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    MARKET EDGES

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The hedge fund strategy du jour in the gaming space is to go long bonds and short equities. Even the sell side has jumped on board, in typical fashion. A little chirping in the ear of the naive sell side community is all it takes.

Today alone, this strategy could’ve KO’d an aggressive hedge fund. Gaming operator stocks increased in the 20-30% range today with a few outliers like LVS up 80% and PNK up 60%. I’d like to think it my note this morning, “A SHORT SQUEEZE COMMETH”, had something to do with it. In fact, I will think that. I need the ego boost.

We also had that inconsequential (sarcasm) MGM earnings release today. Business is pretty bad in Las Vegas but MGM was able to show the market a bit more liquidity than expected. That was also my call this morning on PNK ahead of next week’s earnings. Moreover, PNK’s fundamentals are a bit stronger than for MGM.

So we got our short squeeze, a bit quicker than I expected. Where do we go now? Yes the moves were huge but they were off such a low base. The short interest may be lower after today but most of the other catalysts I pointed to this morning are still intact. The trade is still higher, potentially much higher.

Buy bonds/short the equity? Not a good strategy in my opinion. Not that gaming bonds aren’t attractively priced. They are. But gaming equity has a long way to go until it’s shortable again.

Aside from potential 50% moves in the stocks daily, the other problem with this strategy is interest rates. Yes, higher interest rates are bad for stocks too but they are a direct input into bond pricing. At the current low level, interest rates are likely to go up. Inflation is a big risk with the current Greenspan Fed Fund rate in place. Inflation is very bad for bonds.

Besides, even gaming companies are buying bonds, their own and each other’s, and not buying stock. Given their track record on investing: share repurchases at the top (MGM, IGT), other stock purchases (PNK buying ASCA stock), and the horrible ROI on recent new casinos and expansions, the actions of these guys look like a solid contrarian indicator to me.
I personally own shares of PNK