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In
This Edition... |
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We know we already
published a newsletter this week, but a wave of other data and research
we've been working on all came together recently. So, we figured sooner
was better than later. It's still within the 'bigger picture' (as in months)
theme though. In this edition, we've got:
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Video Gaming to
See Better Days... Soon.
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Don't Completely
Sweat Rising Unemployment
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Video
Gaming to See Better Days... Soon. |
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There's
a long-standing assumption that's being tested in 2009.... the assumption
that video game sales were recession proof. This year may well mark the
first year since the data's been tracked that PC and console game revenue
will be lower than the prior year's. Yes, even in 2001 and 2002,
kids (and kids at heart) found enough cash to keep buying video
games and related accessories. This year so far, though, has bucked that
trend.
 And,
video gaming stocks have paid the price for it. The S&P 1500 Home Entertainment
Software Index (which includes Electronic Arts and Activision-Blizzard)
has lagged the behind the rest of the market - badly - since March's
low.
So, the worst
recession since the Great depression finally caught up with these stocks
too? Maybe. Maybe not. To really appreciate how well video game makers
are doing or not doing, you have to understand how the industry works.
In a nutshell,
best-seller games are the key to success or failure as a video game designer.
There are really no mediocre games... only great, or bad games (as
measured by sales). As it just so happens, a massive number of gaming hits
were released in late 2007 through 2008... Activision's Guitar Hero,
Grand Theft Auto IV, Super Smash Bros. Brawl and Mario Kart for Wii just
to name a few.
Can you name
any blockbuster hits for 2009? That's the point. There have been none.
Games have been selling, but none of them could compare to the string of
wildly successful - fiscally speaking - games seen a little over
a year ago. The year-over-year comparables look terrible, but the comps
from last year are excessively high.
And there's
the opportunity... investors have largely written the industry off, yet
a new wave of pretty compelling titles are starting to trickle out. Band
Hero, Left 4 Dead 2, Guitar Hero: Van Halen, Grand Theft Auto: Chinatown
Wars, and Grand Tourismo are all out, or will be sometime in Q4.
They still may
not collectively rival 2007's and 2008's numbers, but they could/should
re-ignite these severely beaten up stocks.
By the way,
nearly half of all video game sales occur during the fourth calendar quarter
of the year thanks to holiday shopping. The combination of several new
hot titles and the calendar may juice revenue far more than most investors
expect. Factor in how PlayStations and Xboxs are selling at a deep discount
to their prices form a year ago, and a whole new tranche of gamers are
looking to build a game library for their newly purchased consoles. That's
a lot going in favor of these stocks.
Just something
to think about while these stocks are at rock-bottom levels and can't get
any love from the market.
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Don't
Completely
Sweat Rising Unemployment |
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Before anyone
jumps to conclusions about the recent rise in the unemployment rate to
a multi-decade high of 9.8%, a bit of a reality check is in order.
Yes, unemployment
is still rising, but the stock market is rising as well. Since both conditions
just can't last indefinitely, one or the other has to give soon. Which
will it be? The hysterics - who also seem to be the majority right
now - are giving the unemployment trend the benefit of the debt and
suggesting it's the market that's going to head south soon.
 Before
any of you buy into the assumption though, you should know that
rising unemployment is nothing unusual at the beginning of an economic
rebound. The last five bear markets caused by recessions ('69, '73, '81,
'90, and '01) all ended - and a new bull market began - while the
unemployment rate continued to climb. Unemployment didn't peak for months
in some cases, but in no cases did it up-end the new bull trend.
In the interest
of fairness, anything can and will eventually happen - maybe this
new bull market will indeed be stopped cold in its tracks next week. It
won't be because of an increased unemployment rate though. So, let's not
waste time drawing conclusions that aren't founded on a scientific or historical
footing. (Let's at least find valid reasons if we're going to be bearish.)
That said, we
stumbled across some related research recently indicating it could take
a very long time to see the peak in unemployment even if
the economic rebound truly has begun.
 Walter
Kurtz, of Calculated Risk, recently performed a thorough study
of how much time was needed after a recession began before unemployment
peaked. The historical average was about 15 months, which is actually
longer than the average recession. More recently though (i.e. since the
80's), the time needed for unemployment to peak has ranged for more than
20 months, to more than 40 months for the 2001 recession.
In other words,
jobs don't reappear as fast as they used to.
We'll just offer
this additional idea on Mr. Kurtz's research.... perhaps the longer the
recession lasts, the slower jobs are to resurface not from the beginning
of the recession (which was his research focus), but from the end
of the recession. If that's the case, this could be one slow, anemic recovery....
but a recovery nonetheless.
As we've said
before, economic data that's not ideal should affect how you invest
or what you invest in, but not whether you invest at all.
Be sure to check
out our next edition. We'll be looking at another dark horse industry pick
for 2010, and we'll be dissecting this year's holiday sales forecast from
the national Retail Federation.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
