One of the 12 steps that every recovering addict must make, according to the Alcoholics Anonymous program, is to make amends to every person that they harmed while they were under the influence. Accordingly, Morgan Stanley and Goldman Sachs have released a flood of update filings with the SEC over the past few weeks covering some of the hundreds of structured products that they have jammed through their retail distribution networks over the years. The reason for this sudden flurry of paper is that, in the wake of Lehman’s failure, all of the retail investors who bought the products (typically notes linked to the performance of equities, indices or commodities that were packaged as “principal protected”) have suddenly panicked at the thought that they have credit exposure to the issuing bank.
Morgan Stanley and Goldman (along with Lehman and Bear) were such prolific issuers of these exotic retail products that they were given a special filing status by the SEC: “Well Known Seasoned Issuer” or “WKSI” (pronounced Wiksy). This allowed them to issue structured notes to the public with a 2 or 3 page summary instead of filing a full blown prospectus.
Now that they have filed these updates on those streamlined filings, everyone who, for example, purchased one of Morgan Stanley’s “Buffered Return Enhanced Notes” which were “designed for investors who seek a return of twice the appreciation of the Asian Equity Index Basket” can find the updated term sheet at the SEC’s site and Google what the implications of owning “Senior unsecured obligations of Morgan Stanley” are.
Having their own brokerage force sell their proprietary debt to unsophisticated retail investors at terms advantageous to themselves in the guise of “risk free” investments was a great business for the banks while it lasted. Now, in the cold light of sobriety, the potential for self dealing and misstatement of risk all looks rather different.
I wish I could write this from the pure perspective of an outraged observer but, truth be told: I sold tons of this type of stuff through the retail systems of banks I worked at in my 20’s.
My itinerary is top notch, set up by my Macau consultants who are also top notch. These will not be the run of the mill Macau investor meetings. I’ve got junket operators, mid-level casino employees, government officials, development guys, and of course corporate and casino management on the schedule.
This may be a bit unorthodox but I’d like to invite clients to send me questions you would like answered. I will do my best to find concrete answers to those questions and post them for you on my portal. Please email all questions to:
Stay grounded. Flying sucks.
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I use win per day per gaming position (WPD) as a proxy for same store gaming sales as shown on a trailing twelve month basis in the chart. We’ve now had 12 straight months of declines in WPD and 19 out of the last 20. Ouch. As bad as that looks, it was even uglier in 1. WPD declined 13 straight months, averaging 17% down per month. Now that was pain.
Regional gaming stocks got crushed beginning in mid-1996. It’s probably no coincidence that my first day covering the gaming sector was also in mid-1996. Maybe that’s why I’ve always been good on the short side. But stocks rebounded strongly beginning in late 1998 and lasting a decade, interrupted only by 9/11.
So why shouldn’t we be loading up on regional gamers? Valuations are 5-6x, in-line with those prevailing in the mid to late 1990s and WPD trends are similar if not better. Let’s go to the video tape, actually the chart, to answer this question. The difference between now and then is that while WPD declined in 1, total revenues increased dramatically. Markets were still growing. The pie was getting bigger. New casinos were just cutting the slices smaller, temporarily. Fast forward to present time and we see that the markets are contracting along with WPD. Gaming is cyclical after all.
The CEO and controlling shareholder of WEST is Sardar Biglari. Mr. Biglari holds a 35% interest in WEST through The Lion Fund L.P., a private investment partnership. Mr. Biglari is the general partner of The Lion Fund L.P., which is an activist hedge fund. WEST and The Lion Fund have bought positions in a several public restaurant companies that were perceived to be value plays. In the past, Mr. Biglari has been very public about putting pressure on senior management of these public companies to unlock shareholder value. Until WEST files its S-4, Mr. Biglari’s intentions are unknown.
JBX’s management is one of the more impressive management teams in the restaurant industry. That is not to say that they are managing the business perfectly and that there are no levers to pull that could create shareholder value, but in this environment not much is going to get done. JBX is clearly a value stock trading at 5.0x NTM EV/EBITDA.
So what could Mr. Biglari be thinking?
First, JBX operates and franchises Jack in the Box restaurants and Qdoba Mexican Grill. In the past, many have speculated that the company should spin-off Qdoba to create vales for shareholders. I am not sure how that scenario would work in this environment. The company also operates more than 60 proprietary convenience stores called Quick Stuff®, which include branded fuel stations. While the Quick Stuff’s are developed adjacent to a full-size Jack in the Box restaurant, it is not a core competency of the company. This would be a clear target for any investor looking to sell off non-core assets.
After patiently sitting on a 96% Cash position since the initial Paulson ‘bail out my friends’ announcement, I have moved to 93% Cash this morning.
Treading into the water, slowly.
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