What You Should Know About the Latest Market Craze
What you should know about the latest market craze... This 'augmented reality' app is breaking every record... Bad news for Nintendo?... $19 trillion and counting... History says this will not end well...
We begin today's Digest – reluctantly – with one of the most absurd market stories in recent memory...
Judging by the questions we've received from subscribers, we assume you've probably heard about the popular new mobile "augmented reality" video game "Pokemon Go."
In short, it's an "app" that uses a smartphone's camera and Global Positioning System ("GPS") to allow users to play a virtual game in the real world.
Players literally walk around – or worse, as you'll see below – with their phones in front of their faces, scanning the local landscape through their cameras in search of virtual creatures called Pokemon. When they find these creatures, they attempt to capture them by throwing virtual "Poké Balls" at them (yes, really).
Longtime readers may recall similar mobile-game fads in recent years, such as Zynga's (ZNGA) Facebook-based "FarmVille," which reached a peak of 10 million daily active users within six weeks in 2009)... or King Digital's "Candy Crush" game, which drew an all-time record of as many as 20 million daily users in 2013.
But the "Pokemon Go" craze has already dwarfed all others... and the game was only launched on July 7, less than one month ago. Consider this...
Within 24 hours, it became the biggest game of 2016, as measured by daily users. Within 72 hours, the game had more active users than social media networking service Twitter (TWTR). By day five, it was the single biggest mobile game in history. And by the end of its first week, it boasted more than 25 million daily active users... more than Alphabet's (GOOG) ubiquitous Google Maps app.
As of last week, the game was downloaded an average of 4 million-5 million times per day in the U.S. At that rate, the app would be on every smartphone in the U.S. by September.
And unlike many games, it's reportedly making some real money... According to analyst estimates, the game could be bringing in an average of $0.25 or more per daily user.
That may not sound like much, but with 25 million daily users, it represents gross revenue of more than $6 million per day... and more than $2 billion per year.
As you may have noticed, "Pokemon Go's" rapid success created a mini "mania" in Nintendo (NTDOY), the only public company with a financial interest in the game.
Shares of Nintendo surged to a high of $38.25 last Monday... an incredible 110% gain in just eight trading days that added nearly $17 billion to the company's market capitalization.
Unfortunately, this is where the good news ends for Nintendo shareholders...
Since peaking last Monday, shares have been in free fall. The stock has lost 30% of its value over the last five trading days, and there are reasons to believe the decline could continue...
In short, despite the game's success to date, Nintendo may not see much benefit to its bottom line.
Nintendo owns a 32% stake in Pokemon Co., the private company that licenses the game's characters, and an undisclosed stake in Niantic, the small private company that developed the game.
But reports suggest these stakes don't add up to much... For example, Macquarie Securities analyst David Gibson estimates Nintendo has an "effective economic stake" of just 13% in the app.
Even if the game can earn sustained revenues of $2 billion or more, this fractional stake won't make a huge difference to Nintendo's existing $5 billion annual revenues.
Worse, Nintendo itself has now admitted as much...
In a press release after Friday's market close, the company said "Pokemon Go" will have a "limited" effect on Nintendo's bottom line, and that it will not be updating its annual revenue forecast. It also said that revenue from Pokemon Go Plus – a Nintendo-produced wearable device that's expected to go on sale soon – has already been factored into its forecast.
But this isn't the only bad news for Nintendo's exuberant shareholders...
The latest data suggest "Pokemon Go" is already suffering from the same "boom and bust" cycle experienced by other trendy games before it. And the game's record-breaking ascent may be mirrored by an equally rapid fall.
In fact, online-data firm SurveyMonkey Intelligence predicts we have already hit "peak Pokemon," and its decline has officially begun... less than three weeks after it launched. In particular, the firm notes three worrisome signs...
First, the app's daily usage peaked at more than 25 million users on July 14 – exactly one week after its release – and has been falling ever since. As of last week, it had already fallen to nearly 20 million users.
Second, downloads have also peaked... Unlike other record-breaking games like "Draw Something" or "Candy Crush" that gained popularity over months, downloads of "Pokemon Go" peaked on the day it launched.
SurveyMonkey reports that nearly 6 million users downloaded the game on July 7. By late last week – less than two weeks later – downloads had fallen to a little more than 1 million per day.
Finally, search interest in the game has already peaked as well. The firm reports the number of Google searches for the term "Pokemon Go" peaked on July 16 and has been moving lower since.
These trends suggest the craze is already burning out. Meanwhile, the public backlash against the game could just be starting...
In theory, the game has noble intentions. As John Hanke, CEO of Niantic, told the Wall Street Journal...
We wanted to build a game that would inspire people to go outside, get exercise, discover new places and have fun with their friends.
But it turns out that incentivizing millions of people around the world to wander outdoors with cellphones glued to their faces in search of Pokemon has led to some problems...
For example, there have been countless stories of players walking into street signs and fire hydrants, falling into potholes, tripping over dogs, and even walking off cliffs.
People have fallen off their bikes and crashed their cars while playing... including one person here in Baltimore last week who slammed his car into a parked police cruiser.
They have trespassed on private property – including a nuclear power plant – and even stepped onto a minefield in Bosnia in search of Pokemon.
And there have been multiple reports of criminals using the game to lure victims to isolated locations, including a number of robberies, stabbings, and shootings... and at least one death.
We can't help but wonder... Even if "Pokemon Go" can defy the odds and become more than just a passing fad, how long until parents, teachers, employers, and/or government officials say "enough is enough" and push to limit its use?
We're skeptical... And as we noted above, even in the rosiest scenario, the recent rally in Nintendo is likely overdone.
Moving to the economy, we see another concerning side effect of central banks' massive easing programs.
Thanks to record-low long-term interest rates, politicians are no longer even talking about ways to reduce runaway government spending. Instead, they're now pushing for even more... even here in the U.S. From a Wall Street Journal report over the weekend...
No matter who wins the White House in November, don't expect to hear new calls for reduced spending. Gone are the fights of yesteryear over striking a "grand bargain" to slash the debt. In their place a new debate has emerged over whether America's borrowing capacity has gone up—and how the nation might take advantage of it.
The top candidates from both major parties have made scant mention of addressing rising long-term deficits and are calling instead for an increase in federal stimulus. Republican nominee Donald Trump has outlined massive tax cuts and, without getting specific, has promised big federal outlays on infrastructure, border security and an expansion of health-care services for veterans...
Hillary Clinton, the likely Democratic nominee, also has issued proposals for spending on roads and higher education, projects she would fund with new taxes on higher-income earners and the financial industry.
This is a significant change from four years ago, when even the Democratic Party gave lip service to cutting the deficit.
What accounts for the shift? Perhaps it's because the government is paying less to service its debt than it has at any time in the last 48 years. According to the Journal, net interest payments fell to just 1.25% of gross domestic product ("GDP") last year.
Of course, this improvement is an illusion. It's a result of super-low interest rates, due to central bank manipulation.
In reality, the government's debt problems have been getting worse. The national debt now sits at more than $19 trillion – more than twice what it was in 2007. Worse, debt as a share of GDP has more than doubled over the same time period.
Central banks and governments around the world appear to believe they can keep long-term interest rates low forever.
History says they are wrong... And when the next crisis comes, it won't be indebted consumers and companies alone that suffer massive losses. It will be governments, too.
In today's mailbag, one subscriber is upset about the latest from best-selling author and Digest contributor P.J. O'Rourke... and a second asks an excellent question. As always, send your questions, comments, and criticisms to feedback@stansberryresearch.com. We can't respond to every e-mail, but we read every one.
"O'Rourke must be one of them never Trump people! He should step down off his high horse and see what's really going on in the world. Trump is bringing all to the table, rather he can do anything about it who knows. When you have people talking/acting in O'Rourke's manner surly doesn't help to get him in office and find out! Sounds like deep down Clinton is his girl." – Paid-up subscriber Kirby LaFollette
"This is mainly for Porter and P.J. O'Rourke to read. This has nothing to do with any newsletters, but it is something that could have more of an impact than Porter and P.J. realize...
"[P.J.] wrote about multiple candidates during the Republican and Democratic Primaries and even an advertisement for the Stansberry Conference this fall (including a specific reference to Penn Jillette's stand-up about being a libertarian). Porter even wrote about Martin O'Malley and how he screwed up Baltimore and Maryland around when he entered the race for the Democratic nominations or around Freddie Gray's death. I'm not sure which. And despite pointing out the things screwed up in our country and government, there are still crickets heard from P.J. and Porter regarding Gary Johnson, the Libertarian Party Presidential candidate.
"Despite P.J.'s and Porter's rhetoric, the absence of even mentioning Gary Johnson comes across as his approval of the two candidates from the 'establishment' parties to become the next president. I've found that there are lots of people around this country looking for a candidate to support, but have not heard of Gary Johnson due to the media being bought and paid for by the Blue and Red teams. Johnson is hands down the best option right now and a much better option than Clinton or Trump. Porter, you have an incredible opportunity to inform people about a third option, especially when the two pushed by DC and the media are a joke.
"You have the influence to at least get people to open their eyes and ears about a presidential candidate right in front of them that they don't know about." – Paid-up subscriber Anthony S.
O'Rourke comment: My role at Stansberry is to be class clown – and also to bring a longtime political reporter's eye to goings-on that will affect Stansberry subscribers and their investments. True, I'm a small "l" libertarian, but being a political satirist means remaining, more or less, nonpartisan.
I confess that, deep in my heart of hearts, I like Johnson best. I also confess that, deep in my heart of hearts, I don't think he stands a chance. My job is to deal with what's happening, not what I wish were happening.
As to lack of mention of the Johnson/Weld ticket in this and other media, we deserve some blame. But so do Johnson and Weld – if they'd give us a little more red meat to chew on, we'd have something to spit at the two establishment candidates.
Regards,
Justin Brill
Baltimore, Maryland
July 25, 2016
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