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SP500 Levels Into The Close...

I'm like a broken record here now, but we're a buyer here on the worst week for the US stock market since 1933.

BUY stocks level for the SP500 = 848.74

SELL the "Trade" = 1041.89

By my math, there's 23% upside and 3% downside from that 848 line.

Have a great weekend,
KM

House Of Cards: Morgan Stanley's Casino Investment Is A Metaphor For This Leverage Cycle ...

NOTE: The 2 lines of the title and the final line are all taken from the classic song “Atlantic City” by Bruce Springsteen.

"DOWN HERE IT’S JUST WINNERS ANED LOSERS…"
…John Mack gets caught on the wrong side of that line

Morgan Stanley owns a partially finished Casino in Atlantic City.

Really.

30 years ago a top tier Wall Street bank would have turned up its nose at accepting a casino company as a banking CUSTOMER, now Mack & co actually own one. Well, a partially finished one anyway.

The fact that Morgan Stanley is investing in a $2bn project in Atlantic City certainly raised eyebrows in our office. Revel Casino, which will have 3,800 rooms, is scheduled to open in two years and will be one of AC’s largest casinos. Taking current AC market conditions into account, this is certainly a risky move. MS is still seeking financing for the project. While a $2bn bridge loan will not ruin the company, the move certainly raises more questions about the leadership at the firm – something we’ve had our Eyes on constantly of late.

The development of the Revel by Morgan Stanley subsidiary Ventura Holdings seems to have been dogged by problems since inception in 06. The fun Started when Resorts International launched a fraud suit against the bank for last year, claiming that Morgan Stanley had enticed RI’s CEO to steer a prime 20 acre property that had come on the market to them in return for the CEO spot in the new Casino. According to a separate suit filed by RI’s former CEO, Audrey Oswell, Morgan Stanley reneged on that offer as soon as the land was purchased.

Yesterday’s NYP Article highlighted the very latest bump in the road. A ruling by a state judge last week removed a bond referendum from an Atlantic City ballot that would have provided $56 million in assistance to the Revel project. How ironic: the Federal Government is willing to bail out John Mack’s mortgage trading casino but Atlantic City won’t be rescuing his actual Casino.

We at Research Edge have highlighted the issues with Atlantic City in general. The addition of new towers has not prompted any sort of growth; revpar trends are in decline and there has been no market gaming revenue gained from the new towers (see “AC: UNDERROOMED? TRY OVERROOMED” 9/2/08). Furthermore, the ongoing uncertainty regarding the smoking ban (“AC: THE GOOD NEWS….” 9/15), high gas prices, and general decline in consumer markets, make the odds long on this MS gamble paying off.

“Everything dies baby, that’s a fact.”

Andrew Barber
Director
Research Edge LLC

October 16, 2008: This Should Be An Interesting Show...

SPONSOR: House Oversight and Government Reform Committee

AGENDA: Full committee hearing on "The Regulation of Hedge Funds."

WHO: John Alfred Paulson, president of Paulson & Co., Inc.; George Soros, chairman of Soros Fund Management LLC; Philip Falcone, senior managing director of Harbinger Capital Partners; James Simons, director of Renaissance Technologies LLC; and Kenneth Griffin, CEO and managing director of the Citadel Investment Group, testify

DATE: October 16, 2008

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Short Selling Ban, Part VI: Volatility Eruption, The VXO has gone over 90% intra day...

You may recall that I drew a chart of the VXO (the simpler cousin of the VIX, which tracks volatility levels in near month index options instead of the more sophisticated basket used by the newer benchmark) for H2 1987 vs. our current market at the beginning of the month. The following day on Bloomberg television a young reporter chuckled when asked about the “charts of 1987 vs. today going around” and assured the anchor that they “aren’t really the same thing” –it’s different this time.

I agree that this is different –every market distortion is unique:

The VXO hit an intraday high approaching 172 in '87. Let’s put things in perspective: In '87 the markets weren't freely trading. There weren't enough stocks in the underlying index (The VXO was based on the OEX) to open even open the options initially so there wasn't free trading in OEX until around 11:00 in the morning on the day of the crash. They were only able to get through the opening rotation before the underlying index itself closed. With every market order hitting ridiculous premium levels, and the disorganization of the pre electronic trading environment I (for a single series of option there may have been a quote of 2 - 2 1/2 on one side of the pit and 3 - 3 1/2 on the other side of the pit).

The levels we see today, by contrast, represent the conviction of traders globally who are linked in a technologically efficient, much more transparent market. Simply put, with the asymmetrical liquidity distortions of the short selling ban now behind us these volatility levels are more “real” than those in 1987.

I am sure that that young Bloomberg reporter is a very bright person, but I have actually managed volatility real-time as a trader and my professional mentors include some of the sharpest minds that market has ever produced –It was my great fortune to learn lessons from their experience.

I am not predicting that the VXO will reach the same levels it did in 1987, but I am predicting that in the wake on this crash investors start listening more to experienced market participants and less to lapdog talking heads on TV who repeat propaganda of their hedge fund patrons.

If any customers have questions regarding options strategies in this environment I will do my best to address them. Feel free to contact me at

Andrew Barber
Director

Morgan Stanley (MS): Traded through Our Target Price

At $8.95/share (our target was $9.03), MS traded at it's intraday low this morning. The writing is on the wall. John Mack and Chris Cox created their own "uncertainty and fear" that Bush is blaming this market decline on right now.

Dear John,
Be accountable. Quit blaming everyone else for your firm's lack of proactive risk management. This is embarrassing for our country.
KM

DPZ –The credit crunch hitting Franchisees

According to the Detroit News the global credit crunch is forcing some Domino's Pizza franchise owners out of business, as banks cut off loans even to long-standing customers with solid credit.

"The problem has gotten a lot worse," since the passage of the $700 billion bailout, said David Brandon, chairman and CEO of Domino's Pizza Inc. Brandon was in Detroit to speak to a group of entrepreneurs at Wayne State University Wednesday. But the bailout package has done nothing to ease the credit crisis that's slamming many Domino's pizza franchisees, just as it's hit owners of other chains. Tightened credit means it is much harder for franchise owners to borrow money for both short-term credit lines and longer term loans.

"It's a major crisis. We are talking about people who 20-year relationships with their banks and suddenly they are being turned away," Brandon said. "Many of our owners have three or four franchises. It's a very tough situation."

“Brandon wouldn't say how many stores Dominos has lost in the past few weeks, but acknowledged that the Ann Arbor-based pizza chain has lost stores at a far higher rate than in the recent past.”
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Footnote Editorial Sources

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