Electronic Entertainment Expo (E3) Recap

This year’s E3, the video game industry’s annual convention, has come and gone. Even though it took place at a smaller venue (Santa Monica instead of Los Angeles), the big three still made important announcements.

Microsoft (MSFT)

They unveiled some type of kiddie remote which had big buttons. This is part of their effort to appeal to the casual gamers and bring younger children on to the Xbox360 platform. Other than that they only showed games in development. Considering what they showed the company is in cruise mode; just allowing developers to create more content and tweaking the cooling of their hardware. A price cut may be in store before the holiday season. The switchover from 90-nm to 65-nm allows them to make more chips on the same area, reducing costs. I’m personally waiting for these new chips before purchasing an Xbox360, because the Xbox360 is known to be noisy due to the cooling fans. The price drop, improved aesthetics, and plentiful content will help drive sales Holiday 2008. Their blockbuster game, Halo 3 will be ready in time for the holidays. This improved hardware will also reduce the losses incurred by repairing broken consoles, which has cost more than a billion so far. The games in development are for hardcore gamers and ones that hardcore gamers can play in front of their kids.

Nintendo (NTDOY.PK)

At the beginning of the press conference, they announced that they had won this generation’s console war. They are indeed in a position to be envied with hardware and software flying off the shelves. The most important announcement was the new peripheral, the Balance Board and its accompanying game, Wii Fit. The Balance Board senses your weight distribution on a board placed on the ground. By shifting your weight, you can interact with the character on the screen. Initial reports from the show floor indicate that the concept works and is fun even for hardcore gamers. The main target of Wii Fit is perfectly clear when you start seeing the yoga poses. Soccer moms will eat this up. They are ensured to sell millions of copies. Another peripheral announced was the Wii Zapper, a plastic case to put the WiiMote and Wii Nunchuck in to create a light gun for only $19.99 including game. This is perfect for simulating the guns at arcades and for killing zombies in Resident Evil: Umbrella Chronicles. The first party line up of (Super Smash Bros. Brawl, Super Mario Galaxy, Metroid Prime 3: Corruption, and newly announced Mario Kart Wii. Although the bulk of the announcements were for the Wii, the DS Lite handheld is also doing well with The Legend of Zelda: Phantom Hourglass. If all this wasn’t enough, Nintendo is now the 5th largest company in Japan.

Sony (SNE)

One thing I was extremely happy about was the redesigned PSP. I broke mine, so I was waiting for their new and improved version. The new PSP has longer battery life, is thinner and lighter. The game lineup is still lacking, but the PSP’s sales are starting to increase. I know people who have bought it and keep it in their drawer.

The PS3 underwent a pseudo-price drop. They are shifting around the prices and configurations by putting new models with bigger hard drives and bundled games at the $599 price point and pushing down the older configurations to $499. When those older configurations sell out, they will not be replaced. There are 2 killer applications that will drive the sale of the console. They are Metal Gear 4 and Gran Turismo 5. Unfortunately both of them will not make it for the holidays. Gran Turismo 5: Prologue, a stripped down version will come out in October in Japan to wet racer’s appetites. Their online experience called Home is shaping up to integrate games and a virtual 3D-world together. In the online arena, NCSoft, the makers popular of MMORPGs will make the PS3 their sole console platform since it has a hard drive. One thing that Sony does right is push upgrades that enhance functionality of their machines.

Outlook

MSFT is still having trouble penetrating the Japanese market. I know two people with an Xbox360. I own a Wii and NTDOY. My male friends have their own Wii. My female friends own DS Lites. My rich friends have PS3s. The PS3 has a lot of momentum with the brand, but they need to get the ball rolling. By end of 2007 if not sooner, the Wii will be the dominant platform.

Don’t know what to buy? Now might be the time for tech stocks

For those of you that don’t have a position in the Technology sector in your portfolio, now is the time to buy. Big institutions (i.e. mutual funds and hedge funds) all obey an investment cycle. These big institutional investors are the ones that move the market and whose investments are the ones that counts. According to Jim Cramer (A former hedge fund manager, who has his own show Jim Cramer’s Mad Money on CNBC, which I highly recommend for people to watch) now is the time in the investment cycle to buy tech stocks because the big institutions are now buying tech stocks. The two stocks that he recommends now are Dell (DELL) and Hewlett-Packard (HPQ). However whatever tech stock you ultimately buy into, you should sell the stock by no later than January 31, because as you can guess that is when the big institutions begin to sell their holdings in the technology stocks. The only exception to this (according to Cramer) is Apple (AAPL), this is the only stock that historically does well year-round and doesn’t move with the investment cycle. So, for any of you looking for something to buy during this down time in the market, definitely rid yourself of Financial’s (because they are definitely taking a beating) and get yourself into the Technology sector. At the very least definitely take some time to look at Dell and Hewlett-Packard, for they come highly recommended by Jim Cramer. Remember it is almost back to school time for a lot of students, and students will be in the market for technology products, which will definitely bode well for the growth and earnings of companies like Dell and HP.

Top Places to Sell Online (Ebay, Craigslist, Facebook)

I’ve sold a lot of things online, ranging from: concert tickets, collectible fishing lures, bobbleheads, Yu-Gi-Oh cards, digital cameras, and baseball jerseys. I’d like to share what are the most efficient ways to sell things through the Internet. Why keep stuff laying around when you can turn that into cash which can be reinvested?

1) EBAY (www.ebay.com):
Use Ebay (EBAY) as an indicator of the market value for the item you would like to sell whether you plan to use the site or not. View the recently completed auctions to find out what the public is generally paying for the used or new item that you have. For things that can be easily shipped and have some kind of scarcity, I would use Ebay because you have the widest range of possible buyers from all over the country. Be aware that you will have to account for the cost to ship the item and 3-4% of the sales that will be paid in Ebay fees. Then you’ll have to pay another 2-3% of the payment via Paypal (the usually method of payment through Ebay). If you’re not willing to lose up to 7% of the sale plus shipping cost, then Ebay may not be the best option for you.

Best Ebay benefit: can sell almost anything, widest range of buyers
Biggest downfall of Ebay: a lot of auctions to compete against

2) CRAIGSLIST (www.craigslist.org):
If you’re looking to sell items not easily shippable (furniture, artwork, household appliances, car parts), then Craigslist would be the place for you. Craigslist was started in the Bay Area and is basically an online classified site that allows users to post ads for free. There are no fees involved like Ebay, but you have to communicate through e-mail to set up an appointment for the sale. There is a minor amount of fraud on Craiglist with people trying to obtain payment via Western Union wire funds. If you don’t meet with the person to complete the sale, there is no guarantee that he/she is a legitimate buyer. The housing postings are plentiful and are good for advertising to all types of potential renters.

Best Craigslist benefit: ability to sell larger/heavier items, no fees
Biggest downfall of Craigslist: no commitment from buyers, fraud

3) FACEBOOK (www.facebook.com):
Facebook is a social networking site that has recently added a marketplace to their site; where you can post items you want to sell, items you want to give away, or housing vacancies. At this point, it is hard to say how successful the classified ads for material items are doing. The major benefit to using Facebook is for college students or recently graduated college students looking for housing and have yet to invest in a piece of property. The rental options are quite plentiful and you can check out the profile of the poster so you can make an assessment beforehand how compatible you would be. I have easily found three roommates via the rental section of Facebook marketplace.

Best Facebook marketplace benefit: easy way to find college roommates
Biggest downfall of Facebook marketplace: too new to know how effective listings are

Basics: 401(K)

For most workers out there, employers have on offer a retirement plan. In the past, this used to be in the form of a pension plan guaranteed by the company. But with a lot of companies moving away from this corporate financial liability, the in vogue benefit offered to employees has become the 401(k). So how exactly is a 401(k) beneficial in establishing a retirement strategy?

Depending on the employer, the 401(k) plan gives you a variety of mutual funds to invest in set by the company managing the accounts. Some of your wages are set aside pre-tax and placed into the 401(k) account and you choose how much of that contribution are placed into which mutual funds. In addition to the untaxed money, there also tends to be a matching contribution from your employer. The match is commonly 50% of your contribution up to a certain percentage of your wages. So if you set aside 8% of your wages, your company will kick in an additional 4% to give you a total of 12% of your wages set aside in a retirement account.

Why is this so great you might be wondering. Couldn’t you just set aside the money yourself and invest it in whatever you feel like? Yes, you very well could, but then you will have to give the tax man his cut. And if you’ve read the compounding interest article you should know that taxes eating away at your gains will reduce your potential overall savings by a lot in the long run. When you put money into your 401(K), you get that percentage of your wages without it having been taxed and it reduces your taxable income by the amount you set aside. If done properly, you could potentially keep yourself in a lower tax bracket, saving yourself even more money.

While the tax benefit is by itself a great reason to put money into a 401(K), there are also a few other advantages. First, you set up an amount to be automatically deducted from your paycheck. There’s no easier way to save money than to not have it in your hands to spend in the first place. Second, if you’re in a bind you can take out a loan on the balance of your 401(K) or even make an early withdrawal without penalties if under specific hardship situations. Third, you can rollover your 401(K) to another company if you decide to change careers.

But you still need to be careful and keep track of this investment tool. At least once a year you should re-balance the distribution of mutual funds you choose to invest in to keep your money thoroughly diversified. Another issue to be aware of is the fees the mutual funds incur since those will also eat into your long-term earnings. If you change jobs often or have a major financial emergency, be cautious when handling your 401(K) since you might incur penalties and taxes if you don’t follow the rules for withdrawal or rollover.

There are limitations to the amount you can contribute to the 401(K), but you can contribute more if you are 50 or older. After 59 1/2 you can begin withdrawing money from your 401(K) without penalties and you must begin taking distributions after you reach 70 1/2 unless you are still working. Since the 401(K) is a tax-deferred account, you don’t pay any taxes on the gains of the account, but you pay taxes on the distributions you take when you start withdrawing money. A 401(K) is best if you expect to be in a lower tax bracket in the future since the money you put in will then be taxed at a lower rate than if you hadn’t put it into the 401(K).

Starbucks: Add a Caffeine Shot to Your Portfolio

After hitting a high of $40/share in early October, Starbucks (SBUX) has fallen to a current value of $25.87, down 35% and is at a 22-month low. Why is this stock down so much?

1) In late June, the CFO of Starbucks was quoted that the high end of 2007 earnings forecast ($.87-$.89/share) “will be very challenging” to attain due to:
a) rising price of milk (which is directly related to the increase in ethanol production)
b) slowing sales growth in US Starbucks locations

2) Increased competition from other competitors getting into the coffee business such as McDonalds (MCD) who has a premium coffee that has received positive reviews.

Reasons for optimism:

a) Starbucks says that China will be the biggest market outside of the US and will increase international stores by 20% over the next few years. Key growth will be outside of the US in markets that Starbucks has yet to establish. Locations in Russia and India are poised to open later this year. Americans already knows what to expect out of Starbucks when you go to the one of 6,281 Starbucks locations. The goal is to get a foothold in Chinese, Japanese, and Brazilian markets as soon as possible.

b) Adding more drive through locations is a no-brainer. As of October 2006, Starbucks operated 1,600 drive through locations. Life is so fast-paced here in America that sometimes people just want to pay for their $4 latte and get on with the rest of their work day. Some people don’t want to deal with the long lines inside the store and hassle of carrying coffee to their car. If America wants coffee on the go, then that’s what she’ll get.

c) Peet’s Coffee (PEET) isn’t considered direct competition for Starbucks, but Dunkin’ Donuts is probably the closes competitor. These two chains target entirely different demographics. Dunkin’ Donuts was originally founded in 1950 in the Northeast (Quincy, Massachusetts) and appeals more to the lower/middle-class America that is looking to get a cheap coffee and a more down-to-earth experience. Dunkin’ Donuts operates 6,000 shops worldwide compared to Starbucks 14,000.

d) Modification of their food menu because sometimes people don’t want just coffee. Customers sometimes need some sustenance to go with their coffee and Starbucks has delivered recently. Additions to their lunch menu with new items including a tomato mozzarella salad, fiesta salad with grilled chicken, roasted corn and black beans, bowtie pasta with goat cheese, and Asian sesame noodle salad. To cater toward the health conscious consumer, McDonalds did an overhaul of their menu over the last few years including salads, premium chicken sandwiches, negating the supersize option, and offering other healthier options. McDonalds stock price has doubled over the last three years and their upward momentum appears to be continuing. Starbucks understands that they are not just a coffeehouse anymore.

Benefit or downfall?
Starbucks has over 14,000 stores open around the world and aims to have over 40,000 stores in existence for the long term (with over half outside of the US). But some say that with so many stores open this will dilute the appeal of a Starbucks coffee and saturate its image.

The way I see it, if Starbucks can open stores across the street from each other, then they can handle losing the “novelty” label. They cater toward a crowd that is looking for a pleasant ambiance and a casual place to have a drink with a friend, conduct an interview, work on your laptop during lunch, or just have a place to cool off during summer.

Starbucks is at a discounted price and I believe will have more upside potential with minimal risk. Target price: $33

Pro-Ethanol Means Being Pro-Alcohol?

So what does ethanol have to do with alcohol? Well fueling your car with ethanol is just like putting alcohol into your gas tank. Do you know why? Well after the fermentation process step in ethanol production, where sugar is converted to carbon dioxide and alcohol by yeast, the alcohol is concentrated to about 95% through fractional distillation. The fermentation process usually takes around 40-50 hours. With the ethanol at 190-proof after distillation, drinking 151 proof rum at the club barely seems daunting. But just to make sure that the ethanol producing company isn’t charged a beverage alcohol tax, 5% denaturants (additives unfit for human consumption) is added to the mixture to make it undrinkable. Smart guys!!! So it turns out that all those environmentalists that are pro-environment/pro-ethanol are actually pro-alcohol. I guess they would also be pro-corn as well since corn-based ethanol is our staple ingredient to produce ethanol. So next time you’re drinking that fire-water at the bar or eating a corn-on-the-cob at your summer BBQ, think about the correlation to the great alternative fuel we call ethanol.

Whole Foods CEO using internet forums to attack rival company

“DALLAS - The chief executive of Whole Foods Market Inc. (WFMI) wrote anonymous online attacks against a smaller rival and questioned why anyone would buy its stock, before Whole Foods announced an offer to buy the other company this year.”

link to article

Wow, in light of this, the guidelines will be updated to also disclose stocks owned that are in direct competition with stocks you talk about.

Basics: Getting Started

An often asked question is, “How do I get started investing?” People hear about the stock market and such in the news, but it all seems so distance. I associate stocks with a horn and bells ringing. The first thing you do is get a job. You cannot invest without income to invest. Most of the investment technicalities are tax benefits that work in your favor with some strings attached. One should always start by utilizing these investment accounts with tax benefits. To start investing, you need to setup a brokerage account. I will go over the various options.

Step one. If you work for a company that offers stock options or stock purchases, you should try to at least take some if not all. If for some reason purchasing your own company’s stock is undesirable, you should find another company to work for. One should always like their workplace.

Step two. If your company has a 401(K) plan, you should invest up to the level that your company matches. That’s your company giving free money to you. This is similar to donating up to the amount that your company matches to a charity. You want to maximize the impact of dollars spent for charities and your own retirement.

Step three. Invest in a ROTH IRA up to the yearly allowance. They put a limit on this for a reason, since it is a very beneficial account. In a ROTH IRA, you put earned income that has been taxed into the account and when you take money out during your retirement it is tax free. If you’re starting out, you’re likely to be in a low tax bracket, so the taxes aren’t that heavy. When you retire, you wish to retire in style, hopefully by now your money is working for you and you’re in a higher tax bracket.

Step four. Invest up to the maximum contribution level of your 401(k). The tax benefit is that you put pre-tax dollars to be taxed later when you retire.

Step five. Invest in an educational IRA for your children. If you’re middle class by the time your children go to college, then expect to pay a lot for their tuition.

Step six. By now if you’ve followed all these steps, you have invested roughly $20, 000+ per year in accounts with tax benefits. That sounds pretty good, right? If your income is too high, then you won’t qualify for some of the accounts.

Step seven. If you still want to invest even more money you need to open a personal account, which is subject to capital gains tax. Capital gains tax take a chunk of the monetary gains from selling a stock. It’s like having a rat slowly nibble away at your big cheese.

Review of steps

1) 401(k) up to employer matching
2) Roth IRA up to limit
3) 401(k) up to limit
4) Educational IRA up to limit
5) Personal account to your heart’s content.

Why did I put Educational IRA behind 401(k) contribution?

I don’t have kids that I know of. There are also restrictions on how the Educational IRA money can be spent. Your kid may be smart and get a full scholarship or be dumb and not go to college. Uncertainty puts options lower on the list.

Why did I choose a ROTH IRA over a traditional IRA?

In a ROTH IRA you put post-tax money to have tax free withdrawals during retirement. In a traditional IRA, you put pre-tax money to be taxed later when you withdraw. If you’re really being a taxed a lot, then you’re likely to not qualify for these accounts. Investing is about being wealthy later. As people are living longer, they are also still working and contributing to society during their retirement years. The only case where I would choose a traditional IRA over a ROTH IRA is if I was an older person who would soon retire and earn zero income when I retired.

Basics: Stock Portfolio Allocation

Anyone involved in investing ponders the question “how much should I invest in the stock market?” I have seen stock allocation equations in Kiplinger Finance Magazine and other places range anywhere from “120 - x (your age)” to “100 - x (your age)” to determine what percentage of your investment portfolio should be allocated to stocks. So let’s take my age and use the arbitrary equations:

At the age of 24:
a) 120 - 24 = 96%
b) 100 - 24 = 76%

The difference between 76% and 96% is quite a huge difference and I can say that I am personally more comfortable investing 76% of my portfolio in individual stocks. That means when you get to be 65 years old and at the point of retirement, your stock allocation could be as follows:

At the age of 65:
a) 120 - 65 = 55%
b) 100 - 65 = 35%

I think that when I’m 65, I’m also going to feel more comfortable not having more than half of my portfolio in riskier stock investments and keep it in more conservative plays like mutual funds or certificates of deposits with a stable interest rate. So there really is no “rule of thumb” equation that the average investor can point to and determine how much they should invest in the stock market. What this does say though is that the younger you are, the more comfortable you should be in investing a larger percentage of your portfolio. Whether that number is over 90% or maybe just 50%, it has to be comfortable for you. There are so many other factors that we have to consider before we decide how much to allocate toward stocks; like mortgage payments, car insurance, monthly car payments, wedding costs, money for a rainy day, and forking out $600 for an iPhone. Financial situations vary so much from one person to another.

But my golden rules when investing in the stock market are these and you can choose to follow them or not:

1) Diversify your portfolio no matter what. As witnessed with the dot com bust and the subprime mortgage downfall, you never know what will happen.

2) Only invest in stocks that you understand. Don’t run after a company that your friend told you is hot but you know nothing about their business plan or future growth potential. Many people got burned 6 years ago because they bought anything with a “.com” in the name and they had no clue what the companies did. I bet some people investing in those companies were even unsure how the Internet worked. Like I said in my previous post, don’t run after any company that produces ethanol, but make sure you invest in a company that has a solid business model for the long term and can weather through rough times.

3) Try not to let emotions affect your investment strategy. People will tend to let past bad or good decisions affect how they make future investments and that is not the right way to go. One example is that someone loses money in the oil sector and they’ll be afraid to invest in oil again because of the fear of losing more. Another example is not buying a company that goes up a lot (let’s say Amazon.com as of recently), and the investor gets frustrated that they didn’t buy into it so they chase the stock and buy it at a higher price so they don’t miss the next run up. This has a tendency to bite a lot of people in the behind.

4) If possible, don’t invest more than 15% in any one company. This number changes depending on how much you have to invest and if you want to cost-average a stock if it goes down.

5) Get some stocks that pay dividends into your portfolio. Usually those stocks are less volatile and they give you a steady source of interest income. Usually.

Interesting Problem: Roof Worth

I had this problem on my homework for my investment science class. The name of the textbook and problem number will be kept secret to prevent people from using this solution to do their homework. The problem is to determine the worth of a roof that will last 5 more years with the conditions that the house will last forever, a new roof will last 20 years and costs $20k, the bank interest is currently 5% and the cost, interest and longevity of the roof will not change.

The value of the roof is the present value of having the roof lasting 5 years minus the present value of having to replace the roof immediately. This problem is solved by taking each senario and replacing the roofs forever.

PV = present value

PV_{roof} = PV_{5 years} - PV_{0 years}.

If we take the limiting case of each to infinity, we have

PV_{n years} = sum from k = 0 to infinity of -(replacement cost)/(1+r) ^{(new roof lifetime)*k+n}

So, how do we sum to infinity?

Let the sum, S = a + a*r + a*r^2 + …. + a*r^n

S*r = a*r + a*r^2 + a*r^3 + …. + a*r^{n+1}

S-S*r = S*(1-r) = a - a*r^(n+1) = a*(1 - r^{n+1})

S = a*(1-r^{n+1})/(1-r), for n = infinity and r < 1, S = a/(1-r)

PV_{roof} = $7k.

That’s a lot more than what I would think the roof would be worth. Who knew?