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Judge David Ryan's Blog

Judge David Ryan • Location: Natick, MA
• Member since: July 2004
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Coming Next Week..... The HSX Advisory Report (name to be coolified later)
May 17th, 2007 4:48PM

Hey all! Beginning Monday, look in this space for a new blog covering the Hollywood Stock Exchange and my own brand of guaranteed-to-possibly-work investment "advice". So are you thrilled? What? You've never heard of HSX?

Well... the Hollywood Stock Exchange (www.hsx.com) is a long-standing "game" involving the trading of securities based on movies and actors/actresses/directors. Once upon a time it was merely a lark -- albeit a technically sophisticated lark -- used only by Hollywood "insiders" -- and by "insiders" I mean the rank and file of cinematic life, not Bruce and Demi and their buddies. Over the years, it has turned into a VERY sophisticated modeling tool that's actually owned by the huge investment firm Cantor Fitzgerald. (HSX has proven to be highly predictive, and Cantor bought it with an eye towards developing the underlying software into something that could be predictive in the stock market... but I digress.)

Anyhow, the concept is simple. You start with $2,000,000 in "Hollywood dollars", and you buy low and sell high. Since films and actors don't have intrinsic financial metrics such as free cash flow and EPS, the securities are ultimately valued based on more entertainment-related metrics. For films, it's a simple two-pronged calculation: the Monday after a film opens, its market price is adjusted to 2.9 time the film's domestic box office (gross) over the weekend. So if Shrek 3 takes in $100M in B.O. this weekend, on Monday it would be adjusted to $290 per share. Four weeks later, the security is "redeemed" at a value equal to its domestic B.O. over those four weeks. So if Shrek 3 actually earns $500M by its fourth weekend of release, the security will cash out ("delist" in HSX lingo) at $500/share. With me so far?

Bonds -- which represent actors or directors -- are a bit more complex. Bonds are valued based on the "Trailing Average Gross" of the star. For HSX purposes, this is the straight average of the total delist prices of the star's last five credited films. (Generally, a star is credited towards a film if they have any sort of a significant role that exceeds a mere walk-on.) Every Tuesday, a raft of bonds are adjusted as movie stocks delist and the stars that were in them get a new data point on their five-film TAG.

What makes the game interesting and challenging is that pretty much EVERYTHING gets a security, sometimes when it's only a concept. For example, maybe there's just an "idea" floating around town that it would be really cool to actually make Aquaman and cast Adrian Grenier in it. You'd probably see an Aquaman security pop up on HSX, at a low issue price (because the film is highly speculative at this point). Say, maybe, $6. Well, you can buy up shares in that stock (you can buy up to 50,000 shares of a security, or 10,000 bonds) at $6 (which is a pretty low price) -- if you buy the max, that's H$300,000 you're putting on the table. Well, maybe the film never gets made -- the less buzz there is about it, the lower the price will sink. If it's clearly dead, the security will delist at zero. You're out your H$300,000 at that point. But hey -- maybe the Entourage people are really into it, and Spielberg signs on, and Sony Pictures throws $550M at its budget. Well, now you've got a real, live blockbuster on your hands. Maybe the stock soars to H$200, and your little stake is now worth H$10M. Woo hoo!

So there's your introduction to the HSX. And I haven't even mentioned the mutual funds, or the fact that you can short stocks. If only it were real money.... Actually, if it were real money, I'd be retired by now. My original H$2M stake from back in 1998 or so is now worth about H$270,000,000....

Coming Monday, you'll be seeing a daily column with tidbits and advice on the day's IPOs, the day's movers and shakers, and upcoming releases. Come along for the ride -- it's free and non-fattening!

Here's your first tip: the films with the biggest obvious potential are almost always IPOed on Saturday. Why? To drive traffic to the site on weekends, when people aren't killing time at work. This weekend, in honor of Shrek 3, we're getting Puss In Boots (Ticker symbol: PUSNB), a spin-off of the eponymous Shrek character. I'm cautiously optimistic about this one, even at its issue price of H$60. On the plus side, it's an attractive character who can almost certainly carry a film on his own. On the minus side, this was originally intended as a straight-to-video feature, but Dreamworks had second thoughts and decided to push it theatrically. There's nothing to guarantee they won't change their mind again. Tread cautiously.... Still, I think a good short-term gain can be had here. Go for it.

See you on the trading floor... Excelsior!


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