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Volatility across the pond

The VSTOXX rose above 34 in today’s session, reaching levels that it has not seen since March. The VSTOXX can tend to track at a slightly higher level than the VIX due to its narrower component focus (EURO STOXX 50) but the European “fear index” still illustrates that fear of financial contagion is just as strong or stronger on the other side of the Atlantic.

Andrew Barber
Director

AC: THE GOOD NEWS: SMOKING BAN, THE BAD NEWS: SMOKING BAN

Atlantic City will finally catch a break as Pennsylvania implemented a new smoking ban this past Thursday. The ban affects 75% of the floor of PA slot parlors which puts the state on even footing with Atlantic City. This equality will be short lived, however. New Jersey will enforce a full smoking ban effective October 15th, placing PA back in the driver’s seat. AC can’t catch a break. New competition from PA, the smoking ban, high gas prices, and a difficult consumer environment have contributed to a string of monthly revenue declines (see chart). The 10/15/08 full smoking ban pushes back the “easy comparison” thesis by another 12 months.

Full smoking ban goes into effect on 10/15/08

LONDON FALLING

As a follow up to my 9/8 post “LONDON CALLING, BUT WILL THEY KEEP COMING?”, London RevPAR is now in a negative trend. I had predicted October as the first negative growth month but it looks like I will be proven wrong. September is off to a rough start, continuing what can now be called a trend from late August. Weekly RevPAR declined for the third straight week as shown in the chart. Look for continental Europe to capitulate next.

A trend is emerging

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“If you don’t have time to do it right, when will you have time to do it over?”
-John Wooden

Hurry up offenses and hail Mary passes, here we come – those who did not proactively prepare for this crisis of confidence in the US Financial system are going to pay the inevitable price again this morning.

I say again, because this is not new. At every turn, Wall Street didn’t get it this year. “Buy the dip… “… “the Bear Stearns bottom is in”… “this is a buying opportunity”… You will certainly hear those all too familiar ring tones of the perpetually bullish this morning, but since less of them will be employed, you’ll at least hear more muted volumes of their reckless rhetoric in the months ahead.

Lehman has filed for bankruptcy, and John Thain has thrown Singapore under the bus, selling out to Bank of America well below the Government of Singapore’s “strategic investment” price – at least he got paid! The 94 year old Merrill Lynch charging Bull logo is sold to the only bidder. I said it last week, and I’ll say it again this morning – in times of liquidity crisis, reactive management teams sell what they can, not what they should. What they are left with is called illiquidity, and in some cases, bankruptcy.

I could go on and on about the proverbial puck that everyone is staring at in the corner this morning, but I will save that exercise for CNBC’s revisionist historian savants. The goal of this game is to go to where the puck is going next, and that’s what we have been proactively preparing for here at Research Edge since I left Wall Street at the end of October of 2007.

I am moving my immediate downside target for the S&P 500 to 1196.86. We have an 84% cash position, and we are hiring. That’s it. That’s my morning call. Please forward all resumes to our President and Director of Research, Brian McGough, at

We are proactively prepared to service our clients with the best research platform, people, and process in the industry. We have zero counterparty exposure, and we are looking to help you wherever we possibly can. Our main phone# in New Haven, CT is . Please let us know where we can help.

I am getting on a train to New York City right now to meet with those interested in seizing this opportunity to re-build the trust that Wall Street has lost.

Best Regards,
KM



IF PARKING IS YOUR TOP ATTRACTION…..

It’s easy to see why AC is susceptible to demand shocks. The Atlantic City Convention and Visitors Authority released a survey that showed easy parking was the top reason customers chose to visit the city. Gambling, restaurants, nightclubs, retail, beaches; not as important. Pennsylvania, a smoking ban, high gas prices, and a tough consumer environment have all contributed to declining gaming revenue in AC. When parking is your top lure, you are defenseless in the face of these threats.

Parking the top draw? Not good enough

Goldman (GS): "For good and valuable consideration"

The early open of trading in Crude oil futures coincides with an extraordinary net-trading session for ISDA jurisdiction OTC derivative contracts to allow major banks to trade out of their Lehman Brothers exposures amongst themselves conditional on a bankruptcy. This could be a simple coincidence driven by the simultaneous less-severe-than-feared impact of hurricane Ike on coastal refineries and offshore drilling platforms. It could, however, also be intended to allow listed market participants the liquidity to adjust their holdings in the wake of major banks selling into the OTC oil and gas markets as they scramble to cut exposures across the board.

On one hand this second scenario makes some sense: people don’t sell what they SHOULD during a crisis – they SELL WHAT THEY CAN. Unwinding exposures in the oil market could potentially allow banks that are long commodities to raise quick cash to offset other exposures.

At this point it remains nothing but idle speculation on my part. There appears to be unusual volume in the early trading session.

PS -the title of this post comes from the second sentence of the ISDA Lehman Effectiveness Protocol
http://www.isda.org/whatsnew/pdf/Conditional-Effectiveness-Agreement.pdf

Keith has obviously been negative on Lehman and Merrill for months now. Note that he remains short Goldman (GS) in the Hedgeye Portfolio. He thinks that if the stock breaks down to his immediate target price of $147.43, the $100/share line comes into play. We are fully aware that few agree with our positioning here – that’s why the short interest in GS remains shockingly low at 3.5% of the float. Complacency is not an investment process, however.

Andrew Barber
Director

(chart courtesy of StockCharts.com)

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