Yesterday, MGM announced a $750 million senior note deal priced to yield 15%. The proceeds will likely go immediately to pay off some of the company’s 4-5% credit facility. That is an ugly, but apparently necessary spread that will cost the company about $0.15 in annual EPS or 11% of 2009 estimated EPS.
The contrast is striking. It’s entirely fitting that MGM closed this deal the same day PENN received the final $775m payment from Fortress of the total $1.45bn owed. PENN now sits at 2.5x leverage with huge liquidity while MGM is levered at 6x. It’s also the same day that WYNN released earnings and provided an in depth discussion of its massive liquidity including $1.7bn of cash on hand.
The end of the easy money is indeed over and those companies that egregiously exploited the environment to borrow at unsustainable rates and invest in low ROI projects are now paying the price. Over-earning is a theme that we’ve hit on for some time and we are now getting a clearer picture of the true earnings power of these companies.
The new Franchise Business council has been formed to help set the proper direction for the company. Essentially, the Applebee’s franchisees are very unhappy with the company’s strategies. They are choking on the bottom feeder, all-you can eat promotions that are being set by the home office.
I believe the franchisee uneasiness stems from when the current CEO of DIN, Julia Stewart, was president of Applebee’s - from October 1998 to August 2001. Her departure from the company was controversial at the time so it’s not completely surprising that the franchise community is restless over the current direction of the company. Unfortunately, there is not much they can do.
The only thing I see them doing is working with the largest shareholders to force a coup d’état…… The top four shareholders control 62% of this company. With the stock trading at $16, the market believes that the company’s liquidity fears are now over. I think not. Management pulled a rabbit out of the hat in Q3 by announcing its asset purchase agreements for the sale of 66 stores. From where I sit, these sales only raise more questions and did not solve the liquidity issues. As the stock heads back down to $6 confidence in management will wane.
I’m sure we will be reading about this in the WSJ before long.
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“I don't like Bull Riders... They're little men with big egos. Besides, he's got one of them skinny butts like the rest of em'.”
One of my favorite movies of all time is “8 Seconds” (1994), the story of rodeo legend, Lane Frost. Kellie Frost was, of course, Lane’s wife… and in the beginning, she didn’t like bulls anymore than the bears like me right about now.
We aren’t mincing words. We remain bullish for the “Trade” here. I am so bullish that for Halloween I am dressed up like a cowboy at the office. I have my highest allocation to Equities in 2008. I am all bulled up, snake skin boots on and all. My friends up in Calgary, Alberta might not find it to be much of a costume, but if I pranced down to a New York City trading floor, my guess is that I would get a few of them looks that I was getting at about this time last year when I was a raging bear.
Larry Kudlow and I haven’t agreed on much in 2008, but since the man is perpetually bullish, that puts him and I in the same camp all of a sudden. Last night he was chirping about being a “cowboy capitalist”, or something like that… Larry, this morning’s note is for you, buds!
I know, I know… the futures are down pre-market open here in the US, and Larry’s friends on the CNBC desk are talking about bears, Octobers, hedgies, etc… Be thankful for their contribution to this sentiment driven rally. Yesterday was the 3rd consecutive day in US trading where we saw positive breadth (advancers outpacing decliners on the NYSE). This, alongside European stock markets locking down their 3rd consecutive up day is a new new thing. Most of the guys and gals making the “I’m in cash” call are now staring at what should be the 2nd positive week out of the last 3 for the S&P500. Wait, wait… don’t tell the fund of funds that. We are all supposed to be underperforming because of the Great October 2008 Depression, aren’t we?
This is not a Depression folks. We’ve had a great October, and we are looking forward to a blue skies in November. Barrack Obama is going to be the President of the United States, and much like Q3 earnings season in this country, the end of the election line is a positive catalyst now, simply because it is going away. Stocks are discounting mechanisms of future events, not trailing ones… don’t forget that when someone is trying to focus you on the rear view mirror. In this tape, “8 Seconds” of not looking straight ahead might cause you a serious November headache.
Earlier this week we wrote a bullish intraday note to our RE Macro clients titled “Eye on Credit: Signs of a November Thaw?” (www.researchedgellc.com, 10/27), and that remains one of the most glaring fundamental reasons for our newfound “cowboy capitalist” view. The other is the continued steepening of the yield curve. If you are liquid and long cash, you are going to crush the levered long investor who needs long term debt financing. Call us cowboys – we’re dressed up like them today, and we’re cool with that.
The US Federal Reserve seems to be cool with dropping cash from those new USS “Heli-Ben” choppers. In the immediate term, free money is bullish. This week, the Fed initiated its commercial paper program, and this was another bullish catalyst, on the margin. In our macro models everything that matters happens on the margin. The Fed has already bought over $146B in commercial paper this week. Ole Bushy wanted to get this credit freeze “unstuck”, and if there’s ever a day where that Texas lingo rhymes with Research Edge’s reason, our Halloween dress up day is it!
After 25 years of trying to thaw their economic tundra of stagnation, the Japanese reminded us last night that they just don’t get it. The Bank of Japan’s polarized and politicized head of socialism, Shirakawa, broke a split committee vote and moved to cut interest rates last night from 0.5% to 0.3%. If this isn’t embarrassing, it’s just plain funny. These guys are the clowns of the global capitalist rodeo. Investors took the news and chased “wanna be” Japanese stock market bulls right out of the stadium, taking the Nikkei down another -5% overnight.
The media is calling the US futures being down a function of that Japanese selloff. “Hello, bull riding fans,” take your eyes off the clowns and watch the rest of Asia ride them broncos overnight: Taiwan +4%, Thailand +2%, Indonesia +7%, India +8.7%, Philippines +4.6%, Vietnam +3%. This was a bullish session and week in Asian trading. You don’t even need a You Tube to get that. Just look at the math.
The inconvenient truth of the math here in the US (if you went to cash in October that is) is that the S&P500 has ripped the shorts for a +12.5% up move since Tuesday of this week. The immediate term target level for the S&P500 that we issued on the portal yesterday afternoon was 1007, and we’re sticking with that bullish view here this morning. Have the facts changed? Definitely. On balance, they are more bullish today than yesterday.
Halloween pop quiz from the cowboy capitalists: Can you afford to miss a +19% rally in the US market (S&P 500 848 to 1007) and ask your clients for 2 and 20? America will vote on that in “8 Seconds”.
Don’t let the bears, futures, and goblins scare you into cash today. That call is a few months late. Have a great weekend,
VYM – Vanguard High Dividend Yield ETF – S&P announced yesterday that 786 rated corporate borrowers are on watch for possible downgrade; an increase of 28 more than September and 136 y/y.
JO – iPath Coffee – The Phillipines Department of Agriculture announced spending measures as part of a program to end coffee import dependence by 2015 through improved growing methods.
EWG – iShares Germany – Retail sales came in at -2.3% m/m, +1.2% y-o-y on a seasonally adjusted basis, which was lower than economists forecasts.
FXI – iShares China – China’s State Reserve Bureau may postpone plans to buy copper from overseas on speculation a global recession may push prices even lower.
EWH - iShares Hong Kong – The Hang Seng is down -2.5%, but is a relative outperformer versus the Nikkei which is down -5.0%.
UUP – U.S. Dollar Index – The USD is rising into month end as foreign investors are likely buying USD to reset hedged equity portfolios.
EWU – iShares United Kingdom – U.K. consumer confidence levels dropped in October to the weakest level since 1974. Barclays is rising $12BN from Abu Dhabi and Qatar sovereign funds. The pound is on course for its largest monthly decline versus the USD since 1992.
Keith R. McCullough
CEO & Chief Investment Officer
Keith shot me an email today that PENN look the most attractive in gaming on the long side from a trade perspective. Despite a nice move the last couple of days, the stock still looks very cheap, which defies its strong balance sheet and liquidity position. I like the odds of betting with Carlino and company.
We we're bullish this morning. We are bullish into the close. My name is Keith McCullough, and I support this message. Our levels are below:
BUY aggressively = 840.67
BUY on pullbacks = 921.86
SELL the "Trade" = 1007.19
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