There’s been a recent bit of discussion about the “metagame” and what it means.  It’s a concept first illustrated by HSX Hall of Fame Member and former HSB&R columnist Jeff Sandler, and recently revived by HSX diva Kat from Mali’s.  The idea is that it’s just as important to know what other traders are going to do as it is to know what the market is going to do.  By “playing the players” — figuring out what the players are going to do before they get there ahead of you — you can boost your portfolio.I think the “metagame” concept is important because it’s the best way to know how money is being made on the HSX every day — and the sooner you understand it, the sooner you’ll do well.  I think it breaks down into three separate ways to “play the players” and make money on the exchange: 

1.  Play the audience.

This is the heart of the game.  I believe that it’s what attracts people to HSX and what keeps them there.  It is the art of guessing which films are going to be hits and which are not before they are released.

I’ve said before that money is made at the intersection between reality and perception.  HSX stock prices are based on perception from the moment they’re first released to the moment that the first ticket is sold for the Friday noon matinee.  After that point — after the money has been tabulated for that weekend — the price of the stock is based on real, tangible box office numbers.  So you have to ask yourself;  Will audiences go to see this movie?

This is not an easy question.  If you’d asked me, I would have told you that The Wedding Singer looked like just another bag of drivel in a long line of Saturday Night Live flops.  The audience thought it was a sweet, nostalgic “date movie”, and the price of WDDNG went way up.  Of course, if you had asked me, I could have told you that Half Baked and Phantoms and Hard Rain ought to have been premiered at the Westminster Dog Show.  And I was right on the money, as audiences stayed away in droves from those mutts.

The thing about playing the audience is that there are no guarantees.  You’ll hear people talk about “screen counts” — the number of movie screens showing the movie — as an indicator of whether a movie will do good or tank.  It’s a good theory, but inaccurate — all the screens in the world couldn’t save a disaster like Starship Troopers, and The Full Monty packed them in with very few screens ever.  The best advice I can give you is to look to multiple sources.  Ask people what movies they’re going to see, check the columnists that specialize in opener analysis, and don’t rely solely on your own critical and artistic judgment.

2.  Play the game.

There’s a scene in Tom Clancy’s novel, Patriot Games, where the hero, Jack Ryan, is laid up in a hospital bed in England, watching cricket.  A fellow American, visiting in the hospital, remarks that he never learned the rules of the game.

“It has rules?” Ryan asks.  “Why spoil it with rules?”

HSX has rules, plenty of people have argued that the rules spoil the game.  Whether that’s the case or not, knowing the rules is the key to making money outside of the opening weekend.  Some of the rules are part of the game and always have been — like arb.  “Arb” is the idea that it’s possible to buy a MovieStock a day or two before it delists at a reduced price, and then earn a healthy, commission-free profit when the delist takes place.  Arb also has a place in the bond market, where buying a bond before a delist-related price adjustment can also be very profitable.

The problem is that these rules are subject to shifting.  The bond market, especially, is rife with snits and quarrels about the rules (as I know, from being on the losing end of a lot of these arguments).  Veteran stock market traders agonize over how HSX will do the multipliers from week to week and when and if the IPOs will be released.  Pretty much all the columnists, at one point or another, will keep you updated as to the latest rules change — just look for the angry, rambling columns.

But in addition to the regular HSX rules, there are rules of thumb that are just as important.  They’re not official, but they’ve been hallowed by use and misuse for years.  Some of these rules are:

– Always buy IPOs, and then sell them after they’ve gone up a couple of points.
– Always buy anything that Max suggests.
– Don’t hold anything that’s not going to open for four months.
– Take advantage of new opportunities — such as the Oscar Bonds dividend.

3.  Play the market.

The HSX economy is a closed economy.  There’s no way for Hollywood Dollars to go anywhere.  In the real world, you can put your profits in cash if the market takes a downturn.  You can convert your holdings to gold if inflation starts to loom.  You can put your money in the European or Asian markets if they look like better deals.  Heck, you can take your money out of the market altogether and spend it on golf clubs or green chile enchiladas or 16-megabyte memory chips.  But take a Hollywood Dollar to the Kwik-E-Mart and try to buy a Dr Pepper, and see how far you get.

I say that to say this:  every time a stock or a bond becomes a deal, the money has to come from somewhere.  If you decide to spend a million and KWINS the day before the Oscars, in the hopes that she’ll win Best Actress and make you a potful of money, you’ve got to get that money from somewhere.  Unless you’ve got a million lying around in that boring old money market account, you’ve got to sell off another security to get the money.

Playing the market is knowing where the money’s going — the easy part — and figuring out where the money’s coming from.  In the case of Titanic, last year, the money was coming from weaker openers, like Mouse Hunt and The Postman, the bond market (especially the Titanic and Tomorrow Never Dies bonds) and the lower-priced stocks.  After the Titanic delist, that money found its way into the “blue-chip” summer blockbusters and the penny stocks, aided by an interest-rate adjustment.  Now, those securities are going south, as money starts to flow towards the Oscar bonds.

The question is:  where is that money going to go after the Oscars?  Well, part of playing the market is not telling everything you know up front.

Happy trading.