA is preparing to launch a massive lobbying campaign in support of new legislation that will be introduced shortly in Washington D.C. By joining now, we can send a message to our lawmakers to make sure that they know about our love of online poker and desire to bring it back.

Our mission will not be easy - or cheap. Lobbying for reform is an expensive process, and our efforts will not succeed overnight. The PPA is a not-for-profit organization, and your contributions go directly into lobbying efforts. If you can, please support our shared interest further with a donation.

If you are already a member, do not worry, you can upgrade your membership to a fully paid membership, or better by clicking here. Rest assured that your privacy rights will be secure with PPA. Your personal information will not be shared with anyone. I hope that you will join us in this effort. The time to make it happen is now.

For more information about the PPA and what is happening, visit www.pokerplayersalliance.org.

Sincerely,
Mike Sexton

Phantom's Pump & Dump

2007-04-20T10:52:00.000-07:00

Since Tuesday's post, Phantom Entertainment has already dropped more than 64% from its highs. The timing of the press release was ~~fraudulent~~ curious considering the company missed their quarterly filing deadline the very next day. Phantom is now in non-compliance status & has been relegated to the pink sheets. I'll be interested to see how many insiders sold during the rally.

Phantom delays their Lapboard 6 more months - Stock quadruples

2007-04-17T11:03:00.000-07:00

The pink sheet market is a different beast where Market Efficiency theory usually does not apply. For example, take today's press release from our friends at Phantom Entertainment (formally known as Infinium Labs). In their announcement, Phantom released 4 pieces of bad news:

The Lapboard has been delayed 2 additional quarters
Phantom has given up the rights to their only product to instead collect royalties
They have "switched" manufacturers (Ione/Itron)
They have all but left the US markets & have instead entered Asia

In addition, it fails to comment on the company's lack of funding which has been the main reason why the stock has fallen more than 90% the past year. Just last month the company decided to double the number of shares, slashing the current shareholders piece of the pie in half. But these shares are only worth a couple million even after today's rally. Last quarter's cash burn was much more than this amount.

So how did the stock react? It quadrupled from .0006 to .0024! How can this be? First of all, PHEI is an extremely low volume stock that can be moved with great momentum after any news or pickup in volume. But the rally has more to do with the creative way the PR was written. At first glance, it seems very positive. But read into the details & you will see that the real news could send the stock plummeting the next few days:

"PHEI announced today it has entered into a major, multi-product licensing agreement with Ione Technology Inc."
Meaning: We have no funds to build the Lapboard & have sold the rights to another company. Instead, we will receive 5% royalties if it is ever built. It's their problem now! (Ione Technology is actually the same company as Itron, the previous manufacturer. They changed the company name to Itron in 2003. Fradulent?)

"The agreement allows Ione Technology to market an Ione wireless lapboard and Ione wireless laser mouse in markets throughout Asia"
Meaning: We no longer have any credibility in the US markets. Asia has no idea who we are!

"Phantom Entertainment will manufacture the Phantom Wireless Lapboard and Phantom Wireless Mouse throughout the United States and Europe"
Meaning: Even though we have promised this for 3 years and still have no funds to build it, we still plan on launching the Lapboard. Otherwise, we have no reason to still be collecting our gigantic salaries!

"We anticipate Ione Technology will begin production and distribution of the Ione wireless lapboard and Ione wireless laser mouse in the third quarter of 2007"
Meaning: We are delaying the Lapboard for the 6th time so that our investors stick around for another several months (it was originally slated for a 2004 launch date).

As you can see, with a little creativity (and borderline fraud) you can turn any bad news into an optimistic-sounding announcement. It's not difficult to predict how the stock will perform the next couple days once this becomes obvious to the current investors... sell before it's too late!

Finding a Gem Amid the Subprime Debacle

2007-03-12T18:10:00.000-07:00

After the refi boom of 2003, mortgage lenders were forced to get creative to keep their loan volume steady. New riskier products such as interest-only & stated income loans allowed those with credit difficulties the ability to purchase a home. If thes e products weren’t risky e nough, subprime specialists we re bringing in barrels of cash by lending to those with credit scores in the 400s. Why take all the risk? High risk = high margins.

But in recent weeks, several lenders have warned what many observers had been predicting for months:

Borrowers that took out interest-only loans have been unable to make payment after the “teaser” period runs out.
Companies that allowed borrowers to “state” their income (without verification) now realize that applicants grossly exaggerate their income over 50% of the time.
And worst of all, defaults in the subprime arena have been much higher than expected forcing a record 1 out of every 200 American homes into foreclosure.

It's been an ugly couple of weeks for the mortgage sector. The hardest hit have been those subprime specialists such as New Century & Accredited Home Lenders who have seen their funding caught off after warning of massive defaults. Their charts say it all:

From an investing perspective, view this as a healthy cleansing of the weaker mortgage companies. When the dust settles, the stronger lenders should emerge with less competition as more subprime shops go into bankruptcy.

The pressure has been felt industrywide, even affecting those companies with minimal subprime exposure such as Countrywide, Washington Mutual, American Home Mortgage & Suntrust. This recent selloff presents a great opportunity to invest in these oversold cash cows.

American Home Mortgage

My #1 recommendation would be American Home Mortgage. AHM has seen its shares halved to $19 in the last month despite having less than 1% subprime exposure. In an Operations Update last week, AHM released its pipeline data showing only 5% of its loans having credit scores less than 620.

In addition to being oversold, AHM has amazing fundamentals.

4 P/E Ratio
Operating Margin: 46%
20% insider ownership
$400 million in cash (40% of market cap)
Return on Equity: 22%
2006 EPS: 4.96/share

And most important of all, because AHM is a REIT, it must payout a certain percentage of its income in the form of dividends. During this 50% fall in share price, AHM has seen its dividend payout rise to 19%! If you’re afraid this dividend will be cut, consider that AHM has been steadily increasing its payout every quarter and has over $400 million in cash.

In summary, the selloff has left AHM with excellent appreciation potential and an eye-popping yield of 19%. With less competition after this subprime reshuffling, the stronger lenders will emerge more powerful than ever.

DOW Sheds 500

2007-02-27T13:10:00.000-08:00

Is this finally the end of the Goldilocks Economy that all of us pessimists (aka realists) have been predicting? The Dow Jones Industrial Average fell over 500 points at one point during today's trading session. Fear poured over from the Chinese stock market which fell in excess of 8% during last night's trading. Durable good numbers came in this morning at -8% while analysts were predicting only a 3% fall. And to top it off, geopolitical concerns increased as a Taliban suicide bomber failed in his Dick Cheney assassination attempt. All this created the largest single day drop in 6 years.

Slower growth, geopolitical concerns... just as predicted.

Here's a look at how my Bear picks performed today during the stock market crash:

DOG: +3.27%
DXD: +6.10%
FHI: -0.73%
USO: -1.63%
BEARX: +2.53%
PBW: -5.78% (but up 20% in the last month!)

Not too bad. I hold 4 of these 6 in my cautious portfolio, but my equity exposure is still around 70%. While this was an ugly day for the Bulls, I don't expect this kind of volatility to be the norm. I truly believe the markets are in equilibrium with chances of a recession at 50/50 - no crash, no Bull mania. Don't panic!

***UPDATE***
It turns out that Dow Jones admitted to a "calculation error" around 2:00 EST Tuesday that artificially created a 200-point drop in the Industrial Average in a 60-second period. Thus, the DOW was not actually down as much as 540 points like it appeared. Their trading system had difficulties handling the massive sell orders that occurred in such a short span.

Even though this was an artificial drop, it caused a real panic that caused the markets to sell off even more (in my opinion). So the artificial drop became a real drop when perception became reality.

The markets did recover on Wednesday, but sank 200 more points on Thursday & Friday.

Ideas for a Bear Market

2007-01-19T16:08:00.000-08:00

As I outlined last week, I’m not too confident in equities for 2007. If you're on the same side of the fence, it may be time to reduce your equity exposure. Here are some investments that should perform well in a bear market:

Bond Funds
Stick more of your money in bonds. If the futures trading activity is any indication, there is a much higher probability of a Fed cut this year than a rate hike. When interest rates are going down, the prices of bonds rise.

My recommendation would be First Trust’s Strategic High Income Fund (NYSE: FHI). FHI is a high-yield bond fund with an astounding 9.2% dividend yield! If rates do indeed fall, you will gain both appreciation and dividends. If it stays flat, you’ll still realize a 9.2% gain while the stock market struggles. And because it’s an ETF, you have several advantages over traditional mutual funds: you can buy & sell like a stock, fund expenses are much lower, dividends are paid monthly, there are no redemption fees for investing less than 1 year, and you are not dealing with a 3rd party.

Short Funds
If you are 100% convinced that the stock market will crash in 2007, check out ProShares family of Short Funds (some call them the “Un-American” funds). These ETFs are designed to move in opposition to the major indices such as the Dow, Nasdaq, S&P500 & MidCap400.

For example, if the Dow Index falls 10% in 2007, the Short Dow30 Fund (NYSE:DOG) will gain 10%. Even more confident of a down market? ProShares also offers “Ultra” Short funds that move 2x in the opposite direction. For example, if the Dow falls 10%, your UltraShort Dow30 Fund (NYSE:DXD) will gain 20%! As you may have guessed, these funds struggled during 2006’s bull market losing 13% and 26%, respectively.

Be aware that the UltraShort Funds are VERY risky and should not be markup a large percentage of your portfolio unless you are either Nostradamus or executing a short-term trade. For example, if the US invades Iran or there is another domestic terrorist attack, the UltraShort funds could protect your holdings while the predictable selloff occurs.

A more conservative play is the Prudent Bear Fund (BEARX) which invests in a variety of securities that perform well in down markets: short sales, futures, CDs, value stocks. I’ve held this mutual fund for roughly 6 months, and despite the huge run in the stock market, it’s held up pretty well. Plus it pays a nice dividend. This is by far the most widely-held bear fund & is actively managed, unlike most ETFs.

Energy and Defense
Energy and Defense-related stocks generally perform well in bear markets. Energy stocks have been struggling the last several months as the price of oil has fallen over 35% from its peak of $78.40 last summer. There were 3 key reasons for this fall:

· Unusually warm winter weather
· Absence of geopolitical risks
· Concern whether OPEC can control rising inventories

But oil appears to have reached a bottom as it was met with huge resistance at the key $50 level this week. Bullish sentiment from veteran investor T. Boone Pickens helped oil when he was quoted in The Wall Street Journal as predicting an average price of $70 a barrel in 2007. I would recommend the US Oil Fund ETF (NYSE:USO) that follows the price of crude without having to deal with futures contracts. Otherwise, the Oil Service Holders ETF (NYSE:OIH) is a more diversified basket of energy stocks that should perform well in a bear market & as oil recovers.

Also take a look at alternative energies. At Tuesday's State of the Union Address, President Bush is set to unveil his strategy to confront global climate change and work toward energy independence. PowerShares WilderHill Clean Energy Fund (AMEX:PBW) is an ETF that includes solar power, ethanol, wind & carbon energy stocks. With Bush finally admitting our "oil addiction" and the Democrats getting serious about global warming, these stocks should see increased exposure & possibly government funding.

Defense stocks have also been struggling as geopolitical conflict has been relatively quiet (with the exception of Iraq). Any conflicts with Iran, North Korea, Afghanistan, Venezuela or Syria (just to name a few) would aid defense-related spending. Also keep in mind President Bush is approaching his final year in office. Remember what his father did during the last few months of his Presidency?

Democrat-Related Stocks
One warning with Energy & Defense-related stocks: these normally do not perform as well when Democrats hold office. With the Democrats holding majorities in both the House & Senate, more focus could go to alternative energy, stem cell & biotech companies. But this may not happen until Bush leaves office and loses veto power. If a Democrat wins the Presidency next year, avoid health care, defense, pharmaceutical & oil companies.

Bearish in 2007

2007-01-03T17:28:00.000-08:00

I’m officially bearish on the stock market. Equities plowed forward in the 2nd half of 2006 despite slowing growth, rising interest rates, inflation concerns, falling housing prices, a weakening dollar & an inverted yield curve. To me, this sounds too eerily similar to 2000.

So why the rally? 3 reasons:

1) Oil prices have been steadily falling since last summer
2) Corporate earnings continue to rise despite a slowing economy
3) Most investors believe the Fed will cut interest rates in 2007

The 3rd point was the most important (and most intriguing). Every time a bearish set of economic data was released in late 2006, the stock market shrugged it off since it heightened expectations of a Fed rate cut in 2007 (which stimulates growth). On the other hand, when positive data was released, the market still rallied. Thus, the stock market was going to rally no matter what the news!!!

This year should be different due to (a dirty word for investors) STAGFLATION. Yesterday’s Fed minutes indicated the presence of this double whammy: slowing growth AND rising inflation. These 2 phenomena rarely work in opposition. What this means is that the economy is slowing, but the Fed is unlikely to cut rates as long as inflation is an issue. This is very bad for the stock market and, to a lesser extent, the bond market.

The inverted yield curve (where short-term rates are higher than long-term rates) is also still an issue. In 1996, authors Estrella and Mishkin released a famous Fed study that developed a probability table about how likely a recession would be 4 quarters later, given a particular level of the yield curve spread. Their study accurately predicted the stock market crash in 2001 when the yield curve was inverted one year earlier.

The last few months, the spread between the 3-month & 10-year bonds has been -0.40% indicating a ~40% chance of a recession.

Even barring a full-fledged bear market, it's notable that the Dow has now gone over 1000 trading days without even a 10% correction. The current advance is among the 3 longest uncorrected advances on record. The table below indicates all prior instances where the Dow advanced more than 600 trading days without a 10% correction, along with the price/peak earnings ratio of the S&P 500 and the 10-year Treasury bond yield at the market high, and the extent of the ensuing decline.

This rally cannot ignore all these deteriorating economic conditions forever! If you think the stock market will keep plugging along, you’re certainly not alone. But several of the current bearish economic indicators must disappear for this to happen.

In a few days, I’ll share my “Bearish” stock & bond picks for 2007 that should perform well in a struggling environment (if you agree with my predictions!)

$0 Commissions at Bank of America

2006-11-28T16:35:00.000-08:00

For those of you who invest online, this is great news. For those of you who do not, maybe you should start!

Bank of America, the 2nd largest US Bank, announced last week that it will allow investors to make up to 30 free online equity trades per month if they deposit at least $25,000.

Will paying for online trades be a thing of the past? Due to industry consolidation the last few years, commission charges at Ameritrade, Scottrade, Charles Schwab & E*Trade have been gradually coming down. But Bank of America's curveball could run the smaller pureplay trading companies out of business.

After the BofA news, competing online discounters fell more than 10%. But this could be just the beginning of an industry-wide slump.

Bank of America is so gigantic in size ($250 Billion) and diversified across many channels of business that it can afford not to charge these commissions. But so far, all competitors have indicated they will not be matching the $0 trading fees. Will this last long? Probably not. The larger competitors such as Schwab & E*Trade will have to follow suit in order to keep existing customers.

The smaller pureplay trading companies, on the otherhand, may struggle to survive. For them, the trading fee is their primary source of revenue. Since they cannot afford to match this move, I believe the industry consolidation will continue. Ameritrade & Scottrade will most likely be gobbled up by these more diversified banking companies.

I know I will be looking to switch! Every year I probably pay around at least $500 in commission charges on my Ameritrade account. This of course eats away at one's annual return. Here's where you sign up.

The Odd Couple: Alienware & the Phantom

2006-10-27T16:10:00.000-07:00

Where would this blog be without Infinium Labs? The soap opera just won't die. On Monday, Phantom Entertainment (aka Infinium Labs, the company that never brought you the Phantom console) announced that Alienware has ordered the Phantom Lapboard for its PC gear product line & Media Center PCs.

The Phantom Lapboard is a wireless keyboard & laser mouse combo that enables users to work or play games up to 30 feet away from your system. Check out a quick demo from this month's DigitalLife conference:

This is (shockingly) good news for 2 reasons. First off, it appeared the November launch was in jeopardy. In an interview last week, CEO Greg Koler indicated that the Lapboards had not yet been manufactured. Second and most important, this is the first time in 2 years that Phantom Entertainment has partnered with a legitimate, well-respected company. Alienware is one of the most popular gaming manufacturers in the business; so popular, in fact, that it was bought out by Dell Computers earlier this year in a deal exceeding $1 billion. Alienware moves product, and including the Lapboard with its gaming machines means plenty of potential revenue for Phantom Entertainment.

From an investing point of view, this may be an excellent risk/reward play with PHEI's stock down 90% (not a mistype) for the year. The stock is priced with the expectation that Phantom Entertainment will not survive into 2007 (much less ever launch a product). If the Lapboard hits the shelves in the coming weeks, $.02 should be an easy target.

Although this is appears to be great news for Phantom Entertainment, as always we'll believe it when we see it! With no funding, we're not exactly sure how they will come up with the funds to build the Lapboards. Preorders are being taken on Phantom.net, but credit cards are not being charged until the product is delivered. Hopefully PHEI is following Alienware's original business model of "Pay first, build later".

I've contacted Phantom Entertainment's PR department at pr@phantom.net with these concerns and will post their response if one is ever received. Cross your fingers!

Game Over

2006-10-13T19:31:00.000-07:00

He did it. As expected, President Bush today sign the dotted line banning online gambling. What am I supposed to do now? Read a book? Leave the apartment? Get real...

PartyPoker has already stopped taking bets from American players (read the official press release here)! It allows you to login to the site, but does not let you enter any cash games. You are able to take out the cash in your account only if it exceeds $100, but only in the form of a check.

PokerStars announced today they would continue taking U.S. bets saying the U.S. gaming ban does not cover poker. In addition, I received emails from UltimateBet, FullTilt & Bodog indicating they were "Business As Usual".

PartyPoker's withdrawal is surprising considering the hurdles the ban must still pass. The ban clearly violates U.S. agreements with the WTO. Also, the government has 270 days to write regulations and start enforcement. U.S. banks and other credit card issuers can be restricted easily. But third parties outside U.S. jurisdiction — notably a company called NETeller — take electronic transfers from banks and pass them to gambling sites. How do you stop them?

I have a feeling this story is not over just yet. Voice your outrage & send a letter to your local representative by clicking here. Or sign the online petition against the ban.

Congress Passes Bill Banning Online Gambling

2006-10-03T16:02:00.000-07:00

$8 billion: The amount wiped off the value of online gambling shares on Monday after the U.S. Congress passed legislation to ban Internet gaming.

Not since the cancellation of Seinfeld have I cried so much over a news story.

I heard "the news" last night after returning home from a poker-plagued weekend in Denver. There, I was surrounded by a bunch of poker fanatics, even a few professionals. After talking poker for 3 straight days & taking 2nd place in a tournament with these studs, I was finally getting the poker itch back - this after playing virtually every single day the last 4 years before burning out this summer. But this time I was ready to up-the-stakes with my newfound enthusiasm.

Then the bombshell...

Congress yesterday passed a law banning the use of credit cards, checks and electronic fund transfers for Internet gaming basically making it impossible for American citizens to gamble online. We’re not just talking poker, but all forms of internet gambling excluding horse racing. President Bush is expected to sign the Unlawful Internet Gambling Enforcement Act in a few weeks.

I discussed the hypocrisy when the bill was originally proposed in the House back in July. But not one single person, including myself, took the bill seriously! Thus, the surprise passage threw the online gambling industry into a tailspin Monday. Shares of publicly traded companies PartyGaming, Sportingbet and 888 Holdings tumbled in heavy trading on the London Stock Exchange, wiping out nearly $8 billion in market value. The companies immediately announced they would stop taking bets from the millions of active U.S. customers as soon as Bush signs the proposed law.

This news hurts a lot of people: investors saw 50% of their investment sliced in one day, professional online gamblers saw their career ripped away, and the online gaming companies saw the majority of their players banned. Is this fair?

It reminds me of the city-wide smoking ban in my hometown of Madison, Wisconsin. Many of the affected bars & restaurants never recovered after the ban took effect. Should they have seen this coming? The government is essentially telling us what we can & cannot do in our private time. Alcohol good, smoking bad. Lotteries & horse racing good, poker & sports gambling bad.

Don’t panic yet. Many poker players are already preparing for ways to skirt around the law. Setting up offshore bank accounts may be a way to continue gambling online through these foreign websites. The gaming sites themselves are also going to offer gold & silver as an alternative to paying out in cash…

Remember how the music industry reacted too slowly to the mp3 revolution? If they would have embraced the technology instead of resisting it, both record labels & artists would be in much better shape today. In this instance, if the government would have learned to tax & regulate online gambling, both gamblers and the government would be happy.

(To sign an online petition against this ban, click here)

Gentlemen, Stop Your Engines

2006-09-21T15:41:00.000-07:00

CNN just released a piece titled "11 Big Ideas That Will Change Everything." Most inventions were internet-based and didn't seem that important. Then I read an article on a very secretive company called EEStor that is manufacturing a car engine battery that is aiming to replace combustion engines.

The introduction made me quite skeptical since electric cars have been thrown to the wayside due to lack of power/endurance and recharging time. But EEStor is different. Instead of trying to summarize, I've attached the entire article below.

EEStor's new automotive power source could eliminate the need for the combustion engine - and for oil.

By Erick Schonfeld and Jeanette Borzo, Business 2.0

The Innovation: A ceramic power source for electric cars that could blow away the combustion engine

The Disrupted: Oil companies and carmakers that don't climb aboard

Forget hybrids and hydrogen-powered vehicles. EEStor, a stealth company in Cedar Park, Texas, is working on an "energy storage" device that could finally give the internal combustion engine a run for its money -- and begin saving us from our oil addiction. "To call it a battery discredits it," says Ian Clifford, the CEO of Toronto-based electric car company Feel Good Cars, which plans to incorporate EEStor's technology in vehicles by 2008.

EEStor's device is not technically a battery because no chemicals are involved. In fact, it contains no hazardous materials whatsoever. Yet it acts like a battery in that it stores electricity. If it works as it's supposed to, it will charge up in five minutes and provide enough energy to drive 500 miles on about $9 worth of electricity. At today's gas prices, covering that distance can cost $60 or more; the EEStor device would power a car for the equivalent of about 45 cents a gallon.

And we mean power a car. "A four-passenger sedan will drive like a Ferrari," Clifford predicts. In contrast, his first electric car, the Zenn, which debuted in August and is powered by a more conventional battery, can't go much faster than a moped and takes hours to charge.

The cost of the engine itself depends on how much energy it can store; an EEStor-powered engine with a range roughly equivalent to that of a gasoline-powered car would cost about $5,200. That's a slight premium over the cost of the gas engine and the other parts the device would replace -- the gas tank, exhaust system, and drivetrain. But getting rid of the need to buy gas should more than make up for the extra cost of an EEStor-powered car.

EEStor is tight-lipped about its device and how it manages to pack such a punch. According to a patent issued in April, the device is made of a ceramic powder coated with aluminum oxide and glass. A bank of these ceramic batteries could be used at "electrical energy stations" where people on the road could charge up.

EEStor is backed by VC firm Kleiner Perkins Caufield & Byers, and the company's founders are engineers Richard Weir and Carl Nelson. CEO Weir, a former IBM-er, won't comment, but his son, Tom, an EEStor VP, acknowledges, "That is pretty much why we are here today, to compete with the internal combustion engine." He also hints that his engine technology is not just for the small passenger vehicles that Clifford is aiming at, but could easily replace the 300-horsepower brutes in today's SUVs. That would make it appealing to automakers like GM (Charts) and Ford (Charts), who are seeing sales of their gas-guzzling SUVs and pickup trucks begin to tank because of exorbitant fuel prices.

Amazon Taking On Netflix

2006-09-08T16:30:00.000-07:00

The "Unbox"

Amazon (AMZN) officially launched its much-anticipated movie download service today, directly competing with Netflix (NFLX) and other movie services. Dubbed "Amazon Unbox", the online store will sell movies from $7.99 to $14.99 to be downloaded directly to your computer. In addition, Amazon will also sell television shows for $1.99 per episode and rent movies for $3.99.

The advantages are obvious. With a high-speed internet connection, you can download movies in a fairly short amount of time instead of waiting a few days for your movie to arrive via snail mail, as is the case with Netflix. In fact, with progressive downloading, viewers can start watching the video just a few minutes after the download begins (like the buffered videos on YouTube).

These downloaded movies are forever yours. But due to copyright restrictions, you cannot yet burn these movies onto DVD/CD (although I'm sure the geeks are already preparing work-arounds).

The Netflix Advantage

Google & Apple are expected to launch similar services in the next couple months. Should Netflix be worried? Not yet.

There's one glaring concern: who wants to watch movies on a computer? The reason that sites like YouTube have become so popular is because the streams are entertainingly short, not 2 hours long. Although computer screens are getting progressively bigger, they still cannot compete with the larger television screens (especially HDTVs).

High-speed internet connections will also be a huge hurdle. For many, Netflix is an cheap alternative to high-priced cable. These cost-conscious consumers most likely do not have expensive high-speed internet in the first place! With most movies approaching 1 gigabyte in size, average connections will take hours, if not days, to download an entire movie (assuming there are no interruptions!).

The $3.99 price tag for movie rentals is also inferior to comparable Netflix plans. I currently pay $12.99/month for the unlimited 2 DVDs at-a-time plan. This normally equates to 10 movies rentals per month, or roughly $1.29 a movie. Is it really worth an extra $2.70 per movie to download from Amazon?

In the past year, Netflix has been displaying very high customer loyalty with low churn rates. With the popular “Friends” network and an average movie queue over 50, it will be tough for Amazon to steal away customers from Netflix.

If Walmart & Blockbuster failed to take on Netflix, why will it be any different for Amazon?

Phantom Entertainment Launches Online Store

2006-08-15T09:43:00.000-07:00

Lapboard Selling for $129.95 – Verdict: Not For Serious Gamers

The Phantom is here! No not the console, but a keyboard. Phantom Entertainment (OTC:PHEI), formerly known as Infinium Labs, launched its new website and online store to support the marketing and sales of the Phantom Lapboard, a wireless gaming keyboard.

Phantom.net is already taking preorders for the Lapboard despite the fact that the company has yet to secure funding to manufacture the keyboards. That’s right, the Lapboard you just ordered does not yet exist! Phantom Entertainment also delayed the launch of their gaming keyboard until November. These postponements may continue until funding is secured.

To make matters worse, Phantom Entertainment seems to have missed the mark on pricing their gaming keyboard. At a posh $129.95, the Lapboard will by far be the most expensive gaming keyboard out on the market. In contrast, the Saitek Eclipse, Ideazon ZBoard and Wolfking are all selling for around $50. The top-selling Logitech G15 is selling for just $57 on Amazon.com.

The Lapboard is wireless, but otherwise pales in comparison to the other gaming keyboards already on the market. The Lapboard does not yet have any macros, a must for hard-core gamers. The keys are not backlit for playing in the dark. And most surprisingly, there is no LCD screen for keeping track of in-game stats and other pertinent information.

The obvious question becomes, why the $129.95 price tag? Without the must-have gaming features, the Lapboard acts more like a regular wireless keyboard for casual surfers. We'd pass.

The market agrees. Despite the supposed launch looming in a couple months, the stock has yet to break the $.02 mark. With another 600,000,000 diluted shares authorized to sell at the last shareholder meeting, we’d stay away from this company until significant funding is secured. Until then, it should float back to subpenny territory.

August's Props Betting

2006-08-07T11:59:00.000-07:00

Time for some new Props betting!

April's picks went 5 for 6 netting $254 if you laid down a Ben Franklin on each one: Whitney Houston didn't get arrested, the iPod Shuffle is still here, the Fed raised rates by 0.25% & the PSP2 has yet to be released. The only pick that went awry was Ace Young not winning American Idol, but that was a looong shot at 40/1. Although the "male" bet cashed in after my boy Taylor Hicks won.

I guess I need to watch more TV! Online sportsbooks are overflowing with television props bets. Unfortunately, I don't watch Hell's Kitchen, The Next Top Model, Last Comic Standing, So You Think You Can Dance, etc.

Doesn't anyone watch HBO anymore? Why can't we bet on events like:

-What ethnic group will Larry David offend in the first 30 seconds of Season 6 of Curb Your Enthusiasm?
-How many "motherf*cking cocksuckers" will be uttered in Deadwood episode 30?
-How many episodes before Entourage's Johnny Drama actually gets a part in a movie?

I'd be rich. Anyways, here's the picks:

Will Communist Cuban President Fidel Castro reassume control of Cuba by October 31st, 2006?

Yes -160
No +120

Send your "Get Well Soon" cards to our buddy Fidel! Bet yes. Bodog hasn't pulled this one yet despite Cuba's VP stating he expects Castro to be back in office "within weeks." This bet has 7 weeks until it expires, plenty of time for the Commie to recover. The "fine print" is even more favorable for the "Yes" bets: If Fidel Castro passes away before October 31st, 2006, all wagers will be graded as No Action. (I'm not Communist, I swear)

Odds to win the NFL 2007 Super Bowl

Arizona Cardinals 25/1
Atlanta Falcons 30/1
Baltimore Ravens 20/1
Buffalo Bills 100/1
Carolina Panthers 12/1
Chicago Bears 17/1
Cincinnati Bengals 20/1
Cleveland Browns 70/1
Dallas Cowboys 8/1
Denver Broncos 12/1
Detroit Lions 45/1
Green Bay Packers 40/1
Houston Texans 105/1
Indianapolis Colts 6/1
Jacksonville Jaguars 30/1
Kansas City Chiefs 18/1
Miami Dolphins 18/1
Minnesota Vikings 33/1
New England Patriots 8/1
New Orleans Saints 80/1
New York Giants 16/1
New York Jets 90/1
Oakland Raiders 80/1
Philadelphia Eagles 20/1
Pittsburgh Steelers 10/1
San Diego Chargers 18/1
San Francisco 49ers 150/1
Seattle Seahawks 11/1
St.Louis Rams 65/1
Tampa Bay Buccaneers 30/1
Tennessee Titans 105/1
Washington Redskins 15/1

Stay away from any AFC team in Super Bowl future bets. They are by far the superior conference once again. Thus, it will be difficult for either the Patriots, Steelers, Colts, Chargers, Dolphins, Bengals, or Broncos to make it to the Super Bowl.

For a better value, try the weaker NFC conference. The clear favorites are the Seahawks, Cowboys & Panthers. This year's sexy pick is the Cowboys with the acquisition of Terrell Owens. But stay away! They appear to be the most overrated team of all at 8/1. Do people forget how awful their defense was last year, and that Drew Bledsoe is still their quarterback?!

Take the Carolina Panthers at a modest 12/1. They may be the most balanced team in the NFL and have an excellent shot of not only making the Superbowl, but giving the AFC representative a run for their money.

Remember it's all about a good value, not who you actually think will win!

What will the FOMC decide to do with the Fed Funds rate when meeting on August 8?

Leave at 5.25% -170
Increase of .25 basis pt. +200
Increase of .50 basis pt. +500

For the first time in 2 years, futures traders believe the Fed will finally stop raising rates. While they're probably right, paying out only -170 doesn't give you enough. I'd take the +200 on another 0.25% rate hike. With probabilities on another rate hike around 35-40%, doubling your money is a great deal.

Will Microsoft's (MSFT) stock price go below $20/share in 2006?

Yes +120
No -140

No!!! While it's true that Microsoft has been struggling with Windows delays, lawsuits, and emerging competition from Google, all the downside risks appear to be already priced in the stock. MSFT current trades for ~$24. Going below $20 in 5 months would be a 20% drop. When you consider Microsoft is currently valued $250 billion as a company, that drop would equate to losing over $50 billion in market capitalization! Not gonna happen.

House OKs Bill to Ban Internet Gambling

2006-07-12T13:48:00.000-07:00

Congress voted 317-93 yesterday in favor of legislation that attempts to kill Internet gambling by cutting off the flow of money. The bill would prohibit banks and credit card companies from funneling money from American gamblers to Internet gambling sites. It also would allow law enforcement officials to work with Internet providers to block access to gambling Web sites.

Supporters of a ban say the Internet's widespread availability makes it too easy to gamble, creating betting addictions and financial problems. Critics of the ban believe that it would be wiser to regulate online gambling and collect taxes on the $12 billion industry.

Predictably, online gambling stocks didn't take the news well. Shares of PartyGaming (LSE:PRTY), which owns Party Poker, plummeted 24% on the London Stock Exchange.

Short-Sighted & Hypocritical

The bill would exempt state-run lotteries and horse racing. In other words, Congress believes there is "good gambling" vs "bad gambling". Lottery good, poker bad.

In reality, state-run lotteries have the lowest payout of any possible gambling propositions. Most only pay around 55 cents on the dollar. By comparison, online poker sites and casinos payout roughly 95 on the dollar! And they want to exempt the lottery?

Despite these terrible payouts, lotteries are by far the most popular form of gambling. Over 50 percent of adult Americans play legal lotteries in lottery states. Two-thirds of these play regularly, which means that about one-third of the adults are regular players. The poor, minority, undereducated, and middle-aged are all more likely to play.

And are current online gamblers going to stop cold turkey? Of course not. Their money will instead be shifted to brick & mortar casinos, horse tracks, lotteries and old-fashioned bookies. The gambling will continue, just not online. Maybe that's what Congress wants?

Clearly it is unfair to allow online lotteries and internet betting on horse racing to flourish while cracking down on other kinds of sports betting, casino games and card games.

Is It Time to Pick a New Hobby?

Not yet. The bill will likely never pass through the Senate. Not only is the Bill a low priority going into an election year, it's filled with smoke and mirrors. With most online gambling sites being offshore, legislation is nearly impossible. In addition, it will be nearly impossible for credit card companies to know whether or not a company is an online gambling site. Gambling web sites usually use other names to avoid detection during money transfers.

With the bill unlikely to continue its momentum, it may be a good time to pickup the online gambling stocks that saw their shares tumble yesterday for the short term (unless you’re an American citizen. We cannot own these shares since gambling is “illegal”).

Hillary the Favorite

2006-07-06T07:11:00.000-07:00

For Sportsbooks, it's never too early to take our money.

Bodog has just released the early odds on the 2008 Democratic Presidential nominee. Who’s the overwhelming favorite? Hillary Clinton of course; not surprising considering she is the only prominent Democrat to provide the slightest hint of running up to this point (and the media pops the question every chance they get).

No odds have been released on the GOP side.

Who will be the Democratic Presidential nominee in 2008?

Sen. Hillary Clinton 5/6

Former Vice President Al Gore 3/1

Former Sen. John Edwards 19/5
Sen. John Kerry 5/1
Gov. Bill Richardson 8/1
Former Gov. Mark Warner 10/1
Sen. Russ Feingold 10/1
Sen. Joseph Biden 13/1

Sen. Evan Bayh 14/1
Sen. Barack Obama 15/1
Sen. Joe Lieberman 15/1
Gov. Tom Vilsack 22/1

General Wesley Clark 33/1
Sen. Christopher Dodd 35/1
Former Sen. Mike Gravel 40/1

Sen. Barbara Boxer 45/1
Former Sen. Tom Daschle 45/1

Rep. Dennis Kucinich 50/1

Gov. Phil Bredesen 50/1
Gov. Brian Schweitzer 55/1
Sen. Blanche Lincoln 60/1
Gov. Joe Manchin 60/1
Gov. Mike Easley 65/1
Reverend Al Sharpton 70/1

They Don’t Make Trees at BP

2006-06-29T07:32:00.000-07:00

BP has pulled off one of the greatest marketing campaigns in history. Over the last decade, British Petroleum has transformed from an antiquated oil and gas company into an energy powerhouse through several successful acquisitions while “embracing the green movement years before it was cool in the executive suite” according to its CEO Lord Browne.

Recall all the Exxon boycotts during the past year? BP was thought to be the environmentally-friendly alternative to purchase our gasoline.

But it’s becoming apparent that “embracing the green movement” simply involved placing cheery ads about BP's environmental awareness across the nation’s newspapers, while replacing the old BP gas station signs with happier bright signs including green flowery buds implying environmental harmony.

Otherwise, BP’s gas stations and drilling practices appear to operate in the exact same fashion as before (to the detriment of the environment of course).

Greens were so in love with BP’s effective marketing campaign and sunny new gas station signs that “Vanity Fair” featured CEO Lord Browne in its environmental issue alongside fellow greens Al Gore and Julia Roberts.

But the real man behind the curtain is about to be exposed. BP has recently come under heavy pressure for illegal price manipulation and several damaging accidents at its plants.

The Reality

This week, the Commodity Futures Trading Commission and the Justice Department accused BP traders of secretly trying to corner part of the US propane market to “Enron-type proportions.” The CFTC says senior BP management provided its "advice and consent" for an operation that purposely drove up the energy costs of millions of Americans from 2003-2004. A former BP trader has admitted to participating in the alleged conspiracy, and several confiscated audiotapes have backed this claim.

On top of that, BP has been in hot water over a series of refinery accidents and explosions, and its safety record and practices are under investigation.

Not good timing on BP’s part. These illegal activities come at a time when increasing gasoline prices have become a burning political issue this election year. And these concerns are not likely to go away. Just last month, Steven Hawking warned that our days on Earth are numbered, and suggested moving to the moon, Mars and other neighboring stars in the next 10 to 20 years!

It’s amazing what an effective (and deceitful) marketing campaign can cover up.

Too Busy To Write...

2006-06-22T12:11:00.000-07:00

Is Short Selling Un-American?

2006-06-15T14:39:00.000-07:00

I've been bearish on the US stock market for a few months now. Even after the latest 10% slice in the NASDAQ index, I still feel nervous about the near-term prospects of the market as a hole. Interest rates continue to rise, oil prices are at record highs, political turmoil is not going away, budget deficits continue to inflate, and the US trade deficits break records with every passing quarter. But worst of all, in my opinion, is the inevitable housing crash. Keep in mind that housing construction & related industries employ nearly 10% of workers in this country!

Is anything going right?

All this negativity led me to a few interesting "Bear Funds". These mutual funds perform well as stocks decline. The most interesting appears to be the Leuthold Grizzly Short Fund. It's the only current mutual fund that has short positions in 100% of its holdings. As you might imagine, the fund has not performed very well the last few years since the market has recovered from the internet bubble of 2001. But this could be the perfect hedge against a declining stock market for the next couple years, or in any market for that matter.

The largest bearish fund is the Prudent Bear Fund. Similar to the Grizzly Fund, it also engages in some short selling, but not exclusively. Prudent also holds futures & options contracts to profit from market declines. These activities have led to positive gains even during the last few years of the bull market.

But short selling is not as accepted of a practice as it used to be. What was already a difficult and sometimes gut-wrenching strategy has only gotten harder in recent years. Nowadays, more of the companies that short sellers target are fighting back with lawsuits. They also mount sophisticated public relations campaigns against shorts.

And if that weren't enough, there's a new crop of newsletters designed to "squeeze" short sellers. In a short squeeze, investors aim to buy so much stock that the supply used for borrowing dries up and the broker recalls shares already lent out. To return stock, short sellers have to buy them back, forcing the price up. As the stock rises, it can spur other shorts to have to cover their positions, fueling further gains.

Is this criticism warranted? Not at all. It may seem Un-American to profit from a stock's decline, but short sellers help keep valuations of stocks accurate and ensure that capital is allocated more efficiently to the most upstanding companies. There's usually a reason why a company is being heavy shorted: because short sellers see problems on the horizon that the company's investors do not. Enron was heavy shorted before it began its implosion.

Overstock.com (OSTK), one of the companies that is suing its shorting counterparts, has been struggling to keep up with its lofty projections, yet continues to blame the short sellers for its stock's decline.

But until this bad stigma passes, it may be a little more risky to invest in these Bear Funds.

The Death of Infinium Labs

2006-05-24T14:57:00.000-07:00

-$5 million funding deal cancelled
-Founder charged with securities fraud by the SEC
-Authorized shares for sale nearing zero

The coffin is being lowered into the grave. After burning through over $60 million in 2 years with nothing to show for it, the Infinium Labs soap opera finally has come to an end.

Last week, Infinium Labs founder Timothy Roberts was officially charged with securities fraud by the SEC for an illegal fax scam back in Dec 2004. Roberts, while the CEO of Infinium Labs, hired stock promoter Michael Pickens to send mass “pump-n-dump” faxes. As the stock soared over 500% in a matter of days, Roberts dumped his holdings while profiting over $400,000.

But that wasn’t the bad news.

Yesterday, Infinium Labs withdrew their Form SB-2 registration statement. The SB-2 is an optional form for the registration of securities to be sold to the public by small business issuers. In order to initiate their $5 million funding deal from Golden Gate investors, the SB-2 needs to be approved by the SEC. But by withdrawing, the funding deal is cancelled.

Infinium Labs needed these funds to launch their new Lapboard product.

How did this Vaporware company even last this long? Simple. They had hundreds of millions of shares authorized to sell to the public. In other words, even though Infinium Labs has not made one penny in revenue in their 2 years as a public company, they were able to survive by selling more shares on the market (to the detriment of the shareholders, of course). All bills, salaries and R&D expenses were funded solely from stock sales.

But this pool of potential funds has finally dried up. They have issued over 540 million shares, but have less than 50 million left. With the stock trading at a penny, that equates to only $500,000 in available cash. With $13 million in liabilities & CEO Greg Koler’s salary of $250,000, the end is near.

Poker Bots: The Death of Online Poker?

2006-05-11T09:04:00.000-07:00

With online poker already showing signs of slowing down, the invasion of "Poker Bots" could forever ruin the multi-billion dollar industry. Concern is growing that these sophisticated card-playing robots are being widely used on commercial gambling sites to take advantage of us flawed homosapiens.

I have been playing online poker for over 3 years. Even in that short span of time, the skill level online has noticeably improved. For any novice player a few years back, the smaller limit games were easy money. But today with more educated players & the ability to play hundreds of hands daily, it's tougher than ever to show a consistent profit.

Thus, it was inevitable that certain players would resort to other (unethical?) means of gaining advantages over their opponents.

Enter the poker bots. The first publicly offered poker bot software, WinHoldEm.net, was introduced back in 2004 by Ray Bornert. In fact, it remains the most popular public program two years later. For only $25, you can purchase a bare-bones setup of their card-analysis program. For an extra $200, you can purchase the full package that is fully programmable to customize your own strategies (although it helps to be fluent in C++).

One of the biggest advantages is that bots have no fear, no shame, no emotional hurdles that humans struggle to overcome. Fatigue is also a non-issue. Set your program to run on autopilot and it wins money while you sleep. Flick on "Team mode" and you can collude with other humans running WinHoldEm at the table.

The University of Alberta’s Computer Poker Research Group has developed an artificially intelligent bot known named “Vex Bot,” capable of playing poker at the master level. Real money tests turned $400,000 into over $4 million (see chart)! Although the program is intended for "educational purposes only", some fear it may become a blueprint for programmers with more sinister motives. (side thought: if the program is indeed for educational purposes only, who pocketed the $3.6 million?)

Poker site operators have allegedly been able to defeat bots by monitoring the sites for suspicious playing patterns and scanning for commercial bots. But users have their own counter-countermeasures, like limiting their time at any one table, having the bot "chat" with humans, & using their software from a remote computer to evade detection by poker sites that scan their hard drives.

According to the WinHoldEm.net website, their software is currently untraceable by such big players as Full Tilt, Pacific Poker, Ultimate Bet & Poker Stars. Party Poker & Paradise Poker have work-arounds that you can employ to remain undetected.

But be careful! If you’re caught using poker bot software by a site, they will close your account without giving you access to your available funds.

Whether these programs actually work over the long-term is up to debate. But the fear itself over the presence of these robots could severely harm the booming popularity of online poker.

Props Betting is not all Fun-n-Games

2006-04-10T10:25:00.000-07:00

Popularity in non-conventional Props Betting has exploded the last couple years. Props bets historically were additional, more exotic betting options on major sporting events. But lately, we've seen them gain popularity in the non-sports arena. For instance, you can now make money on whether Britney Spears will bear a baby boy or girl. Or even, what fruit will Gwyneth Paltrow name her next baby?

(If you bet the house on these types of props, please visit www.gamblingaddiction.com)

It’s no surprise that Sportsbooks make a mint on these bets. Because they are less liquid and less scientific in nature than conventional bets, the house requires a larger margin of safety. The majority of the participants in props betting are leisure gamblers. Thus, Sportsbooks use these bets as a sort of “gateway drug” to lure in the occasional gambler to more conventional/high-stakes betting. (This year: $5 on Britney having triplets. Next year: $10,000 on the Final 4.)

So why would anyone waste their money on these bets? The main reason is for fun; the average prop bet is much less than conventional bets. But as explained earlier, because these bets are less scientific in nature, you can find some amazing deals with the proper research. This is nearly impossible in conventional betting with millions of professional gamblers creating the accurate line (Efficient-Market theory). Would you rather take on the professionals or Grandma Ethel?

Browsing through Bodog’s Sportsbook, I found some potential money-makers:

Will Sony release the PSP2 by September 30th, 2006? (Playstation Portable 2)
Yes +105
No -145

Last month, Sony announced it was delaying the release of the Playstation 3 until November of this year. It appears all of its manufacturing resources will be concentrating solely on the PS3 to make this happen. The original PSP continues to sell & just received a few upgrades to continue this popularity. Nowhere will you find any prototypes of the rumored “PSP2”. With only 6 months left before the bet’s deadline, an announcement could happen, but an all-out launch appears impossible. At only -145, it’s easy money. Bet the max.

Will Whitney Houston be charged with a drug related offense by May 31st, 2006?
Yes +125
No -165

These are the “media-hype bets” that I love. The National Inquirer a couple weeks back released a supposed picture of Whitney’s “drug lair”. Thus, rumors are flying that Houston will be arrested in the near future. First check the source. This story originated from not from a respectable news source, but the National Inquirer!

Now I’m not saying Whitney Houston isn’t hitting the crack pipe. But an actual arrest by May 31st seems highly unlikely (~5% probability). Yet the “No” is priced only at -165! This type of hype-bet always garners dumb-money on the “Yes” after the rumors are published in some gossip column. But the actual event rarely occurs. I especially like the short-window deadline on this one. Bet big!

Who will be the winner of American Idol?
Ace Young 40/1
Bucky Covington 65/1
Chris Daughtry 5/7
Elliot Yamin 20/1
Katharine McPhee 2/1
Kellie Pickler 12/1
Paris Bennett 15/1
Taylor Hicks 11/10

The title of this bet is deceiving. When considering these bets, you shouldn’t ask yourself “Who will win?” What you want to figure out is who is the best value! I’m fairly certain the Final 2 will be Katharine & Chris. But their odds don’t give a good enough payout. Also don’t bet with your heart. I love Taylor Hicks--and if I’d ever hit rock bottom in my life & actually dial the 1800 number to vote--he’d be my man. But he ain’t winning.

Best deal? Even though I hate the guy, Ace Young at 40/1 has fantastic odds. After a few struggling weeks, look for Ace to lose the cheese & try to appeal to an audience other than hormone-crazed 14-year-old girls.

What about Bucky at 65/1? Sorry Bucky, but you’d have to give me 20000/1 before I’d take an interest. Unless American Idol plays only in Arkansas, he ain’t winning.

Good value is the key to futures bets!

Will the winner of American Idol be Male or Female?
Female -110
Male -130

Staying with the American Idol theme, here’s a simple 2-option bet. Katharine is the Female’s only chance for a winner. The men, on-the-otherhand, have Taylor, Chris, Ace & (maybe) Elliot who could all win (Sorry Bucky Boy). -130 looks pretty solid here.

Will Apple discontinue the iPod Shuffle by July 4, 2006?
No -120
Yes -120

I was quite surprised when I originally saw this bet. After its initial rocky debut, the iPod Shuffle has caught on among those who could not afford the $400 price tag of conventional iPods, and for those who needed a less bulky alternative when exercising. After doing some research, I saw no indication Apple is even considering discontinuing the Shuffle until after this year’s Holiday season. The deadline for this bet is only July 4th. Keeping in mind that the iPod shuffle sells very well during the summer months, the “No” looks like a sure bet.

What will the FOMC decide to do with the Fed Funds rate when meeting on May 10?
Leave at 4.75% +120
Increase of .25 basis pt. -155
Increase of .50 basis pt. +170

Who’s actually betting on anything other than the 2nd option? The FOMC has raised rates by 0.25% for a dozen consecutive times since 2004 & indicated in its “Fed Minutes” that it sees a need to continue this measured pace to keep inflation in line. All other economic indicators also point to a continued climb. Interest-rate futures show traders see the Fed lifting its benchmark a quarter-percentage point to 5% at its next meeting with 85% certainty. Chances are 46% of another increase to 5.25% in June (looking to the Futures traders is historically accurate).

The 2nd option has roughly a 85% chance of occurring. At only -155, you’re getting huge value. As I did before the last FOMC meeting, bet the house!

The Bird Flu: Scare Tactics or the Real Deal? (Pt 2)

2006-03-07T12:36:00.000-08:00

In Part 1, we discussed the potential bird flu pandemic that is already causing panic in parts of Asia & Europe. What about the economic implications?

Since worldwide vaccination would be impossible to achieve in enough time to contain the spread of the virus, everything would shut down & residents would be confined to their homes for months. During a nationwide quarantine, the economy would be brought to a standstill.

It doesn't take a genius to predict how the financial markets will react during this time. Remember September 11th? A Stage 6 pandemic would be even worse. Unlike the terrorist attacks in 2001, this disaster would be worldwide with higher death tolls, more fear & longer recovery time.

The stock market would plummet.

Not surprisingly, people are already profiting from this anticipated dooms-day scenario. A quick search of "Bird Flu" on Google will show you how many scam artists are already trying to capitalize on the fear of the public. You can purchase protective masks, diagnostic kits, and even non-FDA approved drugs for treatment.

To hedge your bets during this potential disaster, you should seriously consider the following companies. The list includes companies with late-stage H5N1 vaccines, companies with considerable federal funding, and more indirect plays such as beef producers and FDA-approved test kit manufacturers. Not only will they perform well after the virus reaches the United States, but also in anticipation of that day.

Please note: I have omitted the obvious choices such as Roche (maker of Tamiflu), GlaxoSmithKline, Novartis and Sanofi-Aventis. While all 4 are already in the process of producing vaccines, their size (>$100 billion) will largely inhibit any positive effect. In addition, I have omitted most companies with early-stage H5N1 vaccinations. While there are many drug companies in the process of creating a potential vaccine, anyone who has ever invested in the Pharmaceutical Industry will realize how much of a crap shoot these drugs can be in the preliminary stages.

Chiron (CHIR)
Price: $45.18
Market Cap: $9 billion
The latest beneficiary of taxpayer generosity is Chiron, which was just awarded a $62.5 million contract by the U.S. Department of Health & Human Services. The goal is to develop a new vaccine and have 20 million doses on hand to prevent people from getting infected with H5N1. The bird flu vaccine contract represents a significant influx of money to Chiron, and the government says it expects the company to develop and deliver the vaccine by early this year.

AVI Biopharma (AVII)
Price: $6.97
Market Cap: $307 million
Three independent laboratories have confirmed that its new drug, Neugene, appears effective in fighting H5N1 flu. The company now plans to file with the Food and Drug Administration to begin human clinical trials.

Quidel Corp. (QDEL)
Price: $11.19
Market Cap: $373 million
Shares of Quidel skyrocketed in late December after the medical test maker said its QuickVue flu test not only showed high rates of accuracy in a recent study but can also detect the virus that causes avian flu. The company said an Australian study of its 10-minute QuickVue Influenza A+B test over the continent's summer flu season accurately diagnosed the presence of Type A flu virus 96 percent of the time and the absence of flu virus 97 percent of the time. In an earlier study conducted in Hong Kong and Japan, the test was shown to be able to detect the H5N1 virus.

Premium Standard Farms Inc. (PORK)
Price: $15.80
Market Cap: $500 million
Simple: As demand for chicken plummets after United States first confirmed case (yet to happen as of this publication date), Pork demand will explode. Premium Standard was poised for a turnaround regardless of the bird flu.

Cal-Maine Foods Inc. (CALM)
Price: $6.26
Market Cap: $133 million
It appears the H5N1 flu vaccines will be produced the conventional way using egg embryos. Once the specific strain is found after human-to-human mutation, governments won't be able to make vaccines quick enough. Egg producers such as Cal-Maine will be in high demand.

BioCryst Pharmaceuticals Inc. (BCRX)
Price: $19.25
Market Cap: $413 million
In January, BCRX said the FDA had granted "fast track" designation for Peramivir injection in the treatment of influenza infections, including highly virulent, life-threatening strains of influenza. In December, the company received FDA approval to begin human clinical trials using injectable Peramivir.

Sinovac Biotech Ltd. (SVA)
Price: $3.94
Market Cap: $148 million
The Amex-traded Beijing company signed an agreement last December with the Chinese Center of Disease Control & Prevention to accelerate development of an avian flu vaccine. Its shares have doubled since January.

Novavax Inc. (NVAX)
Price: $5.52
Market Cap: $271 million
In late August 2005, Novavax reported that preclinical data for its treatment of another avian flu strain, known as H9N2, looked promising in protecting animals. Its shares traded for less than a dollar in August. They have more than quadrupled since.

Indirect Plays:
EBAY/Amazon/Online retailors: During a nationwide quarantine when people are required to stay indoors, the majority of shopping will be done online.

Videogame/Indoor leisure stocks: What else are you going to do indoors all day long?

Precious Metals/Bonds/Cash: Money will travel to more secure investments such as Gold, Copper, Plantium, Fixed-Rate instruments & Cash money.

The Bird Flu: Scare Tactics or the Real Deal? (Pt 1)

2006-02-22T08:56:00.000-08:00

My girlfriend, who is just 2 months away from having a Master's in Epidemiology, attended a Public Health conference this past weekend. During this luncheon, she happened to sit next to a Federal Veterinary Scientist. Their discussion eventually turned to the bird flu and the preparations the State of Wisconsin is taking to deal with this potential pandemic. The picture she painted was nothing short of catastrophic.

This Veterinary Scientist indicated that current projections stand that 50% of Wisconsin residents are expected to die if the bird flu virus mutates from its current Stage 4 to a Stage 6 Pandemic, where the virus can be spread from human-to-human. This federal official did not say that this was a worst-case scenario, but the most accurate prediction!

According to the State's plan, since a vaccination cannot be produced until this Stage 6 virus is present, only government workers would be given doses. That's because the final vaccine must match the mutating virus before mass-manufacturing begins. Since worldwide vaccination would be impossible to achieve in enough time to contain the spread of the virus, everything would shut down & residents would be confined to their homes for months. Treated government workers would then go house-to-house to distribute food/water & other necessary services.

A few recent studies do confirm what this Veterinarian indicated, but to a much lesser extent. One study released this week by the Australian-based Lowy Institute Think Tank indicated as many as 142 million people around the world could die if bird flu turns into a "worst case" influenza pandemic. Global economic losses could reach $4.4 trillion. Even projections of a mild pandemic could kill 1.4 million people and cost $330 billion.

My first reaction was one of disbelief. Would our government, who's current regime thrives on scare tactics, keep this potential disaster under raps as to not cause a mass panic (or have I been watching too many "24" episodes?) Or is this dooms-day scenario not likely to occur at all?

I always look to our wonderful mass media for answers. If there was the smallest chance that the bird flu pandemic could reach these epic proportions, the media would plaster these dooms-day scenarios across the airwaves every second of every day. At present, the bird flu is still backpage news. But with the virus quickly spreading throughout Europe & Asia, the media blitz will explode once the virus reaches the United States.

Are we underestimating the potential damage the bird flu will inflict? Don’t build a brick bunker in the backyard or buy 500 cans of Spaghettios just yet. If the bug jumps from birds to humans, there’s still no guarantee that it will be any worse than any other flu that races across the world. It may be no more harmful than the much-hyped Y2K bug that incited needless panic among investors and politicians in 1999.

Now, of course, this is no Epidemiology blog. In Part 2, we will examine the effect the bird flu will play on the markets & where to look if it does reach global-wide pandemic proportions.

Boston Scientific Overpaid for Guidant

2006-02-03T07:41:00.000-08:00

Guidant & Abbott Labs Come Away Victorious

Wall Street loves a good bidding war. Along with the drama comes the duplicate advisory fees, duplicate legal fees, duplicate financing fees, and in the end the higher share price upon which Jeff Matthews said it best, “so many other sharks in the tank can feed.”

WSJ reported last week that Boston Scientific (NYSE:BSX) examined a Guidant deal three years ago and passed, but became intrigued this time around at taking advantage of a lower Johnson & Johnson (NYSE:JNJ) bid for the company.

But did Boston Scientific overpay for Guidant?

Ask yourself who really knows more about Guidant. Johnson & Johnson – who spent $10s of millions over the past several months combing through the inner workings of Guidant – decided the price was too high and walked away from the deal… Do we trust their judgment?

J&J agreed to buy Guidant in December 2004 after spending upwards of $1 million a day evaluating the business units product-by-product. Then six months later, Guidant reported a flaw in one of its defibrillators, and soon pulled five of the devices from the very market for which J&J wanted Guidant in the first place.

Thus, J&J eventually lowered its deal price for Guidant. This “opened the door” for Boston Scientific to enter the bidding war & eventually come away the victor.

In summary, Boston Scientific passed on buying Guidant 3 years ago. Since then, Guidant’s price has tripled, their defibrillators have failed, and J&J has walked away. Boston Scientific better know something that J&J does not!

Only time will tell whether that's true for Boston Scientific's acquisition of Guidant, but it looks as though Abbott Labs (NYSE:ABT) is already coming out a winner.

Assuming no more surprises in the Boston Scientific/Guidant soap opera, Abbott will end up acquiring Guidant's vascular business for $4.1 billion. It will also buy $1.4 billion worth of BSX's stock. That immediately enhances Abbott's credibility as a future player in the stent market.

Infinium Labs Rises from the Dead

2006-01-26T09:56:00.000-08:00

Infinium Labs shocked critics on Wednesday by announcing they had secured $5 million in funding through Golden Gate Investors. CEO Greg Koler had indicated last month that their Lapboard needed $2 million for launch.

Not surprisingly, the stock rose as much as 70% before dropping back to the penny level. The subsequent drop had more to do with the predicted dilution from the deal than profit-taking.

Going forward, Infinium Labs should be a daytraders dream in 2006 as volatility should return to 2004 levels.

At only $.0185 from this publication time, investors should be rewarded for their patience as launch announcements flood the PR waves. Want a 2006 double? Infinium Labs is well worth the risk. The company is in its best financial shape since 2004, yet the stock is at a fraction of the cost. Launch of the lapboard should push this OTC penny stock to >$.10 levels. Hype alone may be worth investing in.

2006 Turnaround Stocks

2006-01-03T14:19:00.000-08:00

Pier 1 Imports (NYSE:PIR)
$8.50/share
52wk range: 8.50 - 19.50

2005 was not a good year for Pier 1, and the Home Furnishings industry in general. Same Store comps were down for the first time in several years. But it appears Pier 1’s recent problems are a speed bump rather than evidence that the business model is permanently broken. Very few retailers can operate with a high level of sales consistency for an extended period of time as Pier 1 has exemplified the last decade.

Pier 1 has Warren Buffett-type fundamentals. In fact, his Berkshire Hathaway company bought a sizeable chunk of the company late last year. After 2005’s sell-off, Pier 1 is extremely undervalued with a market cap of only $750 million on $2 billion in annual sales. They have consistently returned earnings to shareholders with a >10% ROE over the last decade & 4.5% dividend yield. With its small market cap & large amount of cash per share, Pier 1 is a rumored buyout candidate.

2006 should be a turnaround year for Pier 1. Management plans to close several unproductive locations, leading to higher sales and profits in the remaining store base. They also plan on aggressively advertising a more modern styling to the company's products. $12/share is a conservative target.

Shanda Interactive (Nasdaq:SNDA)
$15.30/share
52wk range: 14.80 - 43.28

Shanda was flying high in early 2005 before hitting several speed bumps. American shareholders found out just how risky it is operating in the Chinese gaming market with such intense competition, Chinese government regulation, and the threat of piracy. In hopes of fighting addiction, the Chinese government recently set a standard for online-game providers to limit the use of their games to three hours per session. As a result, Shanda struggled to keep up with its lofty growth expectations.

At $15/share, this may be the rare chance to invest in a highly-profitable Online Gaming company in the ever-growing Chinese market. Last year’s sell-off has left Shanda with just a 10 P/E ratio vs the 34 industry average. Shanda’s $6/share cash hoard now makes of 40% of its market cap. These conservative figures all come from a company with 48% profit margins & consistent 25% growth rate.

The Online Gaming business contributed more than 90% of their revenue in 2004. But Shanda has been focusing on expanding its products and services outside the online area. In 2005, SNDA announced that it would launch the EZ Station, a video gaming console. Pre-orders were more than 150,000 in mid-December. The EZ Mini, a handheld online gaming device, will be released later this year.

Shanda will continue to benefit from increasing personal computer and broadband penetration, as well as rising personal income levels in China. The stock should recover back to the $20-range.

Pfizer (NYSE:PFE)
$23.40/share
52wk range: 20.27 - 29.21

Patent expiration concerns hurt Pfizer investors in 2005. But a crucial victory last month ended 2005 on a high note. In December, a federal judge ruled in the company's favor concerning patents supporting its blockbuster drug, Lipitor. Pfizer's cholesterol-lowering drug is the best-selling prescription in the world & should generate upwards of $12 billion in sales in 2006.

Pfizer's existing drug portfolio is first-rate. Ten products hold dominant market positions and all generate more than $1 billion in annual sales.

To compensate for potential lower sales & patent expirations, Pfizer is pursuing aggressive cost-cutting to provide earnings growth until it can replenish its product portfolio over the next several years. In addition, Pfizer's late-stage drug pipeline has some promising candidates that could help boost sales in 2006.

Pfizer generates substantial cash flows and is investing heavily in R&D to fund new drugs. The company will be able to leverage its enormous financial and administrative resources to deliver a continuing stream of differentiated drugs.

The company boasts a credit rating of AAA and has more than $18 billion in cash and long-term investments on its balance sheet. With a 10.7 P/E versus an industry average of 21, Pfizer should return to the $30s.

Activision (Nasdaq:ATVI)
$13.50/share
52wk range: 10.50 - 18.03

Take-Two Interactive (Nasdaq:TTWO)
$17.75/share
52wk range: 16.92 - 29.60

Video game stocks struggled in 2005. The majority of publishers were unable to meet growth expectations as consumers awaited the introduction of next-generation game consoles. Microsoft’s Xbox 360 was released in November, and will be followed by new consoles from Sony & Nintendo later this year. While the transition period between consoles tends to be arduous for video game publishers, we expect the industry will resume its long-term growth once the transition is complete.

After 2005's selloff, a few video game publishers are now attractively priced heading into the next cycle of next-generation consoles. Activision and Take-Two Interactive appear to be the best bets for 2006.

Activision announced last week that disappointing sales during the holiday season would lead to revenue coming in below expectations for the remaining two quarters of fiscal 2006. The poor performance of the firm's GUN and True Crime titles, coupled with general weakness in the U.S. and European video game markets, are the primary drivers behind the sales miss. However, we believe both of these issues are short-term in nature.

2006's sales expectations are extremely conservative. With such blockbuster titles as Tony Hawk, Shrek, True Crime & Spiderman, Activision should blow away estimates in 2006 & return to a double-digit growth once the installed base of new consoles reaches a critical mass.

Take-Two Interactive is by far the most under-valued stock in the video game sector. Although there could be a longer term negative impact on the Grand Theft Auto franchise, we believe the recent selloff was overblown. In fact, the publicity could further strengthen the cult status of the Grand Theft Auto franchise. Plus Take-Two is no one-hit wonder. We believe other key releases will drive results such as Manhunt, Max Payne 2: The Fall of Max Payne, Mafia, and Red Dead Revolver.

Investors forget that Take-Two is still a relatively small, growing gaming company. But with a current PE ratio of only 15, the stock is priced as a mature company, not one that analysts expect to grow 25% annually for the next 5 years! Take-Two is cheap and poised for a near-term correction to fall more inline with its competitor's valuations:

TTWO vs Industry
Price/Earnings 15.6 vs 42.4
Price/Book 1.9 vs 6.0
Price/Cash Flow 14.4 vs 25.5
Price/Sales 1.0 vs 5.7

After all the supposed bad news this year, TTWO is still poised to earn over $1 per share in 2006 – a 100% year-over-year improvement. Plus it continues to churn out $60 million in Free Cash Flow. The balance sheet is solid with nearly $2.80 per share in cash/investments and no debt. This is a rare chance to invest in a small-cap, high-growth Gaming company that is poised for a valuation correction before the next cycle of consoles hit the market.

More picks to follow...

Best New Product of 2005 - The "Swash"

2005-12-20T15:06:00.000-08:00

The Best Seat in the House

You walk into your bathroom and sit down on your Swash-contoured and comfortably heated toilet seat. When finished, you simply press a button for a posterior or feminine wash and you are met with a warm, aerated water spray. You can dry yourself with the warm air dryer or pat-dry with a small amount of toilet paper. You leave your bathroom shower-fresh as the gentle-closing lid slowly lowers behind you.

Dave Samuel and Scott Pinizzotto, two Silicon Valley vets and co-founders of Brondell, are taking their ideas out of the boardroom and into the bathroom. The San Francisco-based startup recently launched the “Swash”, a high-tech toilet seat that provides all the sanitary benefits of a bidet. The pair is betting the luxury gizmo will blow the lid off a potentially huge, untapped market.

Introduced nearly a year ago, the Swash actually replaces your conventional toilet seat to transform a run-of-the-mill toilet into a bidet — a device that cleanses both posterior and feminine regions with a spray of warm water, relieving people from the hassles of toilet paper. The Swash also features heated seats, remote control and warm-air dryer, which eliminates the need for toilet paper.

“The toilet is a product that is used by every man, woman and child on earth, and we are going to gadgetize it and make it better,” Samuel vows.

But pampering the posterior isn't cheap. The Swash retails for $429 to $549, yet sales have risen by nearly 50 percent every three months.

Although bidets are common in Europe and parts of Asia, the high-tech toilets haven't made much of a splash in the United States. But after using bidets while on business trips in Japan, Samuel and Pinizzotto realized they may be sitting on a potential gold mine. They were sure high-tech toilet seats would be a smash in the United States, with some adjustments from Japanese models. “Proportionally, just creating more space for the large American body,” says Pinizzotto.

The Swash is already available at Home Depot, Bed Bath & Beyond, and many other home furnishing stores. As part of Brondell's agreement with Bed Bath & Beyond, a demonstration video will be placed near the product display in order to educate wary consumers. Test driving the Swash is not yet available.

Investors are taking notice. Billionaire Mark Cuban recently joined the board of directors after his $1.3 million investment. “The team has developed an innovative approach that targets a massive market which has seen little innovation in the last 250 years” said Cuban.

“We want to be No. 1,” Samuel says, “in the No. 2 business.”

Until then, Samuel and Pinizzotto may have to sit and wait.

Investing in Sin

2005-12-19T09:18:00.000-08:00

In the battle of good and evil, evil is winning—at least in the investment world.

Socially Acceptable Mutual Funds

Scanning through my portfolio last weekend, I noticed that I own shares in a number of companies that profit off the seeming misfortune of others: an online gambling company, two pharmaceutical companies, a slot-machine manufacturer, and the most hated software monopolist in the world (my first investment ever—I know, real original…).

Profiting at the expense of another made me ponder the nature of the so-called Ethical or Socially Responsible Investing (SRI).

"Ethical Investing" depends on your personal definition of "ethical." Generally, Socially Responsible mutual funds shun fairly obvious industries such as tobacco, alcohol, or gambling. Others introduce criteria by investing only in companies that are friendly to the environment, treat their employees fairly, promote diversity or pass other social screens. There are even funds designed for Catholics, conservative Christians, Mennonites, Muslims, Presbyterians and others.

These funds have exploded in popularity the last few years and have performed quite well. A quick look at SocialFunds.com illustrates the wide variety of available SRI funds that promise socially responsible investing techniques.

Are Socially Responsible Funds good investments?

First, let me introduce you to the Vice Fund (aka the Socially Irresponsible Mutual Fund). Created in 1994 by Dan Ahrens, The Vice Fund invests exclusively in those “sinful” stocks which the SRI funds purposely avoid! For those who love drinking, smoking, gambling & war-mongering, this is the fund for you!

Top 10 Fund Holdings as of 10/31/05:
4.9% - Altria Group
4.4% - British American Tobacco
3.8% - Diageo PLC
3.7% - Constellation Brands
3.6% - International Game Technology
3.5% - L-3 Communications Holdings
3.5% - Imperial Tobacco Group
3.4% - Anheuser-Busch Companies
3.0% - United Technologies Corp.
2.6% - General Dynamics Corp.

And the Vice Fund has been performing quite well—much better than the majority of Socially Responsible funds, in fact! But are these results surprising? Not in a capitalistic society that rewards unethical business practices, allows political ties, and showers citizens with mass marketing campaigns promoting “sinful” products. And the results don’t lie:

3 Year Lipper Quintile Ranking: 1
Annual Return: 19%
Lipper Percentile Ranking: Top 9%
Multi-Cap Core Category Rank: 48th out of 570 funds

So maybe investing in sin is just good investment practice (if you can sleep at night)! The Vice Fund Prospectus explains, “Although often considered politically incorrect, these and similar industries and products...will continue to experience significant capital appreciation during good and bad markets. The Advisor considers these industries to be nearly ‘recession-proof.’”

Furthermore, most Socially Responsible funds charge outlandish fees as compared to other mutual funds (perhaps they need to extend their definition of ethical). The Sierra Club Stock Fund, for example, takes back 1.84% of your assets each year to pay its expenses. That starts the Sierra Club fund off at a disadvantage to its market peers and partly explains why it has lagged the S&P500 by more than five percentage points since its inception in 2003.

Socially-Responsible Funds are just a Marketing Ploy

Are these self-described Socially-Responsible funds really more virtuous? Again, it depends on your definition of ethical. The Sierra Club fund does not hold any energy or utility companies, although it does count Amgen (NSDQ:AMGN), a pharmaceutical company that performs tests on animals, and casino operator MGM Mirage (NYSE:MGM) among its top holdings.

Forbes magazine recently ran a "Social Scorecard," which graded many of America's most admired corporations on diversity, community, human rights, and the environment. The grades ranged from A to F, and none of the 30 firms avoided earning at least one C, D, or F grade. In fact, only Johnson & Johnson (NYSE:JNJ) and Intel (NSDQ:INTC) managed to earn three A's and/or B's.

I'm not enamored by so-called ethical investing, because I think that most times it's more marketing-driven than value-driven. That's not to say that all socially responsible funds are the same. Indeed, if you want to dig deeper, the Vanguard index (with its low expense ratio) is a good place to start. But buyer beware: check every socially responsible fund's holdings before you invest. You'll want to make sure that you see eye to eye with the manager.

TTWO - Strong Buy of the Month Review

2005-12-09T10:24:00.000-08:00

Since recommending Take-Two (NSDQ:TTWO) back on Nov 1, the stock has enjoyed a 12% 30-day rise. Shares of Take-Two Interactive continue to be attractively priced heading into the coming cycle of next-generation consoles.

Infinium Labs CEO Resigns

2005-11-21T21:03:00.000-08:00

A difficult month of November got even worse for Infinium Labs (OTC:IFLB) shareholders today as CEO Kevin Bachus resigned amid rumors of his involvement in a fax scam. Instead of enjoying a holiday launch of their much-anticipated Phantom video-game console, the company now appears to be the verge of bankruptcy.

Last week started with great enthusiasm. Earlier this year, CEO Kevin Bachus indicated that Infinium's Phantom®, a cutting edge online gaming service, would launch soon after Microsoft's Xbox 360 on November 21st. But on Tuesday, Infinium delayed the filing of their quarterly 10-Q. Friday followed with an 8-K filing disclosing Kevin Bachus' resignation from all duties with Infinium Labs.

It gets worse. After today's market close, dozens of previously undisclosed insider transactions of Mr. Bachus were released to the public. Many of these insider sales occurred late last year during the infamous "pump-and-dump" fax scam that ex-CEO Timothy Roberts is currently being questioned for. The SEC requires officers and directors of public companies to file a Form 4 shortly after stock sales. Yet these insider sales, whose disclosure are essential in keeping the investors informed of the insider's actions, were never disclosed until today.

Earlier this year, we discussed in length whether the Phantom was fact or fiction. The events over this last week show that Infinium Labs' journey may be over. If these recent events were no indication, then today's failure to file the 10-Q after last week's extension shows that Infinium may be headed for bankruptcy or the pink sheets.

Blame It On Katrina

2005-11-11T13:06:00.000-08:00

"Katrina ate my earnings"

Third quarter reporting season is wrapping up with the majority of companies missing their forecasts. As the last few companies release earnings next week, only 42% have met or exceeded estimates thus far. The common excuse? Hurricane Katrina of course. Not since "El Nino" has there been a more popular scapegoat.

At last count, well over 100 companies have blamed Katrina for affecting their earnings according to Reuters Estimates. Ok, maybe I'll forgive Walmart's miss due to all the store closures... but Intel and Amazon?

There was, of course, a direct impact on many insurance, home-building and oil-related companies. But from chipmakers to Internet companies, seemingly unaffected companies are blaming their short-comings on the disaster. Many on Wall Street are showing increasing skepticism and wonder if the "Katrina get out of jail free card" is a coverup for other problems.

For instance, cosmetic firms Estée Lauder and Avon both slashed 2005 earnings forecasts in part due to Hurricane Katrina, adding that higher gas prices hurt both its representatives and customers. But both companies were struggling well before Katrina hit. Such excuses make Krispie Kreme's "Low-Carb Craze" excuse look legit.

And one of the most extreme? Folgers coffee. Last Sunday, a 77-year-old lady in Iowa found a dead baby turtle in the 2-pound package of Folgers coffee. She said a customer service representative explained that because many Folgers plants are based in New Orleans, the turtle might have ended up in the coffee as a result of Hurricane Katrina. A spokesman for Procter & Gamble (the company that owns the Folgers brand) said it's too early to say how the turtle ended up in the coffee.

Although the previous example obviously did not affect earnings (Proctor & Gamble actually exceeded estimates), it shows the broad impact of Hurricane Katrina.

Some companies may mistake the hurricane with the real factor that's squeezing the economy: the campaign by the Federal Reserve to raise short-term interest rates. It will be interesting to see if these companies' misfortunes are indeed attributable to weather or perhaps better attributable to the Fed and slowing economic growth.

Strong Buy of the Month - TTWO

2005-11-01T19:44:00.000-08:00

Take-Two Interactive (TTWO)
Current Price = $17
12 mo Target = $25

Back in July, we discussed the future of the Grand Theft Auto franchise after Take-Two’s blockbuster game was tagged with the “Adults-Only” rating. Since then, the company has been rushing to finish the revised version. On Oct 18, it released Grand Theft Auto: San Andreas Special Edition (rated M for "Mature") for Sony's PlayStation 2 -- with a couple of extras. Not those kind of extra, though.

Shares of Take-Two Interactive are now attractively priced heading into the coming cycle of next-generation consoles.

Recent Blunders
Earlier this week, Take-Two (NSDQ:TTWO) reduced its earnings expectations for the 3rd time in only 4 months. Take-Two said it had to decrease its guidance for this year and next because of issues including product delays. The company now says that it expects earnings for fiscal 2005 of between $0.53 and $0.56 per share, and sales between $1.18 billion and $1.19 billion.

The company blamed a delay in shipments of Grand Theft Auto: Liberty City Stories for Sony's PlayStation Portable device in some European territories. The game won't hit the shelves in those areas until the first quarter of fiscal 2006, rather than the fourth quarter of FY 2005.

Meanwhile, citing "expectations of a continued cautious U.S. retail environment through the holiday season, and the inherent uncertainty in forecasting the pace of manufacturer shipments and consumer adoption of new hardware platforms," Take-Two dragged down its guidance for FY 2006.

Not surprisingly, 3 analysts downgraded shares of Take-Two on Tuesday. The stock now hovers just above its 52-week low of $16.92.

Oversold and Undervalued
We believe the market has overreacted to these recent blunders. Shares of Take-Two Interactive are now attractively priced heading into the next cycle of next-generation consoles. Microsoft’s Xbox 360 is slated for a Nov 22nd release, followed by new consoles from Sony & Nintendo in 2006. Although there could be a longer term negative impact on the Grand Theft Auto franchise, we believe the recent selloff was overblown. In fact, the publicity could further strengthen the cult status of the Grand Theft Auto franchise. Plus Take-Two is no one-hit wonder. We believe other key releases will drive results such as Manhunt, Max Payne 2: The Fall of Max Payne, Mafia, and Red Dead Revolver.

Investors forget that Take-Two is still a relatively small, growing gaming company. But with a current PE ratio of only 15, the stock is priced as a mature company, not one that analysts expect to grow 25% annually for the next 5 years! Take-Two is cheap and poised for a near-term correction to fall more inline with its competitor's valuations:

TTWO vs Industry
Price/Earnings 15.6 vs 42.4
Price/Book 1.9 vs 6.0
Price/Cash Flow 14.4 vs 25.5
Price/Sales 1.0 vs 5.7

After all the supposed bad news this year, TTWO is still poised to earn over $1 per share in 2006 – a 100% year-over-year improvement. Plus it continues to churn out $60 million in Free Cash Flow. The balance sheet is solid with nearly $2.80 per share in cash/investments and no debt. This is a rare chance to invest in a small-cap, high-growth Gaming company that is poised for a valuation correction before the next cycle of consoles hit the market.

Housing Buyers Beware

2005-10-27T15:08:00.000-07:00

The stars are aligning.

Like the money managers in 2000 who either closed up shop or joined the New Economy—I'd better either jump on the real estate bandwagon, or stop barking at the tires. Predictably, I'll put a stake in the ground and say what so many others have been preaching for so long: the housing cycle is over.

There are worrisome signs that soaring energy prices are beginning to spill over to the rest of the economy. This last month after 3 major hurricanes, surging fuel prices pushed inflation up by the most in 25 years. 2-year Treasury yields, more sensitive to expectations for monetary policy, reached four-year highs after streaking past 4.3% this week.

Mortgage giant Freddie Mac reported today that the nationwide average for 30-year, fixed-rate mortgages rose this week to 6.15 percent, up from 6.10 percent last week and the highest level since 30-year mortgages were at 6.21 percent in late July 2004.

The housing market cannot continue dodging these natural market forces forever. Although we have witnessed tremendous appreciation during the last few years, rising inflation and soaring energy prices were not a concern as they are today. Homebuilders must now manage around unprecedented raw material price increases that will filter directly down to the consumer.

If the housing market turns south, where is the economic damage likely to be the greatest? Surprisingly, the greatest economic impact may not come where prices slide the most. Instead, the regions that see the most pain will be those where homebuilding has been a major source of new jobs. A decline in housing could accelerate job losses in the entire local economy. The most vulnerable spots according to a new analysis by BusinessWeek, include the Riverside-San Bernardino region, San Diego, Phoenix, Las Vegas, Tampa-St. Petersburg and greater Baltimore. In each of these areas, new jobs in construction accounted for over 20% of total payroll growth in the past year versus a national average of 10%. Surprisingly, some of the areas that have seen the biggest runup in housing prices aren't overly vulnerable to a homebuilding slide.

Those planning on residing in the same dwelling for many years can continue to sleep well at night knowing that they will be sheltered from a potential bubble. But everyone else, especially those in the higher-risk areas, should be very careful entering the market in the near future.

Southwest Airlines - Strong Buy of the Month Review

2005-10-14T09:57:00.000-07:00

Since recommending Southwest Airlines (NYSE:LUV) back on Sept 16, the stock has enjoyed a 13% 30-day rise despite the overall bearish market conditions and continued rising fuel costs. The airline industry (AMEX:^XAL) rose only 4.5%, in comparison, during the same time period.

The solid showing was fueled by several positive catalysts:

3 separate upgrades from Fulcrum, JP Morgan & Citigroup
Interruptions from Hurricane Rita were much less than expected
Flights are starting to recover at New Orleans airport
September traffic increased 19%

With Southwest's increasingly aggressive pricing, rising growth opportunities, and superior survival prospects, the stock should continue to shine.

PHH Cornering the Credit Union Market

2005-10-06T13:04:00.000-07:00

PHH Corp (NYSE:PHH), which was spun off from Cendant (NYSE:CD) earlier this year, said it had agreed to acquire the mortgage assets from CUNA Mutual Group, making it the largest mortgage bank for credit unions. Under the deal, PHH, which already provides mortgage services for as many as 500 credit unions, will take on the 1,400 served by CUNA Mutual Mortgage and the $11 billion in credit union-originated mortgages being serviced by CUNA Mutual. In the last 12 months, the origination volume at CUNA was approximately $1 billion.

The company’s decision to sell the business operations of CUNA Mutual Mortgage comes after several months of strategic review of CUNA Mutual’s mortgage division. The company is also conducting reviews of non-core business areas companywide in an effort at improving its focus and efficiency. PHH, long a player in credit union mortgages, was acquired by Cendant, then spun off again in February as publicly traded company. The company has a servicing portfolio of almost $150 billion in mortgages, ranking it 11th largest in the country, according to National Mortgage News.

The acquisition of CUNA Mutual's mortgage operations will significantly expand the credit union market for PHH Mortgage and immediately make it the top mortgage lender in the credit union market. After completion of the deal, CUNA Mutual said it expects to eliminate the 200 jobs in the mortgage operation in the Madison suburb of Fitchburg.

Since Monday's news, the stock has fell 5% to $26.35.

The World Poker Tour Struggles Continue

2005-09-21T09:39:00.000-07:00

Since our sour take on the World Poker Tour (NSDQ:WPTE) back on August 29th, the stock has plunged another 25% to below $9/share as investors digest the future of the franchise. WPTonline.com continues to disappoint and analysts are taking any potential revenue from the site out of their forecasts completely. Thus, WPTE is quickly becoming a televised-tournament pure play. Unfortunately it appears that the World Poker Tour tournament ratings are starting to taper off.

In addition, the entire poker industry is losing its steam after PartyGaming (LSE:PRTY) hinted that the boom in the popularity of online poker may be starting to wane.

The implied brand value of the World Poker Tour should decide whether WPTE is a good buy at these levels. A conservative guess is roughly $50 million or $2.50/share. With a cash value of over $1.50/share and the televised tournaments breaking even, we'd be interested in the stock around $5/share.

Strong Buy of the Month - LUV

2005-09-16T11:21:00.000-07:00

Southwest Airlines (LUV)
Current Price = $13.80
12 mo target = $18.00

Investing in the airlines, are you nuts? But there is one gem among this mess. We have been watching Southwest Airlines (NYSE:LUV) with interest the last couple weeks as the airline industry has dropped over oil concerns. But why Southwest? They have 85% of their oil hedged at $26/barrel until 2008! In other words, Southwest need not worry about the price of oil for another 3 years. On the otherhand, oil has surpassed labor costs as the #1 expense for all other airlines. Even in the face of increasing labor, fuel & maintenance costs, Southwest margins are actually widening in 2005.

This has been known for quite some time, though. But two events happened yesterday that has turned our interest into a screaming buy:

1) Delta & Northwest filed for Chapter 11 bankruptcy after yesterday's close.
2) OPEC is expected to increase its production quota when it meets Monday.

Southwest Airlines is dominating the price wars against the legacy carriers, driving them into bankruptcy. As more carriers file for Chapter 11, Southwest will continue to steal marketshare & increase routes. Last year Southwest bought several routes from bankrupt ATA Airlines in Chicago. And with many carriers strapped for cash, Southwest should be the most likely candidate to buy new routes from Delta & Northwest.

We have a strong buy recommendation on LUV, reflecting our belief that it is the financially strongest and operationally best positioned U.S. airline, as well as our expectations of increased investor interest in the sector if industry conditions improve. LUV has posted 32 consecutive years and 57 consecutive quarters of profitable operations, and we see the quality of those earnings as high, since LUV has no pension issues. In our view, LUV has ample cash, and its debt to total capitalization is significantly below peer levels. We think these measures warrant a premium valuation to the S&P 500.

With little debt, a conservative 23 PE, a 14.5% forecasted earnings growth rate, coupled with today's catalysts, its time for Southwest to make a run.

Has Online Poker Peaked?

2005-09-14T09:31:00.000-07:00

PartyGaming (UK:PRTY) shares lost a third of their value last week after the online gaming company hinted that the boom in the popularity of online poker may be starting to wane less than three months after an IPO raised just under $8 billion from investors.

Results on the surface appeared quite positive. PartyGaming, owner of the popular PartyPoker.com, said first-half after-tax profit climbed 23.8% to $171 million, with EBITDA excluding share option and IPO expenses up 70% to $257.7 million. Revenue climbed 81% to $437 million on strong growth in poker. The number of daily active players rose to 123,447 from 60,738.

So why did investors flee the stock leaving the company with $4 billion less in market cap? PartyGaming announced that it expected slower growth rates from its online poker business in future quarters. In addition, although new sign-ups were in line with expectations, more casual players joining its site weren't spending as much as its initial core of users. The yield per active player per day slid to $17.80 from $19.20. PartyGaming said it would lower its spending on advertising and marketing and prioritize customer retention.

In addition, PartyGaming has faced increasing competitive pressures in the key US market. Part of the reason is the onset of competition from WPT Enterprises (Nasdaq:WPTE) and Sportingbet (LSE:SBT), which runs the Paradise Poker website. With only 15% of its active players from outside the U.S, the group is seeking to expand into other countries as well as diversifying away from its core poker market.

With this valuation correction, should you now buy shares of PartyGaming? Unfortunately you don’t even have that option. Because hosting online poker in the US is illegal, Americans can not even hold shares of the London-based stock.

Complaining About the Price of Gas

2005-09-09T13:53:00.000-07:00

“There are going to be questions about what major oil companies are doing with all the resources they’re accumulating…they can’t escape that.”—U.S. Senator Pete Domenici, WSJ

Now the witch-hunt begins. With gasoline prices rising in the seven days since Hurricane
Katrina disrupted a tenth of the domestic refining capacity and much of the energy transportation infrastructure, politicians whose previous “fact-finding” missions to that hurricane-prone region of the country had no doubt been limited to touring the newest casino, are doing what they do best: they’re blaming somebody else.

The above-quoted Senator Domenici’s official web site, for the record, has a handy “On The Issues” segment devoted to four topics: Health Care, National Defense, Taxes/Economic Growth, and Water.

Energy—specifically why energy policy in this country has promoted truck traffic at the expense of railroad traffic and protected car companies from including SUVs in automobile mileage standards—is nowhere to be found in Senator Domenici’s Fab Four topics.

But now that gasoline prices are up in his district—a natural occurrence when 10% of refining capacity gets shut down for a week—Senator Domenici is all over this one.

As will be, I’m sure, my own Senior Senator, Chris Dodd—whose Kennedyesque Big Hair looks really terrific on TV when he starts working up his righteous indignation at whatever it is he wants to get on TV for.

Meanwhile, here at the local Starbucks they sell “Ethos” brand bottled water for $1.85 a bottle.
The bottle contains 1.5 pints of water from the Tomhicken Mountain Springs—which happens to be in Pennsylvania, near Pottsville. Cost: $1.23 a pint.

There are 8 pints in a gallon.

So the Starbucks customer is paying about $9.85 a gallon…for water that comes from a self-replenishing spring, gets put into bottles and shipped to the store as is.

Yet that same Starbucks customer is going to complain bitterly to Senators Dodd and Domenici that it now costs $3.25 for a gallon of gasoline that has been shipped via crude oil tanker from depleting oil fields in Saudi Arabia across 3,000 miles of ocean to an offshore tanker port, pumped through pipes to a refinery in the Gulf Coast, refined via an energy-intensive distillation process into a variety of fuels—jet fuel, diesel fuel, kerosene and even asphalt, not to
mention three types of gasoline—and then shipped by pipeline to distribution terminals from whence it has been loaded into tank trucks and hauled up an Interstate Highway to a gas station for the Starbucks customer who is complaining about the High Cost of Gasoline to Senators Dodd and Domenici……

and doesn’t think twice about paying $9.85 for a gallon of water.

-selection from http://jeffmatthewsisnotmakingthisup.blogspot.com/

Still Sour on the World Poker Tour (WPTE)

2005-08-29T14:30:00.000-07:00

It’s been nearly one year since the World Poker Tour (NSDQ:WPTE) went public after spinning off from parent company Lakes Entertainment (OTC:LACO). The once-hyped IPO opened at a disappointing $7/share after analysts questioned whether the stand-alone WPTE could achieve profitability from revenues generated solely from their televised Poker Tournaments.

Fast forward to earlier this summer where shares surged past $15 after WPTE announced they would be joining the online Poker craze by launching WPTonline.com. The timing was ideal as PartyGaming (LSE:PRTY), owner of PartyPoker.com, had just went public garnering an $8 billion IPO price tag.

Then poker legend Doyle Brunson added more fuel to WPTE’s roaring stock price. On July 8th, Brunson and a group of financial backers made an unsolicited bid to buy the whole company for $700 million in cash. The offer was double WPTE's closing price of $17.75. The news boosted WPTE shares by 56% the next trading day peaking at $29.50!

But right away, it was apparent that something was amiss. The $700 million offer valued WPTE at $34/share. So why the big gap? WPTE released further information on July 11, stating that it had contacted Brunson to get more information and that he "suggested that WPTE should not expect any further contact regarding the offer." Shares tumbled.

After peaking in early July, the World Poker Tour has since shed over half its value sitting around $12 today. Is this now a potential value play? Not quite yet. While the World Poker Tour brand name undoubtedly possesses great potential in one of the hottest industries, it should continue to suffer several negative catalysts in the short-term:

Near-term Catalysts:
1.) Online traffic at WPTonline.com continues to disappoint. A quick check at the site shows only a couple hundred players playing at any given time. Compare this to PartyPoker.com who consistently hosts well over 10,000 players daily. Keep in mind that American players are not allowed to gamble on the site with WPTE being an American company.

2.) The company does not have an auditor. They were dropped by Deloitte & Touche after the accounting firm claimed WPTE was too small and did not want to "get their arms around" the online gaming business. This seems odd considering Deloitte & Touche also audits International Game Technology (NYSE:IGT), the leading slot machine manufacturer which also recently acquired Internet-Gaming firm WagerWorks. This auditing departure comes only 2 weeks before the quarter meaning WPTE should be late in filing until finding a replacement. Every day that goes by without an announcement should pressure the stock further.

3.) Last week, WPTE surprised analysts & investors by swinging to a $0.4 million loss on $6.6 million in revenues ($0.02 per share).

4.) Massive Insider selling continues.

5.) The Doyle Brunson conspiracy. Was this a classic “pump & dump” ploy? Were WPTE insiders involved? I wouldn’t be surprised if the SEC investigated the bluffed buyout, which would not be positive PR for the company.

Conclusion:
From a business standpoint, WPTE is in decent shape as the company's licensing businesses are profitable. But from an investment standpoint, the stock is a bit of a gamble: The online business could be worth zero, in which case the stock is probably worth about half its current price. If WPTE is to justify its $250 million market cap, WPT Online must deliver. The online poker site officially launched at the end of the second quarter. Interestingly, the company accounted for zero contributions from online gaming in its third-quarter forecast, instead noting that any significant contributions may not come until toward the end of the year at the earliest. With the WPT Online hype fading and the reported loss last week, WPTE should continue to drop past $10/share.

Strong Buy of the Month Review - EYET

2005-08-19T08:55:00.000-07:00

Since recommending Eyetech Pharmaceuticals on July 18th, the stock has enjoyed a 25% gain resting around $14/share today. Earlier this week, the stock soared as high as $15.65 before some predictable profit-taking took place. Even after these healthy gains, we remain bullish on the long-term prospects of Eyetech.

Check back next week for August's Strong Buy of the Month pick.

Don't Buy Housing Bubble Propaganda

2005-08-08T11:19:00.000-07:00

Over the last year, the media has done an excellent job of warning the general public of the “imminent” real-estate bubble, comparing this irrational exuberance to the Stock Market Crash of 2000. But an end is nowhere in sight as most regions around the country continue to see double-digit appreciation. People are rushing to buy for fear that rates will increase and that housing prices will keep rising, locking them out of the market.

The most obvious red flag analysts will point to is the fact that price appreciation is far surpassing gains in personal incomes. Logic tells us that eventually people will take their money and run. But for the last decade, we have observed a fundamental shift in the amount of debt households have been willing to take on as Americans have leveraged themselves more than anytime in history.

Since 1990, interest rates on 30-year mortgages have plummeted from more than 10% to roughly 5.5%. The drop in rates, combined with an approximate 50% rise in national median income, has resulted in a 130% increase in the maximum mortgage that a family with a median income can qualify for. So it only makes sense that home prices in California have increased 131% since 1990. Nationally, home prices are up only 104% over the past 15 years, leading economists to wonder why prices aren’t even higher!

In addition, the statistics published by bubble mongers grossly inflate the actual price appreciation taking place. The numbers released by the Office of Federal Housing Enterprise Oversight (OFHEO) only include homes purchased with mortgages below $360,000 that can be bought or backed by Fannie Mae or Freddie Mac. That’s a big distortion, considering that the low end of the market is where most of the speculation takes place. It’s like judging the equity market based solely on penny stocks. Another major flaw is that the OFHEO make no adjustments for property improvements. If I buy a home for $200,000 and later spend $100,000 on renovations, then sell it for $350,000, the entire $150,000 difference would be treated as appreciation!

So don’t buy the housing bubble propaganda as normal market forces are driving the current housing boom. Even if prices do eventually fall, people who are looking for a house should not attempt to time the market. If you plan to live in the same residence for a long time, a potential bubble should never enter into your decision. Otherwise, your timing better be perfect. Remember December 1996, when Alan Greenspan first cautioned stock investors about "irrational exuberance"? The market more than doubled over the next 3 years, and even at the market low, didn’t fall to December 1996 levels. While prices may struggle to keep rising at their current pace, it’s highly doubtful the bubble will burst absent a recession. Most likely, we will see a few more years of considerable gains before leveling-off. Simply put: If it was so obvious that interest rates were going to rise, then rates would already be higher!

Strong Buy of the Month Update - EYET

2005-08-04T08:38:00.000-07:00

Since recommending Eyetech Pharmaceuticals (NASDAQ:EYET) only 2 weeks ago on July 18th, the stock has enjoyed an 15% bounce. Last week, the drugmaker said its second-quarter net loss narrowed to $7 million, or 16 cents a share, from a loss of $31 million, or 77 cents a share, a year ago. Sales more than quadrupled to $57 million from $12 million a year ago, as revenue of main product Macugen reached $50 million, up from $25 million in the first quarter.

More importantly, the hype appears to be slowing for Genentech's (NYSE:DNA) rival drug Lucentis. Rumors of deaths during trials of Lucentis buoyed EYET's gains last week. Already more than 2 years away from being on the market, if true, this news may delay the approval process even more. And today, the stock is up to $12.98 (at post time) on buyout rumors. Although nothing official has yet been released, Pfizer (NYSE:PFE) appears to be the obvious suitor.

Infinium Labs - Fact or Fiction?

2005-07-26T12:38:00.000-07:00

After a 6-month hiatus (and 95% stock decline), Infinium Labs (IFLB:OTC) is back in the news. According to sources close to the company, a final round of funding is being closed before finally launching the Phantom console in early 2006. Most observers remain skeptical.

The Idea

The exciting questions investors grappled with last year sounded something like, "Will the Phantom ever catch on? How many games will be available? And what kind of hardware will be employed?" After delaying the launch of the Phantom console late last year, this excitement has turned to paranoia. Followers now question whether Infinium will ever gain the necessary capitol to launch the Phantom service. Conspiracy Theorists will tell you that the Phantom console was never meant to launch in the first place.

For those new to the company, Infinium Labs basically employs the NetFlix model for PC gaming. Their Phantom Gaming Service aims to be the industry's first end-to-end, on-demand game distribution service accessible through their broadband receiver. Infinium Labs will offer subscribers a vast library of titles, from the top new games to old standards. This service will be available with purchase of the Phantom console and a recurring monthly fee.

The idea is beautiful: Gamers will no longer have to put up the hefty $50 purchase price for the latest titles, but rather rent these games for as long as they please. More importantly, the Phantom will be compatible with all platforms meaning users will not be confined to a certain set of titles designed for one specific console such as the case with XBOX, Game Cube or PlayStation.

The Hurdles

It remains to be seen, though, whether Infinium has the means to bring this great idea to market in a profitable manner. The Phantom was originally slated to go live on November 18, 2004. But in addition to the delay, a number of other events have crushed the stock to mere pennies.

-After creating quite a buzz at the 2004 E3 conference, Infinium Labs was nowhere to be found this year. Critics found it extremely puzzling for an upcoming product to skip the industry's most important conference considering it is the perfect venue to gain potential users & investors. President Kevin Bachus indicated that a booth was too expensive.

-The following press release regarding the employment status of President Kevin Bachus on April 18, 2005 baffled analysts:
"Contrary to published reports, I have not left Infinium Labs. I have not accepted another job. I am still in the same role, working with the same great team and still 100 percent committed to our mission to launch the Phantom Game Service later this year."
Instead of reassuring investors, the news instead furthered their paranoia as most followers had no idea this was even an issue. The stock continued its descent as a launch seemed even more unlikely with the apparent executive instability.

-In an April 20th filing with the SEC, President Kevin Bachus stated, “there’s a high likelihood that sufficient capital will not be available for the launch of the Phantom.” When questioned later, Bachus indicated that this sort of situation is typical for "pre-revenue public companies" and that he remained confident that they would find the necessary funding for launch.

-On July 19th, Michael Pickens and another man were arrested and charged with securities fraud for allegedly manipulating thinly traded stocks through a "pump and dump" scheme orchestrated via blast faxes. Infinium Labs does have a monetary link to Mr. Pickens and CEO Timothy Roberts executed a curious insider sale in the mid-$1s days after this took place. Infinium Labs has not been charged with any wrongdoing.

-As of today (July 26th), the balance sheet shows only $4,000 in cash (not a typo) and still no word of funding. In addition, insiders continue to sell.

But the main reason for the 95% decline? CEO Timothy Roberts & the shady reputation he has created for Infinium Labs. Never has such a more promising company been destroyed so suddenly be executive mismanagement. It appears that until Infinium Labs rids itself of Mr. Roberts, shareholders will have to sit patiently while Roberts and the chosen few enjoy the good life at $250,000 per year plus amazing benefits at a near-bankrupt company. Below are the details of Mr. Roberts’ equity package that he has created for himself:

On December 13, 2004 (stock price $0.25) Roberts committed to a convertible security at a 25% discount with a maximum price of $.10. If the stock traded below $.10, he would then get it at 75% of the current price to assure him a minimum profit on the deal of 33%. The $0.10 maximum represents a discount of 60%.

On December 23, 2004 (stock price $0.80) Roberts went back to the well and cut a deal for another million in cash with a similar 25% discount and a maximum price of $.10. But this time around IFLB was trading around $.80 on its way to $1.60! In layman's terms, Mr. Roberts bought shares for $.10 when the market was at $.80 and climbing. With this kind of shareholder dilution, anyone can see why IFLB stands at $0.08 today.

The Million-Dollar Question

Can Infinium Labs survive all these hurdles, receive capitol, and launch a profitable Phantom console? Infinium Labs has eaten through hundreds of millions of dollars & diluted millions of shares with nothing to show for. The good news for current and potential shareholders is that IFLB is priced to fail. In other words, every piece of bad news is already priced into the stock with the market valuing the company at only $13 million! If you have some extra money lying around, this appears to be a good entry point as the risk/reward is very favorable. Any news of funding and/or launch should push it past $0.30. But with all the shareholder dilution during the last year, it will be tough to see anything north of $0.50 until the console hits the shelves. Once it does, all signs indicate that it will receive plenty of looks from potential consumers. Just last month the Phantom was ranked in "Top Gear: The Top 25 of 2005" in Maxim magazine. Plus all the conspiracy theories will be proven wrong.

But time is of the essence. President Kevin Bachus frequently refers to Sirius as a similar "pre-revenue" business model that has succeeded by building a customer base over time. But Sirius never had problems finding capitol. And in an industry with competitors like Nintendo, Sony, and Microsoft, the window of opportunity is closing.

The Future of the Grand Theft Auto Franchise

2005-07-22T12:03:00.000-07:00

Shares of Take-Two Interactive (TTWO) shed more than 5% yesterday after racy scenes in its popular Grand Theft Auto: San Andreas game led the Entertainment Software Rating Board to change the title's rating from Mature to Adults Only. As a result, Take-Two will stop producing the game, recall any copies from retailers who no longer wish to sell the current version, and ship a new version later this year that blocks access to the infamous sex scenes.

The ESRB found that players can download a file off the Internet -- the so-called hot coffee mod -- to view sex scenes on the disk. Thus, the board assigned the game its uncoveted adults-only rating. According to the ESRB's official definition, the AO rating means that the game "should only be played by persons 18 years and older and may include prolonged scenes of intense violence and/or graphic sexual content and nudity." On the other hand, the M for Mature rating has “content that may be suitable for persons ages 17 and older.” Sounds pretty similar, right? But the AO and M ratings are different in one big way: Most major chain stores will not carry AO-rated games. By contrast, M-rated games aren't even separated from games bearing the T for Teen and E for Everyone ratings.

Major video-game retailers wasted no time responding on Thursday. Citing company policies that prohibit the sale of "adult only" rated titles, Wal-Mart (WMT), Best Buy (BBY), Circuit City (CC) and GameStop (GME) all said they would pull San Andreas from their store shelves.

Consequently, Take-Two predicts earnings will come in 30 cents to 40 cents lower than expected and projects a $50 million shortfall as the company braces for the massive returns. For fiscal 2005, the company is looking to earn between $1.05 and $1.12 a share, while analysts were expecting $1.44. But investors differ on the longer-term meaning for the company.

Are these recent “missteps” actually a good thing for Take-Two? There’s no doubt the company has received plenty of free press over the last few week; albeit negative. But current GTA gamers should remain unaffected by the recent negative press. In fact, the Grand Theft Auto should rise to an even higher cult status with all the buzz surrounding the company. While this crimping of distribution could hit sales, the company might actually benefit from the publicity, reducing the hurt. I believe that the ‘Adults Only' rating, particularly for people over the age of 17, may actually increase sales for future installments. With Grand Theft Auto: Liberty City Stories due out later this year, we could get the answer sooner than later. The game has been expected to be a big part of Take-Two's revenue and earnings this year.

Who was responsible for this modification? Last week, Take-Two denied that this came from any internal employees suggesting that the modification was created by outsiders. Although Take-Two executives seemingly had no knowledge of the hidden content, the source was most likely the work of a naughty programmer (remember the old Disney cartoons when bored animators included explicit messages?).

At what cost is NetFlix growing?

2005-07-22T09:14:00.000-07:00

I'm in the mood for math. I want to illustrate some principles of how Netflix's current potential profitability is being spent to induce growth. I'm going to focus principally on the marketing component of cost.

Marketing for Q1 was 23% of revenue. For the year, it will be about 20%. 2005 Net earnings is estimated for -10M, producing a net profit margin of -1.5%.

Now, what if Netflix decided to convert all growth to profit?

This introduces what I call the 'replacement rate' which is the nominal number of new subs required each quarter to achieve a net growth rate of 0%.

At 3M subs and 5% churn this figure is 530K subs per quarter. This is a direct result of the Netflix churn calculation applied in reverse.

Now, what is marketing as a percentage of revenue if this were the number of gross adds per quarter?

Presuming a 40$ SAC (to be revisited):
Marketing Cost: 40$ * 530K = 21.2M$
Revenue: 3M * 18$ * 3 months = 162M$
Marketing as percent of revenue: 13.1%

We have now squeezed out 6.9% in net profit points. But it gets better for 2 reasons:
a) Slower growth implies a more rapid aging of subscriber base, which has been shown to reduce churn.
b) At a 40$ SAC Netflix actually achieves much more then the replacement rate, so it must reduce the SAC in order to reduce growth.

To address the first component, recall that a trial sub churns at 10%, 6-month-old subscriber churns at 5%, and a 12+-month sub churns at 2.5%. It should be fairly evident that the fewer new subs put in the pipe, the lower the average churn will be for the entire sub base given the above fact. Let us for simplicity presume something like a 4.5% churn just so we feel like we have considered this benefit.

Running the numbers on a churn of 4.5% we get a reduction of marketing from 13.1% to 11.6%.

To address the second component, Netflix does not pay 40$ per new member precisely. Some members are former customers that would return without advertising inducement, other members are free word of mouth subs, still others are enchanted by a banner or two but don't go through affiliates.

The expectation in Q2, which is the most difficult quarter for Netflix to add subs, is 750K gross adds at a SAC of 40$. If we presume that 200K subs would join at 0$ in marketing, the SAC of the remaining members is 55$. At replacement rate this is: (200K * 0$ + 330K * 55$) / 530 = 34$. If 200K is accurate, this is an upper bound to the SAC required.

Employing this fact reduces marketing expenditure further by (34/40) or 15%.

We now have a 'replacement rate' marketing expenditure of 10%. Revenue for the year would be 3 * 18 * 12 = ~650M, and net profit is then 8.5% (-1.5% + 10%), and the current profitability is 55M or a current P/E of roughly 21.5.

This would be considered pricey if you are looking at a company with 0 growth, however Netflix chooses to invest in growth because it leads to a higher total in profitability. If you run these figures at 4M subscribers, the P/E drops to 16.

Another perspective... in 9 months they will add 1M subs but will incur an opportunity cost to do so of about 40M$. However, at 4M subs they would be making 18M$ more per year and it is therefore like an investment with a 45% yield. A wise choice.

This analysis focuses only on marketing; there are many other reasons to adjust potential earnings including today's news. The second biggest adjustment to profitability expectations is a change at Blockbuster.

Raising the Entry Fee at the World Series of Poker

2005-07-20T13:33:00.000-07:00

Is the World Series of Poker getting out of hand? At what point will viewers begin to lose interest?

The 2005 WSOP main event concluded last Friday with Australian poker pro Joseph Hachem taking home the $7.5 million first prize. With a prize pool exceeding $50 million, the WSOP is by far the richest sporting event in the world. But when will these out-of-this-world numbers lose their novelty value?

Since Chris Moneymaker's WSOP victory in 2003, TV ratings have skyrocketed from events such as the World Poker Tour, to celebrity charity events. NBC's ratings for its National Head-us Poker Championship last month, which included many household names & ex-champions, exceeded those of Major League Baseball's All-Star game. But do viewers watch these tournaments for the people involved or for the sheer amount of money at stake? Judging by the recent ratings for celebrity events & the Heads-Up Championship, the answer is name recognition!

This year's WSOP championship included nearly 6000 participants. So it was a forgone conclusion that the seats at final table would be filled with amateurs. Until the WSOP dramatically increases the buyin & cuts down on the amateur entries, the event's popularity will soon plateau. This is already starting to occur as the World Poker Tour continues to gain in popularity.

A popular observation among non-poker fans is that the game is all about luck. You'll eventually need the cards to win. In contrast, poker historians will point to Johnny Chan's consecutive victories in 1987 & 1988 as proof otherwise. But if amateurs continue to dominate the final tables at the WSOP, this thought will continue among casual fans. Who has ever heard of Joseph Hachem or even poker pro Mike Matasow? Yes, the serious poker fans & fellow players will tune in regardless of who makes the final table. But these no-names will not lure in the casual viewers.

Strong Buy of the Month - EYET

2005-07-18T14:29:00.000-07:00

Eyetech Pharmaceuticals Inc (EYET)
Current Price= $11.25
12 mo Target=$17.50

Highlights:
"This is a rare chance to invest in a small-cap, high-growth Pharmaceutical company that has a minimum 2-year monopoly in the highly lucrative AMD market."

"With $265 million in cash (>50% of market cap), an expected $450 million from Macugen sales before rival Lucentis launches & the backing of Pharma giant Pfizer, I believe EYET is extremely undervalued at these levels."

Thesis:
Eyetech shed another 10% today after positive Phase III results were released for rival Genentech's (DNA) Lucentis drug. After finishing the day at $11.75, Eyetech now sits well below its IPO offering & more than 75% below its 52 week high of $47.92.

At these levels, Eyetech is priced to fail. Rival drug Lucentis is not expected to come to market until 2007 at the earliest. This gives Eyetech more than a 2-year monopoly. At that point, how many doctors will switch to Lucentis? With a market cap of only $500 million, the market is basically saying almost all. This is a rare chance to invest in a small-cap, high-growth Pharmaceutical company that has a minimum 2-year monopoly in the highly lucrative AMD market.

No studies have yet to compare Lucentis versus Macugen. That doesn't stop analysts, however, from making such comparisons from reporting speculation that Lucentis will eclipse Macugen as the principal treatment for AMD. It should also be noted that Lucentis is dosed once every four weeks, while Macugen is dosed once every eight weeks. Which would doctors & their patients prefer? Also, Macugen should be much cheaper to manufacture than Lucentis. This will allow Eyetech to offer price advantages without significantly sacrificing margins.

With $265 million in cash (>50% of market cap), an expected $450 million from Macugen sales before rival Lucentis launches & the backing of Pharma giant Pfizer, I believe EYET is priced to fail at these levels.

Key Statistics:

Cash at hand: $265 million (over $6/share)
Total debt: $2.35 million (0.017 debt/equity)
2005 Revenue: $175 - $190 million
Revenue Growth: 195%
% Held by Insiders: 10.08%
P/E: 13.03

Recent "Analyst" notes:
07.14.05
CSFB believes that EYET's shares reflect expectations for flawless DNA's Lucentis data that will be presented at the ASRS meeting on Monday, leaving more room for stock upside than downside as only slighest hiccup in data could benefit EYET shares. Firm continues to believe that safety could favor Macugen due to less frequent dosing, an outcome that could temper potential efficacy advantages for Lucentis. Firm assumes roughly equal market share for Macugen and Lucentis with a slight edge for Macugen owing to its 2-year lead time to market, Pfizer marketing strength, fewer injections, potential for combo use with Visudyne, and longer patient experience indicating. With $550 mkt cap, $265 mln in cash, and expected $450 mln from Macugen collaboration before Lucentis even launches, firm believes EYET is undervalued. Maintains Outperform and $30 tgt.

07.18.05
Standard & Poor's Equity Research maintained a "hold" rating for Eyetech Pharmaceuticals after positive Phase III results for Genentech's Lucentis drug. "Lucentis, as well as other drugmakers' experimental treatments, reinforce our view that Eyetech's Macugen is poised to lose market share. Still, we think Macugen sales will be supported by current patients, those unable to tolerate Lucentis, and possibly non-age-related macular degeneration conditions in the future." The research firm also maintained a "strong buy" rating on Genentech.
"Meanwhile, we think Eyetech needs to expand its product portfolio." S&P Equity Research has a $15 price target for the company and views it as a potential takeover candidate.

Profile:
Eyetech Pharmaceuticals, Inc., a biopharmaceutical company, engages in the development and commercialization of novel therapeutics to treat diseases of the eye. The company’s Macugen is a pegaptanib sodium injection, which is used for the treatment of neovascular age-related macular degeneration. It has collaboration with Pfizer, Inc. to develop Macugen for the treatment of diabetic macular edema and retinal vein occlusion.

2005 World Series of Poker results

2005-07-18T10:26:00.000-07:00

In the longest final table in the history of the World Series of Poker (WSOP) Main Event, 39-year-old Australian poker professional Joseph Hachem survived a record field of 5619 players to win the $10000 buy-in 2005 WSOP No Limit Texas Hold'em World Championship Main Event at Binion's Gambling Hall.

The 9-player televised final table, which started at 4:48pm on Friday July 15, ended at 6:44am on Saturday July 16. The 2005 final table eclipsed the previous record set in 1983 by 18 minutes.

A former chiropractor who quit his practice to become a poker professional three and a half years ago, Hachem (pronounced "HAH-shem") won the record $7.5 million first prize and the coveted white gold world championship bracelet after 7 days of play.

The top nine places at the 2005 World Series of Poker were:

Place/Prize Money
1st Joseph Hachem, Melbourne, Australia $7.5 million
2nd Steve Dannenmann, Severn, Md. $4.25 million
3rd John Derick Barch, McKinney, Tx. $2.5 million
4th Aaron Kanter, Elk Grove, Calif. $2.0 million
5th Andrew Black, Dublin, Ireland $1.75 million
6th Scott Lazar, Studio City, Calif. $1.5 million
7th Daniel Bergsdorf, Umea, Sweden $1.3 million
8th Brad Kondracki, Kingston, Pa. $1.15 million
9th Mike Matusow, Las Vegas, Nev. $1.0 million

Let the iPhone Hysteria Begin

2003-06-26T18:00:00.000-07:00

The only email spam I consistently read comes from Apple. Every few weeks, they always manage to come out with some new iPod add-on that I must own. I think I’ve now spent over $1000 on accessories for my $179 video iPod.

Somehow this Apple spam consistently avoids the Bulk folder of my Yahoo! Mail account (while my girlfriend’s emails get flagged as spam. wtf?). Today’s message reminded me of this Friday’s iPhone launch. Being an Apple shareholder (AAPL), you’d think I would remember such an important date. But the iPhone hype has been on overdrive for so long that it’s easy to ignore when it dominates the headlines for 6 months.

Also today, Apple & its exclusive carrier AT&T announced 6 different service plans ranging from $59.99/mo for only 450 minutes to $219.99/mo for 6000 minutes. These monthly fees are on top of the $499 price tag for the 4GB model and $599 for the 8GB model based on a two-year service contract.

The $3000 Hobby (and Other iPhone Hurdles)

Judging by today’s selloff, I think potential customers are starting to realize how expensive the iPhone will be. If you sign the mid-range $99.99/mo service plan after purchasing the 8GB iPhone model, that alone will set you back $3000 during the two-year contract (without any accessories)!

Here’s a few other potential hurdles that could prevent the iPhone from exceeding its already lofty expectations:

You must be an AT&T customer to use the iPhone. With a market share of 20%, that means 80% of wireless customers must cancel their current contracts to sign with AT&T. Being a Sprint customer, I would have to pay a $175 cancellation on top of the $3000 price tag for the iPhone. AT&T’s exclusive contract runs through 2009.
Only 4 & 8GB of hard drive space? My tiny video iPod holds 30 GB for less than $200.
Recent surveys have shown that the majority of IT departments will not even consider the iPhone due to its PC incompatibilities & exclusive AT&T contract. That will dampen business spending & all but eliminate demand for the higher-tier contracts.

“Sell the News”

On Jan 9^th 2007, Steve Jobs announced the iPhone at the Macworld Conference & Expo. The stock has since been on fire rising 50% to $125, adding $30 billion to the company's market capitalization. Will the iPhone really hold that much value for Apple? This huge runup comes after a fantastic finish to 2006 after Apple’s stock bottomed out at $50 in October. Thus, nearly everyone holding Apple is sitting on huge gains.

Expect an Apple selloff following the iPhone launch. 3 similar mini-selloffs have occurred during this recent runup:

June 26^th: Apple announces 6 AT&T service plans for the iPhone. The stock drops 3% on investor concerns over the high prices.
June 11^th: Steve Jobs shows off the iPhone at Apple’s World Wide Developer's Conference. The stock falls 5% after investors saw no “surprises”.
March 20^th: Apple beats 4^th quarter analyst earnings & revenue estimates. The stock falls on profit taking.

Apple’s recent success has created impossible expectations. With all the mega-hype already priced into the stock, just meeting expectations will create a selloff. Longer-term investors need not worry because the future looks bright with Macs gaining market share & the iPods continuing their dominant foothold on the music industry.