After scratching our heads about why MGM would take such a big tax hit to sell TI, we have dug a little deeper. We now believe MGM may be actively buying its deeply discounted bonds back in the open market. While such a strategy triggers another taxable event, it also allows the company to de-lever at the tax affected discount since they are retiring the bonds at par. Strangely, the credit facility and the recent $750 million note agreements place few restrictions on the company from buying back subordinated debt.

The TI transaction will not close until Q2 2009 but MGM maintains undrawn capacity on its revolver that can be used to buy back bonds currently. We’ve spent a lot of time analyzing this situation and there are many moving parts, but we estimate the company could buy back $600 million worth of bonds at 65 through Q2 2009 to escape breaching its leverage covenant. However, the covenant issue could still resurface again in Q3. For this reason, we think there is a decent probability MGM pursues yet another asset sale. Selling its 50% share of Borgata to BYD is high on our likelihood list.

So where does this leave MGM’s equity? Another asset sale would certainly be a near term positive as the company would buy more time through 2009. The perception of covenant/liquidity relief is a big positive for MGM’s equity. The stock is still down 85% on the year despite the recent sector move higher. The long-term problem is that MGM will still face covenant issues in 2010 and still must close on the asset sale. It is in the company’s best interest to enhance the stock price to raise equity. Look for another asset sale in the coming months and a subsequent equity raise. Land sales are also a de-leveraging opportunity although finding buyers has been a struggle.

These actions by MGM could renew focus on the sector. Transactions, activity in the bond market, and improved liquidity are probably good for the entire beaten down gaming sector, bonds included. The bulls may be in charge for a while in this space.

Revised to reflect repurchase of discounted debt

"C'mon Man!": Updated SP500 Levels...

After we made our Monday Night Football call to action, “Are You Ready For Some Rate Cuts?”, we had some great feedback from clients in our network – I think, primarily, because I finally stopped talking in knucklehead hockey speak.

Elevating my market strategy discussion to a higher place of intellect is always my goal – it makes my call more “institutional”, or so they say…

So let’s get academic and call this morning’s selloff for what it is, “C’mon Man!”

Seriously – we’re getting really serious here about buying stocks. So let’s use the NFL’s “C’mon man” slogan, like Keyshawn Johnson does in his You Tubing Sunday’s worst professional plays. The shorts are caught off-sides and the bulls need to get invested. If you’re running around out there pitching my 9-12 month old bear case, “C’mon Man!”

Our macro playbooks is charted below:
BUY zone is 867-889 in the SP500, and the SELL zone is .

Don’t fumble in the red zone; the guys from Monday Night Football and I are working on some You Tube technology for that.

Have fun out there,

Eye on Tail Risk: India's Bird Flu

We are certainly not interested in being known as alarmists, but as investors we do need to be aware of potential tail risks. Conventionally, a tail risk is defined as a possibility that a portfolio will move more than three standard deviations from the mean. In a normal distribution, this possibility is 0.03%, or virtually nil. In practice, tail risks are often more common than a normal distribution might suggest. We have been negative on India for some time, and short the country via the IFN, and were again reminded of the tail risks associated with investing in the region yesterday.

India is presently facing the consequences of overpopulation and unsanitary living conditions. As a result, Indian authorities confirmed a new outbreak of the deadly bird flu virus in the eastern state of West Bengal yesterday.

A state official found the H5N1 viral strain of bird flu in samples taken from dead chickens. Some five million poultry has already been killed by authorities to contain the virus, adding to the 250,000 chickens that were slaughtered since the virus was detected late last month in poultry.

To date there has been no confirmation of a human case of the deadly H5N1 virus in India, yet health officials are monitoring at least 100 people who have started showing signs of the virus in the way of fever and respiratory tract infections. The government has begun offering farmers money in compensation for infected chickens to quickly offset the spread of the virus.

Since 2003, bird flu has infected 389 people in 15 countries, particularly in Indonesia, China, and Vietnam. Just 39 cases of the human H5N1 strain have been reported this year, including 29 that led to deaths.

So far, bird flu's tail risk has been minimal on a global level because of its inability to easily pass from human to human, yet studies are currently testing if a genetic change could make it easier for bird flu to pass from chickens to people. If such a link proved easily transmissible, it could trigger a global epidemic.

As BBC noted in an article on the bird flu outbreak yesterday: “While no case of humans being infected by bird flu has been reported from anywhere in India, experts fear the H5N1 virus might mutate or combine with the highly contagious seasonal influenza virus and spark a pandemic that could kill millions of people.” Although the odds are low, the potential for a major human impact from bird flu is a possibility.

This increased outbreak of bird flu adds another supporting factor to our bearish macro outlook on India as we head into 2009.

Today, we covered our short position in IFN because it was down -5%. That’s part of managing risk too. Keep moving.

Daryl Jones
Managing Director

Matthew Hedrick

Early Look

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Eye On The UK: Career Opportunities

Unemployment is on the rise, wages are sinking …

The pound made new lows against the Euro as more collateral damage arrived for the stagflating UK economy today in the form of 75,700 new faces in the dole line in November, raising the claimant count rate to 3.3%. NBS unemployment rate data for October –seasonally adjusted and calculated by the ILO definition, now comes in at a 3 month average of 6%, while average wages for the period stagnated on a year-over-year basis.

These heavily massaged data points do not factor the rapid shedding of manufacturing and construction jobs last month and the anticipated further cull in the financial sector that will inevitably arrive as the year ends –but the trend is still clearly visible: Jobs are disappearing and wages are declining. These indisputable facts put further pressure on the residential real estate markets and consumer spending, pressure that can’t be alleviated by more rate cuts.

As the Nanny State’s politicians grapple with harsh reality, they will undoubtedly look for more rabbits to pull out of the hat (publics works anyone?), but the damage is clearly baked into the cake at this point. We will continue to keep an eye on the UK and will opportunistically look to short into strength until the market finds a bottom or Brown, Darling & King are fired.

The EWU etf still has legs to $13.04 – that’s where our short selling guns come out.

Andrew Barber



While I debate the sample used by Sportscan, the reality is that it is consistent. Sports retailer sales were down sequentially 3-weeks in a row. Stick with the share gainers (UA +90bp this week).

Where Did All The Bulls Go?

“If it's a good idea, go ahead and do it. It is much easier to apologize than it is to get permission”
~ Admiral Grace Hopper

At the end of the day, this business isn’t about having “ideas”… it’s about asking the right questions first, acting ahead of the crowd, and being right on those ideas.

We’ve been saying this for the last 12 months, and we’ll hammer it home one more time this morning – those who do no respect the history of how manias and markets move are doomed to repeat its mistakes. While we can get the “knucks” for having called the market crash, I am much more proud of our recent wins in being able to be long China, Hong Kong, Brazil, and the USA before these massive one day rallies. It’s one thing to be a perpetual bull or bear. It’s entirely another thing to have a business model that’s driven by one cause – to be right. That’s why I started this firm. That’s what gets my feet on the floor to write this every morning.

Prior to yesterday’s open we had been beating our “Re-Flation” Investment Theme to a pulp. As history buffs will recall Churchill saying, “if you have an important point to make, don’t try to be subtle or clever. Use a pile driver.” And like wrestling fans of yesteryear, there was nothing quite like growing up in the 80’s when we could all watch Hulk Hogan on the “Main Event” teeing Rowdy Roddy Piper up for one of them babies like we did to the shorts yesterday. Americans love one thing, above all else, a winner.

Upon reviewing the replay of yesterday’s Bull vs. Bear title match, the facts are beginning to emerge for all revisionist historians and CNBC entertainers to see. Yesterday’s +5.1% gap up in the SP500 to close at 913 (we were in print with our “Are You Ready For Some Rate Cuts” call looking for 914; close enough) was the biggest “Fed day” rally since 1994. If you want to be paid 2 and 20, you can’t miss those. Post “Weekend at Bernie’s”, Re-Regulation cometh, and the performance You Tubes are on. There is nowhere to hide. You will be accountable to uphold a transparent investment process from this day forward.

Proactively predicting that a bunch of wanna be short sellers were going to get squeezed was about as complicated as understanding how Madoff made-up the numbers – not very. What is jumping out of my notebook this morning however is how far away from the land of nod the bulls were… where did all the bulls go?

This morning’s II Bullish to Bearish survey still has a negative delta of -20 points, playing to the Bear camp. This iteration of the market’s rally may not be as much about the bad news bears being late as it is the “buy the top” bulls missing the boat. Now that the US Dollar has collapsed -11% in less than a month, stocks on the Hang Seng have rallied 40%, and gold has ripped higher for a +21% one month move, CNBC “Reports” (they don’t call Kudlow’s show by his own name anymore; I wonder why) is catching onto the idea that there has been a little “Re-Flation” being passed around at the Greenspan Goes Global rate cutting party!

“Economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time” – thanking God that that statement by the US Federal Reserve yesterday is not my religion, that certainly doesn’t mean that the fact of the matter ceases to exist. Reality can bite bulls and bears alike, and the reality is that we are in the midst of seeing a FREE money global devaluation of everything called currency. The output is that asset classes from Chinese stocks to Brazilian ones “Re-Flate”, so I’d personally like to thank our financial media sponsors for reiterating this message across the loudspeaker today. I realize it’s the holiday season, but this is very kind of you all. Special thanks to Larry.

Since the thralls of a nuclear October, this is what the perpetual “it’s global this time” bulls of yesteryear have missed: Hong Kong +40%, Brazil +36%, Russia +28%. If you’re more into the liquid local thing, since the November capitulation “everyone is going to cash” low, the SP500 is +21.4%. The facts don’t lie folks, people do. I think that one of the main reasons why the bulls don’t want to believe this global market rally is that they can’t afford to. What kind of storytelling would Portfolio Managers be able to make up if the best asset allocation, globally, for December of 2008 turns out to be what they have been preaching for the last 25 years of the bull market – “being fully invested for the long run?”

I’ll end with that. The SP500 futures are pretending to be worried, but that looks like some form of emotion than anything else. Since the Japanese Prime Minister is quote, un-quote, “hailing” the US rate cut decision this morning, your next macro calendar catalyst is the Bank of Japan cutting to zero on Friday. Hong Kong cut rates by 100 basis points overnight to 0.50%. That’s the lowest rate that the Honk Kong Monetary Authority has EVER had. China told us that they’ll be cutting again in t-minus whenever they decide to. Brazil is going to start cutting aggressively next.

It’s a global rate cutting holiday party, and the best parties are the ones where all the booze is FREE!

Good luck out there today,

Long ETFs

SPY-S&P 500 Depository Receipts – CME front month futures were down this morning, trading as low as 887 in morning trading before 7AM.

DIA –DIAMONDS Trust Series – CBOT front month futures were down were down this morning, trading as low as 8,738 before 7AM.

XLV Health Care Select Sector SPDR – Bristol-Myers Squibb (XLV: 4.08%) announced a 10% reduction in employee headcount, the second round of layoffs for the year. 

 EWZ – iShares Brazil—Brazil’s Bovespa Index was up 4.4% yesterday in trading. Petroleo Brasilerio SA, Brazil’s state-controlled oil company, found more evidence of oil in an onshore block in the Sergipe Basin, the country’s petroleum regulator said.

EWG – iShares Germany – The DAX is trading down slightly this morning to 4,697.88 or 0.68%, with financials leading the decline.

EWH –iShares Hong Kong –The Hang Seng closed up this morning 2.18% at 15,544.97. Hong Kong’s central bank lowered its base rate 100 bps from 1.5% to 0.5% and asked lenders to follow suit to help grow the city’s economy.

FXI –iShares China – The CSI300 closed up today 6.97 points, or 0.35%, at 2001.42. China announced it will reduce a tax on home sales to improve the property market. Sales profits, rather than prices, will now be taxed.

Short ETFs

FXY – CurrencyShares Japanese Yen Trust – The USD fell to 88.54 Yen,  a 13-year low, in the wake of the FED’s rate cut.

IFN The India Fund—The Sensex fell 47.55, or 0.5%, to 9929.43.

Keith R. McCullough
CEO & Chief Investment Officer

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