the Skandia Life study

The Financial Times reported today that Skandia Life has done a proprietary study that “proves” its investments in private equity have made money for the company, even from purchases made during the wildest days of the middle of the last decade–when loans were flowing like water and everything not nailed down was being bid for at very high prices.

Despite this, Skandia concludes that its private equity investments earned it “between six and 14 per cent per year” better than publicly traded equities (which would likely have lost some money during the period).  The print newspaper article said the margin of outperformance was “between 0.8 and 1.5 per cent,” a set of figures that the FT apparently subsequently changed.  I don’t know which is correct.  (I’ve looked for the study on the internet but have been unable to find it.  So all I have to go on is the FT newspaper and website.)

the study’s assumptions

To get the Skandia results,  you have to make a number of (heroic) assumptions.  They include:

1.  that the private equity people who sold Skandia its deals worked for free.  That is, they collect no fees and have no carried interest.

2.  that estimates of the current values of the companies bought, which are made by the private equity firms doing the buying, are fair and accurate.  There was apparently a “third party” check on the figures,  presumably by the investment banks who were paid by the private equity firms to line up and help finance the deals.

3.  that the highly leveraged acquisitions of poorly-performing companies are no riskier than buying, say, a stock index ETF, so no adjustment to returns for”extra” risk needs to be made.

are they believable???

How likely are any of these suppositions?  In New York they say…”If you believe this, I have a bridge you might be interested in buying.”

The icing on this comedic cake is the answer to the question, “What financial professional could possibly have approved this study and endorsed its dubious results?”    …why, the guy in charge of giving Skandia Life’s money to private equity, that’s who.

In the thrust and parry of bureaucratic infighting in large companies, I can see why someone might call for a justification for making private equity investments at the top of the market to be made.  And I can see how a study like the FT writes about might have been the response.  What I don’t understand is why the authors would want it made public in any form.

On the other hand, maybe they didn’t.

Activision reported fourth quarter and full year 2010 results after the market closed in New York on Wednesday. On a non-GAAP (Generally Accepted Accounting Principles) basis, the firm earned $.53 a share–in line with Wall Street analysts’ expectations–vs. $51 in the year ago quarter.  For the full year, GAAP earnings per share were $.34 vs $.09 in 2009.  On a non-GAAP basis, eps were $.79 vs. $.69.

On a GAAP  basis, however, ATVI reported an operating loss in the vicinity of $400 million for the closing three months of the year–the second time in a row they’ve accomplished this “feat.”

The company issued initial (non-GAAP) guidance for 2011 of $.70 per share in earnings, or about an 11% year on year decline (more on this below), which was lower than analysts’ preliminary guesses of a flat earnings year.  (Some are also saying that ATVI is guiding to earnings of $.07 a share for the March quarter, which would be below analysts’ estimates of $.10.  I don’t think that’s right, though, since the $.07 includes $.02-$.-3 of restructuring charges.  In other words, ATVI guidance is for earnings of $.10 per share for March.)

ATVI also announced that its board of directors had authorized a 10% increase in the dividend to $.165 per share and a $1.5 billion share buyback.

The shares were down about 7% in the aftermarket.   As I’m writing this, in the early afternoon of February 10th, ATVI shares are down about 10% on very heavy volume.

the details

1.  Bobby Kotick has developed feet of clay.  The CEO of ATVI has had a well-deserved reputation for quickly focusing his firm on new trends and deftly cutting his exposure to the old without taking big losses.  No more.  For the second year in a row, ATVI is taking a gigantic writeoff related to the Activision side of the business.

Elements of the writeoff are scattered around in different accounting categories, however, including some costs that will only be recognized in 2011, so I find it difficult to figure out exactly how big the current damage is.  $400 million + is the best I can do.  Unlike last year, when management blithely ignored the loss completely in the conference call, there were at least a few passing references to it Wednesday night.

What’s happening?  ATVI’s financials suggest that, ex Call of Duty, the Activision side of the house continues to be deeply in loss. That got the former Activision-side top brass fired a year or so ago.   After posting a large deficit ex CoD again in 2010, new management has decided to:

–stop making new versions of Guitar Hero and concentrate on digital downloads to the title’s waning fan base,

–shut down True Crime,

–not launch a new Tony Hawk game this year (no more, ever?).

ATVI will also be laying off 500 employees.  This will leave the Activision part of ATVI with Call of Duty, the Bungie team that’s developing a new MMO, and some niche products like Cabelas hunting games, that make money.

2.  Blizzard is doing fine–better than fine, actually.

–Non-GAAP operating income, at $850 million, was up 53% year on year. 

–World of Warcraft has over 12 million subscribers globally.  Blizzard’s new partner, NetEase, is making it easier to get permission from Beijing to introduce new WoW software to China. 

–WoW: Cataclysm sold 4.7 million units during its launch month in December.

–Starcraft II has sold almost 4.5 million units, as well.

–Blizzard has also been talking about a new WoW-like game it is developing, code name: Titan.

3.  Call of Duty is, too.

–Despite pre-launch worries that Call of Duty: Black Ops could never surpass the success of the 2009 entry in the game series, CoD: Modern Warfare 2, the number of players of Black Ops during its first three months is about 50% higher than for MW2.

–First-day downloads of the initial expansion pack for Black Ops (just launched) were 25% higher than for the comparable release for MW2.

4.  ATVI will be announcing a mystery new gaming initiative at Toy Fair today.

5.  New releases for 2011?  Will there be any?

–There’ll certainly be one for Call of Duty. But ATVI is (sensibly) unwilling to project that it will meet the lofty sales standards of Black Ops. Other than that, the current-year cupboard may be pretty bare.

–There’s no word from Blizzard on (the now long-awaited) Diablo III. All we know is it’s not ready for beta testing yet.  A 2011 launch has not been ruled out.

–Heart of the Swarm, the Zerg entry in the Starcraft II series, is certainly a 2012 event (if then).

–The Bungie MMO definitely won’t debut this year.

–On the bright side, there won’t be self-inflicted losses from Guitar Hero et al. But worries the new Blizzard launches could be pushed back into 2012 are the main reason for ATVI’s conservative earnings guidance.

why the big selloff in the stock?

1.  Some investors may be throwing in the towel.  ATVI has been a severe underperformer over the past two years.  Another huge writeoff and prediction of a down earnings year in 2011–especially when most other firms, video game and otherwise are posting surprisingly good results–may have been more than many investors are able to take.  Some professional investors who use mechanical rules for buying and selling, in an attempt to keep emotion out of their decisions, may also have been forced by them to divest.

2.  Has Bobby Kotick lost the magic touch?  I thought the Activision division problems had been fixed last year.  It’s distressing to see that it has required another year of large losses to get management to smell the coffee.  Odder still, ATVI has been much more aware than its rivals about the threat from casual and mobile games.

3.  It’s also possible that ATVI’s juvenile attempt to divert investor attention from the writeoffs by not mentioning them is undermining investor confidence in management’s integrity and competence.

where to from here?

ATVI is a stock I’ve been consistently wrong about, so maybe you should skip this part and make up your own mind without my two cents. 

First of all, the company has about $3 a share in cash on the balance sheet, and no debt.  It is generating cash flow from operations, principally from Blizzard, of about $1.15 a share.  That level of cash generation can probably continue indefinitely.  True, there may not be a new mega-hit like Starcraft II in 2011, but there won’t be Guitar Hero, Tony Hawk or True Crime to pile up offsetting red ink.  And MMOs, a field Blizzard leads, are the future for serious gamers.

Assume a current stock price of $11 and subtract the $3 in cash.  The remaining $8 is equal to about 7x cash flow.  If the current level of cash flow is sustainable–and I think it is–the stock is cheap.  It’s the equivalent of a bond that yields 15%.  If this were a different industry, or if ownership weren’t so concentrated in Vivendi’s hands, a takeover bid would be a good possibility.  I don’t think that’s likely here, though.

The big question is whether there’s anything in ATVI’s future that could make it less cheap than it is today.  A new Bungie MMO, a big increase in the number of WoW subscribers, new online moneymaking opportunities for Starcraft or Call of Duty are all possibilities that come to mind.  Also, in time, and with more forthright communication, management may win back investor trust.  In addition, at some time before the end of summer, focus will turn to 2012, which could be a year with two or three big new releases.

I can easily imagine circumstances–and again I have been as cold as ice with this stock–where ATVI is trading 20% higher than it is today six months from now.  Like almost any value stock, however, the “what” is easier to figure out than the “when.”

The Financial Analysts Journal is the flagship publication of the Institute of Chartered Financial Analysts.  The ICFA is a trade association of financial professionals that focuses on academic theories of the financial markets.  Although the FAJ has an occasional piece by a professional money manager, it contains mostly the kind of journal articles that university professors need to write for each other so they’ll get tenure.

the January/February 2011 issue

The lead article in the January/February 2011 issue is called “The ABCs of Hedge funds:  Alphas, Betas and Costs.”  The authors divide the hedge fund universe into nine different strategies and analyse the returns of each strategy over a long period of time.  They conclude that for each of the eleven years ending in 2009, every one of the strategies produced “positive alpha,” that is extra returns for investors above their benchmark indices.  These extra returns remained even after deducting management fees and after adjusting for the risks (like financial leverage) that the investors were taking.

This is a stunning result.  It’s by far the most positive assertion I’ve ever heard about the hedge fund industry.  A more usual observation would be that you would have been better off since 2003 by holding an S&P index fund than by giving your money to the typical hedge fund manager.  What’s also remarkable is that there are not just a select few outperforming managers.  According to this study, just about everybody is a hero.

What’s also a bit surprising, given the academic bent of the publication, is that this result flies in the face of the academic dictum that sustained outperformance, year after year, is impossible–and the FAJ makes no fanfare about this.

too good to be true?

Turning to the real world, my personal experience is that what the article says can’t be done.  I’ve known a few managers who’ve strung together long series of outperforming years.  Invariably, they stray from their professed styles or take hugely concentrated positions (say, 20% of the portfolio in one stock) that conventional risk measures don’t capture, to keep their strings intact.  In one (amusing) case, the manager got his clients to agree to a defective benchmark, one that 95% of the entrants in his category could consistently beat.

my opinion:  yes!

I think that what the article says is just too good to be true.  True, I’m not a hedge fund fan.  Maybe I’m jealous of the high fees hedge fund managers get to charge.  But as a group they remind me of the oil and gas tax shelter purveyors I analyzed (among other things) in my first stock market job.   Those vehicles appealed to the egos of the limited partners, who could brag that they had a tax problem, but had lots of snake oil and little investment merit.

Other than pure prejudice, the one observation I’d make about the ABCs study is that it uses returns that are voluntarily reported by the hedge funds themselves and not independently verified.  I’ve written about this practice before.  Basically, it seems hedge funds often inflate their returns when they report them to consultants.

In fact, the February 2010 issue of the CFA Digest, a very handy publication, also from the ICFA, that summarizes important academic articles, cites research published in the Journal of Finance in a piece titled “Do Hedge Fund Managers Misreport Returns?  Evidence from the Pooled Distribution.”  Short answer:  YES. The same issue cites a second article, this one from the Review of Financial Studies. It’s called “How Smart Are the Smart Guys?  A Unique View from Hedge Fund Stock Holdings?”  Its conclusion:  hedge funds outperform mutual funds in stock selection but subtract all that extra value, and more, through higher fees.

That’s more like the hedge funds we all know and …well, that we all know.  (What was the FAJ thinking?)

The average person may be a good judge in picking the winner of a beauty contest, but unfortunately your average investor is ill-equipped to sift through the thousands of mutual funds and hedge funds and thoughtfully discern the relevant performance metrics for investment purposes.

Investment firms however, are well-equipped with smoke, mirrors, and a tool-chest filled with numerous tricks. Here are a few of the investment firms’ gimmicks:

• Cherry Picking: Fund firms are notorious with cutting out the bad performance numbers and cherry picking the good periods. As investment guru Charles Ellis reminds us, the wow factor results of “investment performance become quite ordinary by simply adding or subtracting one or two years at the start or the end of the period shown. Investors should always get the whole record – not just selected excerpts.”
• Limited Time Period: Often the period highlighted by investment firms is insufficient to make a proper conclusion regarding a manager’s outperformance capabilities. Ellis acknowledges that  gathering enough yearly performance information can be practically challenging:

“By the time you had gathered enough data to determine whether your fund manager really was skillful or just lucky, at least one of you would probably have died of old age.”

• Fee Disclosure: Some managers’ performance figures look stupendous until one realizes once hefty fees are subtracted from the reported figures, what previously looked top-notch is now average or below-average. It is important to read the small print or ask tough questions of the broker peddling a fund.
• Audited Figures: Legitimacy of performance is key, and there are different levels of audited figures. Global Investment Performance Standards (GIPS) compliance is an industry accepted standard. For pooled investment vehicles, audited results from regional or national accounting firms can be important too. 
• Misused Rating Systems: Morningstar is the 800 pound gorilla in the mutual fund world and provides some useful data. Unfortunately, most Morningstar investors use the data incorrectly. A 2000 study by the Journal of Financial and Quantitative Analysis discovered, “There is little statistical evidence that Morningstar’s highest-rated funds outperform the medium-rated funds.” On this subject, Charles Ellis points out the following:

“While Morningstar candidly admits that its star ratings have little or no predictive power, 100 percent of net new investment money going into mutual funds goes to funds that were recently awarded five stars and four stars…Indeed, in the months after the ratings are handed out each year, the five-star funds generally earn less than half as much as the broad market index!…Morningstar ratings are misleading investors into buying high and selling low.”

Investors need to be careful in how they use the ratings – simply buying 4-5 star funds and selling star-losing funds can be a heartburning recipe for bad results. Buying high and selling low usually doesn’t turn out very well.

Find Winners…Then What?

Even if you are successful in identifying the winning funds, those same funds tend to underperform in subsequent periods. Ellis, a believer in passive index investing, noticed only 10% of active managers outperformed over 25 years, and the odds of sustaining outperformance in subsequent periods diminished even further.

Charles Ellis also noticed a fat-tail syndrome of losers versus winners. For example, Ellis found 2% of active managers outperformed over a set time period, but a whopping 16% underperformed the market over a similar timeframe. Consistent with these findings, Ellis stresses that past performance does not predict future results, with one exception: “The worst losers do tend to keep losing. If you do decide to select active investment managers, promise yourself you will stay with your chosen manager for many years…changing managers is not only expensive, but it usually doesn’t work.”

Professionals to the Rescue

Well, if individuals are not in a position to pick future winning fund managers, then thank heavens the professional consultants can help out…not exactly. Ellis was blunt about the capabilities of those professionals selecting active investment managers:

“Pension executives and investment consultants who specialize in selecting the best managers have, as a group, been unsuccessful at selecting managers who can beat the market.”

Ellis uses a respected firm as an example to prove his point:

“Cambridge Associates reports candidly, ‘There is no sound basis for hiring or firing managers solely on the basis of recent performance.’”

At the end of the day, finding current winners is not a problem, but sifting through the massive quantity of funds and selecting future winners is very challenging for individuals and professionals alike. The financial industry would like you to believe picking the future performance beauty winner is a simple task – the data seems to indicate otherwise. Rather than wasting your money attempting to pick the beauty winner, perhaps your money would be better spent on purchasing a tiara for yourself.

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper. 

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in MORN, Cambridge Associates, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

It’s been my strong impression that in the US market growth stocks have outperformed value stocks this year.  I get that impression, among other things, from looking at my own portfolio (remember, I’m a growth investor).  This wouldn’t be surprising, since in a typical business cycle recovery value stocks outperform strongly in the first year.  But as pent-up demand is gradually satisfied and the economy slows a bit, growth stocks typically take over market leadership.

IWD vs. IWF

But I know I look mostly at growth stocks.  So I thought I’d check the IWD and IWF ETFs.  These are securities that track the Russell large-cap value and growth stock indices, respectively.  They show a neck-and-neck battle until the past couple of months, when the growth index pulls out in front.

Indices like these are the best we have.  And from a practical money management perspective, if a client were to hire me as a money manager and specify the Russell 1000 Growth Index as my benchmark, it would be simple enough to construct a portfolio whose under- and overweights would be geared to that index.

how good are style indices?

But are such indices really good representations of the relative performance of growth and value stocks?   Not so much.  The reason has to do with the academic tilt to their construction.  To be honest, I don’t have a better solution.  And as you’ll see in a moment, the way the growth index is composed may give a manager benchmarked against that index a slight performance advantage.  So I’m sure these style indices are here to stay.  You just have to remember that the growth index in particular has some drawbacks.

Here’s what I mean.

The idea of style indices has its genesis in the reasonable question, posed by academics, as to whether either a value discipline or a growth investing discipline has an inherent advantage over the other.  Their method was to divide a stock index with broad market coverage, like the S&P 500 or the Russell 1000 into value and growth components and then study the relative performance of the two.

constructing a style index

They proceeded as follows:

1.  They defined value stocks, reasonably, as those with some combination of low price to book (or net asset value), low price to cash flow, and low price to earnings.

2.  Using various weightings of these three factors, or other similar ones, they constructed a ranking of index constituents that ordered them from being the most value-like (scoring the best on the value stock variables) to the least.

3.  Using this list, they (usually) took the half exhibiting the best value characteristics and called it the Value sub-index.  They called the other half of the list the Growth sub-index.

4.  They compared the performance of the two sub-indices.

Looking at the relative performance of the sub-indices over time is itself interesting:  until the Nineties, relative outperformance of either style is short-lived.  Starting in the recovery of 1992, however, Growth and Value each have multi-year periods of significant outperformance.

The overall academic conclusion, supported by the sub-indices, is that Value trumps Growth over long periods of time.

the error in logic

The academics make two assumptions that have no factual, or logical for that matter, support.

–They assume that every stock can be characterized either as growth or value.  This allows them to define growth as being what’s left over when value stocks are separated out.  hey don’t consider that there may be a set of “clunkers,” or stocks no one in his right mind would touch (even though there’s research showing that bad-performing stocks persist in underperformance far longer than good stocks in their outperformance).  They all get tossed into the growth pile.

–They assume that the growth stock universe and the value stock universe are mutually exclusive–that growth investors somehow refuse to buy fast-growing companies unless their price-earnings multiples were already high.  That would be crazy.  At the beginning of this year, for example, AAPL–a classic growth stock–was trading at 10x earnings, with no debt and cash making up a quarter of its market value.  Has AAPL been a growth stock for the past five years?  Yes.  Has it been a value stock, too?  Yes, again.  But which sub-index is it in?  Depending on how a particular style index is constructed, it could be either.

Of these two errors, I think the first is the more serious.  My suspicion is that the supposed underperformance of a Growth sub-index is because of the presence of clunkers.

Why don’t growth investors make more of a fuss over their investing style being maligned?  I think it’s the same reason why professional investors don’t make a fuss about many of the other crazy, erroneous things taught about investing in business schools.  Why invite more competition?

the results

DIS earned $.45 per share, adjusted for writeoffs, on revenue of $9.74 billion for 4Q10.  This compares with eps of $.46 on revenue of $9.7 billion in the comparable period of fiscal 2009.  DIS doesn’t give detailed earnings guidance.  The reported results fell a penny shy of the Wall Street consensus, however, which covered an unusually large amount of territory for the quarter, ranging from $.39 to $.53.

the adjustments

Hang onto your hat.

1.  DIS’s financial reporting is based on weeks.  This has not-so-obvious accounting consequences.

Q:  How many weeks in a year?  A: 52.    But 52 x 7 = 364.    This means 52 weeks falls one day short of a full year, except in leap year, when it falls two days short.  Therefore, to keep its accounting year more or less anchored to the actual calendar, every six or seven years, DIS has to make a leap-year-like adjustment by having a 53 week year.

That happened in fiscal 2009.

Because of this, the fourth quarter of fiscal 2010 contains 13 weeks, but the fourth quarter of fiscal 2009 contained 14–meaning it had 7.7% more days in it.

There’s no easy way to make an accurate adjustment that will make the year on year comparison an apples-to-apples one.  The the thing any portfolio manager worth his/her salt will do is to make an easy adjustment that may not be accurate but will give a flavor of what the right number should be.  In this case, let’s assume the extra week has no operating leverage effects.  In other words, let’s just multiply the 4Q2010 eps by 1.077.  That yields eps of $.485, a $.035 gain.

2.  DIS’s cable deals are like oil and gas deals, insanely complex and no two alike.  One common feature, though, is minimum performance guarantees (of one sort or another).  In general, these contract clauses call for higher payments to DIS throughout the year if the product it sells exceeds the contractual guarantees (whatever they may be in a given contract).

How does DIS account for these contracts?  It starts out with the assumption that it will not meet the guarantee minimums (even though it may think it can do so in its sleep) and reports the only the amount it would earn if it didn’t.  Once it achieves the minimum, however, DIS does two things.   It begins to report the higher amount from that point onward; and, in the quarter it hits the minimum, it reports–in one big lump–all the extra money it has earned year-to-date at the higher meeting-the-minimum rate.

Normally, this is a bonanza for the fourth quarter.  Fiscal 2010 was so good, however, that the big payday came in the third.  Here are the figures:

deferred revenue recognized:

3Q2010     $344 million     vs.     3Q2009     -$37 million

3Q2010     $170 million     vs.     4Q2009     $524 million.

Net extra payments in the second half of 2010 were $27 million higher than in the second half of fiscal 2009.  But hitting the minimum performance levels earlier this year than last shifted $.09 in eps that would normally be shown in the fourth quarter into the third.

3.  Oh, yes.  DIS is exiting its image capture business, IMD, and wrote off $100 million ($.07 a share) that reduced operating income from the Media Networks segment.

Let’s add all this up.  $.45 reported + $.035 to correct for the extra week last year + $.09 for the cable contract timing shift  +  $.07 for IMD   =  $.595.  In other words, 4Q2010 was a really good quarter.

things I noticed in the report

From an investment point of view, the key positive is that the advertising market is growing very strongly, both for ESPN and for ABC.  But there are other positives that caught my eye as well, namely:

Writeoffs of older, unsuccessful movies appear to have stopped.  For the full fiscal year, DIS reported impairment charges of $132 million, the largest part of which was for writeoffs of abandoned/unsuccessful movie projects.  The fourth quarter number was only $3 million.  If I’m correct, this is a real positive.

The theme parks are perking up.  Adjusting for the extra week last year, park attendance was up 1% and spending per person up 6% for the quarter.  Hotel occupancy was flat, with spending up about 5%.

Hotel reservations are up 5% year on year so far in 1Q11, with room rates also up by about 5%.  Unlike the case during the past couple of years, both metrics are moving in a positive direction.

what about the stock?

I like it.  It probably won’t be a rocket ship ride, but up 15% in eps is easily achievable in the current fiscal year, I think.  The company has also been buying back its own stock at around the $35.50 level recently–always a good sign.  I probably should mention, though, that I trimmed my DIS position a bit a couple of weeks ago, because I thought it had gotten too big.

I look at the prices of the stocks I hold every day.  Sometimes, but not always, I’ll look several times intra-day.  The advent of smartphones has made this possible for everyone to do, both for US and foreign stocks.  This is so, almost no matter where you are.

It takes a substantial amount of self-control and emotional discipline to do this productively.  I’ve seen almost every professional investor I’ve worked with, including myself, at one time or another mesmerized–and paralyzed into inaction–by staring at random fluctuations of stocks marching across the screen that’s virtually always on your desk.  The only short-term cure is to turn the machine off.  Otherwise, it’s kind of like watching a trashy TV show.  You know it’s a waste of time but you’re sucked in.

With TV, this compulsion to watch may come when you have other, unpleasant, stuff to do.  For investors, it’s typically when plans have gone awry and you’re hoping against hope that a miracle will happen and you’ll see the situation reversing itself on your computer.  It never works.

Still, there’s sometimes information to be gleaned from stock prices.  Sometimes, the movements are unusual in that they’re not random.  The only way you can tell is by checking them regularly.

how I learned

My first international portfolio job, managing holdings in smaller (that is, non-Japan) Pacific Basin markets, was also my first time working in non-US markets.  Every morning my boss would call me into her office.  She always had a report showing prices and volumes for all the major stocks–whether we held them or not–in all the areas I was responsible for.

She would name a stock.  I had to tell her the stock price change, in dollars and cents and in percentage terms, the trading volume and who the major brokers were who were active in the stock–both on the buy and sell side.  I also had to say how the trading in this stock compared with the trading in similar stocks in the same industry.

This grilling went on for 15-30 minutes, every day for several months.  I stopped having to do this, I think, when I started to give my boss significant information that she didn’t already have.  Although I wouldn’t have described the process as pleasant, my boss forced me over a period of time to try to distinguish between random and information-laden price/volume data and to think about and improve my analytic/intuitive capabilities in this area.  Otherwise, I might still be in that room!

an (obvious) example

A number of years ago, I owned a Canadian energy royalty trust.  The stocks were primarily owned by Americans attracted by high income.  I bought after they collapsed when Canada announced the payouts were going to become subject to Canadian income tax.  The stock I bought had a 14% dividend yield that was slated to be gradually reduced to 8% as the new income tax was phased in.

One afternoon, very close to 4pm, someone placed a million share order, at the market, in the stock.  The US$20 million that the order represented amounted to about half a day’s volume and was maybe 100x the size of the typical order.  The broker who got the order seemed to do the minimum legally required to find stock away from his in-house market maker and then filled the order, pushing the stock price up about 5% in the process.

This trade screamed that something unusual was going on.  Maybe you should  think twice before saying someone with $20 million to spend on a single stock is a total idiot, but this trade was done in a way that would humiliate any professional trader.  So either the buyer was an idiot by entering a huge order with no price sensitivity, or he knew something that the market wasn’t yet aware of.  The “something” also had to be such that even waiting until the next day was an unacceptable risk.

A few weeks later, the stock was bid for by a Middle Eastern sovereign wealth fund at a 25% premium.

why I’m writing about this today

As regular readers of this blog will know, I like the casino industry–because it’s simple to analyze–and I own both WYNN and 1128 (Wynn Macau).  Overnight, 1128 was up 8.7% to HK$15.98, after hitting an intra-day high of HK$16.40.  The stock just doesn’t normally move more than a few percent in a day.

Sands China (1928) and Galaxy Entertainment (0027) were both up 4.6%.  The Hang Seng, in contrast, was up 1.2% and its China Enterprises index was up 1.5%.

These are all unusual price movements, although 1128 jumps out as extraordinary, especially since all three stocks have been star performers in the Hong Kong market this year and are all trading at relatively high PE ratios.

What’s going on?  My guess is that information is leaking out that the Golden Week holiday has gone surprisingly well for the Macau casinos–and especially so for the American-run ones.

What am I doing as a result?  I’m hanging on to my entire 1128 position longer than I would otherwise.  In my analysis of the Wynn-related companies posted earlier this year, I had used a sum-of-the-parts method to look at WYNN.  I started with the idea that HK$15 (20x what I estimated 2010 eps would be) was a fair price for 1128.  Although I may not have written it, I’ve been thinking that HK$18 (same multiple, eps up 20%) is a reasonable first target for Wynn Macau for 2011.

Ordinarily, I’d be selling a portion of the 1128 I hold, maybe with a limit order of HK$16.50, hoping to buy it back later on at a lower price.  I think I’m going to wait and see, instead.

Addendum:  WYNN gained 8.5% in New York trading on Monday in a flat overall market.  If we figure that 1128 represents at current levels about 70% of the market value of WYNN, the move up in 1128 is the equivalent of a 6% rise in WYNN.  The “extra” 2.5% is the interesting part of the parent’s performance.

The bottom line is that many equity mutual funds and ETFs have large accumulated recognized losses.  These are akin to operating loss carryforwards that operating companies may have.  This was bad news for shareholders during the time the losses were racked up.  But it can be valuable good news for current or new shareholders.

How so?

They don’t appear in the net asset value calculation, so you don’t pay for them.  Nevertheless, they can be the single biggest asset a fund has.  Their value is that they offset the taxable distributions you would otherwise get when the fund sells stocks at a gain.  In other words, you get to keep the entire amount of the gain (inside the fund) rather than having to pay tax on the gain at either short-term or long-term capital gains rates.  Skillfully used by the fund management company, this ability could be worth 10% or more of the NAV of the fund.

Neither brokers nor fund companies talk about this topic.  This is mostly because doing so would highlight again the fund’s loss-making past that its marketing people hope everyone has forgotten about.

As it turns out, I’ve been hired more than once in my career to turn around a poorly performing fund that contained very large tax losses.  So I’ve seen the value of this asset first hand.  Along the way, I’ve been cited by Forbes a number of times for running very tax efficient portfolios.  I know this is an odd topic, but it can be a profitable one.

Let’s get started.

background

funds as corporations

Mutual funds and ETFs are, as legal entities, are a special type of corporation.  They are exempt from taxation of income at the corporate level in return for restricting their activities to portfolio investing and distributing virtually all their income and realized capital gains to shareholders (who are liable for paying income tax on the distributions).

individuals tend to buy high and sell low

The old brokers’ joke is that Wall Street is the only marketplace in the world where customers run out of the store when a 30% off sign is placed in the window.  It is a characteristic of the behavior of many individual investors that they tend to act in a highly emotional fashion.  This leads them to buy when prices have already been rising for a considerable time and the market is very enthusiastic and to sell after sharp drops and everyone is scared.

in the Great Recession

In the most recent instance of such behavior, according to the Investment Company Institute, equity mutual funds in the US had net outflows of about $150 billion between October 2008 and March 2009.  During this time the S&P 500 ranged from the high 600s to the high 800s–or 30% or more below today’s level.

In contrast, net inflows to equity mutual funds during the first half of 2007, when the S&P was above 1400–25% higher than now, were about $85 billion.

US funds vs. international

We can disaggregate these flows to see the behavior of investors toward US-oriented funds and their international/global counterparts.

US funds had virtually no net inflows during the first half of 2007 and about $100 billion in redemptions at the bottom–outflows equivalent to most of the money invested in them (at levels above 1200) since 2004.  (there’s a clear shift by investors away from domestic funds to ETFs during this period but that’s another story.)

Global/international funds, in contrast, captured just about all the $85 billion in inflows at the top and had “only” $50 billion in outflows at the bottom.

concentrating on US funds

If we assume that the $100 billion in redemptions occurred when the S&P was at 800 and that the stocks were bought on average when the S&P was at 1300, we can get a rough idea of the magnitude of the losses that this “sell low” trade engendered.  The two index levels imply that the stocks sold for $100 billion had a cost basis of about $165 billion–therefore that the selling funds created an aggregate loss of about $65 billion, much of which is still on the books of mutual funds.

Why still on the books?  For many funds, their share of this number dwarfs the unrealized gains they have on positions they still hold.  Given the (rare) occurrence of two bad bear markets during the last decade–the aftermath of the Internet bubble + the financial meltdown–a fund would likely have to have either bought stocks recently or held them since some time in the Nineties to have unrealized gains.

caveats

Not every fund has accumulated losses.  Not every fund has a skilled manager or a management philosophy that will allow them to use this asset effectively.  Although most funds are in a loss position because the past few years have been the worst for stocks since WWII, some have added to their woes because they’re not good investors.  This latter type is one to identify and avoid.

ETFs

Many equity ETFs are passive entities.  They may have very large losses, but unrealized ones, because they became popular and received large inflows in 2006 and 2007.  Today those purchases are probably deeply under water.  To the extent that these funds are run by computers, not humans, it’s unclear how they’ll be able to realize and use these losses.

That’s it for today.   Tomorrow I’ll write about how to find and evaluate the loss position for any given mutual fund.  You’ll find the numbers buried in the fund balance sheet and accompanying footnotes.

Two aspects of the WSJ account of the study struck me as interesting.

It’s not the study itself.  From what the press accounts indicate, Morningstar compared the performance of 1-star funds with that of 5-star funds over the five-year period from 2005-March 2010.  The conclusion?–in a majority of cases, an investor who chose funds that charged the lowest fees would have done better than one who used the Morningstar stars.

Although Morningstar has skillfully build a business that generates about $500 million in annual revenue from its star ratings, that fact that they may not have predictive value should come as no surprise. The company itself is careful not to claim that they do.  And there have been academic studies from time to time that have raised the same issue.  Nevertheless, it’s a powerful psychological fact that when faced with highly complex decisions, people are invariably drawn to mechanisms that seem to distill the decision down to a small number of easily understood choices–like “Do I want one star or five?”

What did I find striking?

–the WSJ story notes that 1-star international equity funds outperformed 5-star funds over the study period.  Despite this, just about half of the 1-star funds were closed down during the half decade.  Not only that, but the best performing funds appear to have been the ones that shut their doors.  According the WSJ, the performance situation is reversed when considering funds that survived the entire time period.  5-star survivors outdistanced 1-star survivors.

Why would a fund company shut down a fund that’s outperforming?  Because it can’t get anyone to buy shares.  Why would that be?  My bet is that good performance is not enough to overcome the stigma of a low star rating.  To me this illustrates how powerful Morningstar has become in individual investor behavior.

–as presented in the WSJ, this is a pretty weird study.  Morningstar has over 25 years of data on mutual funds.  Why choose a five-year-and-three-month period?  It should be very simple to see if the same patterns hold over longer time frames.  Did Morningstar look? If so, what did it find?  How did the 2- 3- and 4-star funds, which represent the large bulk of the funds rated, fare?  Did the lowest-cost 5-star funds outperform the highest-cost funds?

Anyway, there are lots of questions the WSJ could have asked that could have provided analysis and insight.  The fact that it didn’t shows what the WSJ has become over the last few years.

early days

The latter part of the nineteenth century and the first half of the twentieth were times of what amounts to class struggle in the US between business and labor.  Issues ran the gamut from child labor and workplace safety to wage levels and unionization.

The sides coalesced around two political parties, the Democrats representing labor and the Republicans defending business.

(This struggle is basically over today, I think–leaving both major parties trying without a great deal of success so far to redefine themselves.  For good or ill, most Americans no longer draw a sharp distinction between management and labor.  This is partly because the nature of work has changed, partly because most Americans consider themselves part of management.)

During the time when workers were fighting for what we would now regard as basic, and self-evident rights, inflation became a significant weapon in the battle.  How so?

inflation and bonds

A conventional bond is a series of interest payments made to the holder plus return of principal at the end of the bond’s term.  The present value, or value today, of the bond is the sum of all these payments by discounting each back to the present using an appropriate interest rate.  The higher the interest rate employed, the lower the present value.

the holder

A rising inflation rate erodes the present value of a bond.  If, for example, when the holder purchases it, inflation is at 3% the buyer may be content with a 6% coupon.  He receives $60 a year in interest payments and his $1000 back a the end of the bond’s term.   The interest payments offset inflation and provide a real return of 3% annually.

Suppose the inflation rate rises to 7% immediately after the holder purchases the bond.  Suddenly, he is no longer receiving a real return on his money.  Part of the purchasing power of his investment is disappearing, due to the higher rate of inflation.

the seller

Conversely, the seller benefits from an increase in the inflation rate, since that results in a real decline in the value of the payments he has agreed to make to the holder.

back to politics

It seems to me that during the late nineteenth and early twentieth centuries a basic assumption of the Democrats, the party of labor, was that its constituents held no physical or financial assets.  In fact, many might be net borrowers, or, as the financial world would put it today, be “short” financial assets.  Their main source of economic worth was their ability to sell their labor.

In contrast, Republicans thought of their constituents as the “longs,” wealthy bond-coupon clippers, with ownership of vast amounts of physical and financial assets.

two opposing agendas

These differences set the agendas of the two parties.  If the Democrats were in power, they could attempt to transfer wealth from business to labor overtly by increasing taxes on the wealthy and/or by raising benefits provided by the government to workers.  Or they could do so covertly by establishing economic policies that induce inflation.  That would decrease the wealth of the old time robber barons–and at the same time it would lessen the real value of the loans workers had taken out from them.

When the Republicans were in power, they would start to undo the policies initiated by the Democrats, by trying to balance the government’s books and by fighting inflation with restrictive economic policies.

I think this is the way Washington worked even through the 1970s.

the new order

Not any more, though.

The nineteenth century model was one of massive capital investment in plant and equipment (think: blast furnace steel) operated by manual labor.   Accelerating rates of technological change have destroyed that economic model.  Who are today’s economic heroes?–Google, Apple, Amazon, Pixar, biotech…  They are relatively small groups of highly educated people creating service businesses that require little physical capital, many of them using the internet as a substitute for having a large advertising budget and extensive physical distribution facilities.

the old dynamic reborn

At present, most domestic economists are praying for any sign of inflation to emerge, simply to give the US some breathing room against the possibility of deflation.

Beyond this, however, inflation has reemerged as a political issue in the US.  The new dynamic has arisen from the fact that Washington has borrowed heavily from foreign governments–notably Japan and China–as well as from domestic sources.

So the drama of the first half of the twentieth century has been recast, with the Chinese in the role of big business and Washington in the role of labor.  It is certainly tempting to lawmakers to attempt to repay foreign creditors in inflation-diminished dollars rather than to have to have tax revenues large enough to generate the entire real amount owed.  On the other hand, China, sensing this line of thought, has been increasingly vocal over the past year or so in its concern that Washington protect the purchasing power of the dollar through economic orthodoxy.

This new drama is still in rehearsals.  The collapse of the euro has meant it won’t need to open on Broadway any time soon.  But it will still be important to monitor how the play is shaping up.

The article states that market timing amounts to gambling because it is impossible to forecast market movements, and “you run the risk of missing periods of exceptional returns.”  As an example (here comes the nonsense), a $1 investment in the S&P 500 over the last 20 years would have grown to $4.84, but if you had missed the best 10 months of stock returns, the ending value would have been only $2.04.

It’s pretty easy to grab these numbers from Yahoo and throw them into a spreadsheet.  I used the Vanguard S&P500 Index fund assuming reinvested dividends.  The author used the April, 1990 to April, 2010 timeframe, so I used the 20 years ending June 1 to capture the latest downturn, which ”proves” the case against market timing just as well.  In the 20 years ending June 1, 2010, a $1 investment would have grown to $4.43, and missing the 10 best months would have resulted in only $1.91.

Now for some results that were not mentioned.  What if you missed the 10 worst months, which is just as ridiculous as somehow missing the best months, but equally likely?  In this case, your $1 turned into $13.48.  Doesn’t that seem worth mentioning?  How about something less ridiculous, like missing the 10 best and 10 worst months?  Now, the $1 is $5.43, a 22% improvement!

Now let’s get a little smarter about the whole thing.  If a big positive month happens in the middle of a string of positive months (bull market), why would you get out of the market?  So let’s assume we miss positive months only when they happen after at least an 8% drop, when a portfolio would likely have been moved to cash.  Similarly, if a negative month comes after a positive trend it is likely you would be fully invested, so we’ll assume you experience the full month’s loss.  As a specific example, the monthly returns for June-Sept, 1998 were 4.08%, -1.06%, -14.47%, and 6.41%.  We’ll count the big negative return in August because the previous month would not have triggered any selling, and we’ll miss the positive return in September because August would have caused us to move to cash.  This is still incredibly unsophisticated, but it’s a heck of a lot better than the brain dead 10 best or 10 worst months.  The result with just a little intelligence added results in $6.36, a 43% improvement over buy-and-hold.

The conclusion is that anyone who uses a “missing the best [days, weeks, months]” argument to prove a buy-and-hold point is either being incredibly sloppy with the data, or being disingenuous.  I’m open to other arguments on the topic, but not that one.

the bottom line

The research studies a large number (79) of past currency collapses, mostly in developing countries.  There’s a complicated definition of what constitutes a collapse, but it’s basically meant a drop of 22% or more in the value of a country’s currency in a short period of time.

Collapses are associated with a permanent loss in real GDP of 6%–not a good thing.  –also something you’d expect to see.

What’s interesting about the study, though, is that it finds the output loss begins three years before the currency drop.  Therefore, although the currency decline is correlated with the output loss, the currency movement doesn’t cause it.

In fact, quite the opposite.  The currency collapse appears to mark the beginning of a period of accelerating economic growth that would likely not have occurred in the absence of the currency decline.  The better economic performance continues for several years, and ends up offsetting about two-thirds of the economic loss.

In other words, the currency decline, although frightening, is the first sign of economic healing, not the harbinger of further economic doom.  (Note, again, there’s no claim to have established causation.  The only assertion is that the better economic performance comes after the currency debacle.)

think:  the euro

The fall in the euro vs. the US dollar has been 21%+ over the past half year or so.  For my money, this counts as a currency collapse.

We know in theory that currency decline has three effects:

–it acts like a drop in interest rates as a stimulus to economic growth,

–it redistributes economic energy toward exporters and import-competing industries.  It channels growth away from importers and foreign manufacturers.  And,

–it increases the value to locals of foreign hard-currency assets.

Said a different way, a stock market investor should look for companies that have hard-currency revenues and weak-currency costs.

My experience with European stocks has been that recognition of the new currency facts of life lag the actual currency movements by a couple of months.

What does the BIS study add to these theoretical musings?  The fact that in 79 past instances, this is the way things have turned out.

what happened

Last Thursday, May 6th, was a generally bad day on Wall Street.  What makes this session worthy of not, however, is the Tower of Terror-like plunge that the market took at about 2:45 pm, followed by an equally swift rebound several minutes later.

visiting the SEC

Representatives of the major exchanges met with the SEC yesterday to discuss the situation.  All reportedly professed to have no idea what caused the sudden decline and rebound.  That’s not really much of a surprise.  On the one hand, no one wants to take the risk of becoming Congress’s latest whipping boy if they admit to having had even an innocent hand in the debacle.  On the other, its track record in cases like Madoff suggest that the SEC doesn’t have the knowledge or interest to pursue the issue by itself.  So anyone involved would likely be calculating that, absent a public declaration of repsonsibility, they will never be found out.

rumors

There have been two persistent stories about the trigger for the mid-afternoon drop.  One, offered by CNBC, is that a trader from Citigroup made an input error that generated a sell order that was 1000x the amount intended.  Citi denies this.  The second, more detailed–and therefore, I think, initially more plausible–comes from the Wall Street Journal. According to the newspaper, the initial trigger was a relatively small sell order placed in the Chicago options market by hedge fund Universa Investments.   However, the Journal may have been attracted to this trade as much by the fact that Universa is linked to Nassim Taleb, who popularized the idea that disruptive “black swan” events are much more numerous than academic theories allow for.

what we do know

Several things are clear:

–as the computer-to-computer selling got more intense, the NYSE turned its machines off and reverted to manual processing of trades.  Apparently, although I wasn’t aware that this was the case, this is the NYSE’s publicly stated policy.  This action effectively eliminated one of the main ways derivative holders could hedge their positions with offsetting exposure in physical stocks.  It caused trades to be redirected to other middlemen, who buckled under the added pressure.  It isn’t clear whether the others took defensive measures similar to the NYSE’s or whether they were simply overwhelmed by volume.

–ETFs were hurt unusually badly in the selloff.  According to the Financial Times, two-thirds of the securities where exchanges subsequently cancelled trades were ETFs.  ETFs themselves represent only about 16% of the total number of securities traded on US exchanges.  I don’t think there’s any great significance to this, however.  In a “normal” stock trade, the market makers matches a third-party buyer and seller–who have already decided they want to transact–and charges a bid-asked spread.  In an ETF trade, however, the counterparty is often the market maker himself, who is constantly calculating the NASV of the underlying ETF and his hedging possibilities and deciding whether to transact at a given price or not.  To let the market know he is potentially a buyer or seller, he typically has “placeholder” bids of, say, $.01, that under normal circumstances let the world know that he may be interested in transacting.

Last Thursday, a lot of those $.01 bids were hit before the market makers could withdraw them.

–as mentioned above, the exchanges unilaterally decided to cancel transactions they considered to be anomalies.  This presumably leaves a lot of unhappy individuals who had placed low-ball limit orders.  Perhaps not by coincidence, the counterparties–that is, the losing side–to those canceled trades are the same exchange members who canceled them.

what happens next

The SEC is under political pressure to do something to prevent a recurrence of anything like the near-instantaneous decline of 5% that happened last Thursday.  Some of this pressure likely comes from proponents of having a stronger “uptick rule” (see my post on this topic).  Although the current uptick rule seems to me to invite sudden plunges in stock prices of the type we had last week, no one is publicly suggesting that this is the cause of last Thursday’s meltdown.

Whether needed or not, a new trading halt mechanism is probably the “solution” the SEC will opt for.

I have two related thoughts:

–added volatility may just be a fact of life in a modern stock market, where computer-to-computer trading and monthly performance measurement of the type hedge funds undergo are prevalent.  In other words, get used to this.

–the first time something like this happens, it’s a surprise.  Even now, I’m sure that investors are beginning to devise strategies to cope with–and take advantage of–increased volatility.  Understanding what’s going on and planning for it, investors will enter the market as buyers sooner and more aggressively. By doing so, they will temper volatility.  For their part, sellers, learning that there’s a penalty for being aggressive on the downside, will adjust their behavior as well.

That’s why I think canceling money-losing trades made by people pushing the market down is a really bad idea.

–no one so far is questioning the behavior of the NYSE (admittedly, not my favorite organization).  It’s kind of like switching from big fire hoses to small ones as soon as the fire starts.  What good is that?  In fact, if this incident isn’t the accident that I think it was, short-sellers may have been counting on the NYSE to remove liquidity from the market.

ATVI and ERTS are the only two large third-party video game software companies left standing (sorry, Ubisoft).  Add Nintendo to the list and you can delete “third-party” from the statement.

Sega was acquired years ago by pachinko machine maker Sammy and lost the lion’s share of its game staff.  Sony’s traditional Japanese management practices managed to alienate most of its developers and drive them out of the company, mostly between the PSI and PSII generations.  (By the way, one of the reasons social networking and online casual games have been so successful is the surfeit of game developers looking for work.)  Microsoft never arrived.  And Vivendi’s games unit, which contained Blizzard, maker of the Warcraft and Starcraft franchises, recently merged with Activision.

rising risk in shrink-wrapped game software

As I’ve written elsewhere in this blog, the risk profile of video game software development has risen radically over the past decade.  The short version of why:  there are about 300,000 inveterate gamers in the US and, say, 600,000 worldwide.  These are people who will buy any reasonable game, pay full price, play it 20-30 hours a week until they beat it, and then go on to the next one. Since games that work in one part of the world usually don’t appeal to gamers in another (Blizzard games are the notable exception), a game software company can probably count on selling 400,000 units of a good game to this sure-fire audience.  If we say that the development company gets operating income of $30 (after marketing costs) on each unit sold, then we can pencil in a minimum of $12 million in cash coming in the door from a good piece of software.

A couple of console generations ago, when development costs were, say, $5 million per game, the existence of these hard-core customers assured a profit.  Now, with costs having risen above $20 million, the “sure thing” money from video game-crazy customers only covers about half the price of making the software.  So the video game company has to rely on the much less predictable group of casual gamers to end up in the black.

The king of the mega-hit in the era of high development costs has been ATVI.  It gave us, among others, Tony Hawk, Guitar Hero and Call of Duty.

musical chairs

Because of its apparent Midas touch in the now-risky business of shrink-wrapped software, recent turnover of talent at ATVI has become a source of concern for Wall Street.  Specifically:

–after racking up huge losses by expanding its music game division just as demand for the genre was waning, the head of this unit departed ATVI.

–the founders, and many professional employees working at, Infinity Ward, creator of Call of Duty, left ATVI.  They formed a new company, Respawn, funded by ERTS.  All sorts of lawsuits are in the works.  One might see this move as a return to the womb, since the principals of Infinity Ward made their reputation by working on the ERTS game, Medal of Honor. Conspiracy theorists have seen the ERTS support as payback for ATVI’s pirating key developers from ERTS last summer.

–Michael Griffith, president and CEO of Activision Publishing, stepped down from his job, although he remains with the company.

At the same time:

–Bungie, the developer of the wildly successful Halo franchise for MSFT, has signed a ten-year deal with ATVI.  Halo still belongs to MSFT; anything new is ATVI’s.

It’s hard to know whether in a net basis ATVI is better or worse off with its new cast of characters.  My guess is that the business is relatively unchanged.  It’s also important to note that the Warcraft side of ATVI, which accounts for the majority of its profits is unaffected.

ATVI’s stock

ATVI has been a severe market laggard during the past year.  The stock was fine until last fall, when news began to emerge that the 2009 holiday selling season was going to be a relatively poor one.  Modern Warfare 2, the latest installment in the Call of Duty franchise, ensured that ATVI was relatively insulated from industry woes–though it did have the music game writeoff mentioned above.  But MW2 did little for ATVI other than preventing it from falling.

The stock began to perk up earlier this year, as the market began to look for laggards and after ATVI revised up its March quarter earnings guidance.  But then the Infinity Ward stories began to break and ATVI shares started to slide.

What to do?  I’m keeping my shares for now.  I take comfort from the huge (but maturing) cash generation from Warcraft;  I hope Starcraft will eventually get released; and I think ATVI management is sound.  I also own a social networking game company (DeNA in Japan) so ATVI isn’t an all or nothing bet for me.

If I saw someone working for me doing what I describe in the paragraph above, I would be very skeptical and wonder if he needed to wake up and smell the coffee.  For anyone wanting to switch to a different consumer discretionary name, however, the current period of stock market weakness is a natural time to do so.  Stocks that have gone up a lot tend to be hit by the heaviest profit-taking.  Stocks like ATVI don’t go down as much because they never went up.

ATVI reports after the close tonight.  Maybe the company will shed more light on its situation then.

If so, I’ll write about ATVI again tomorrow.