Quote Of The Week: Merry Christmas!

A Christmas Car-Oil

The Monarchs crept to Congress, crowns in hand,
All sniveling, slinking in on private jets.
Proud Gettelfinger meanwhile took his stand
And said “We shall not budge – off are all bets!”

Our President – who singly had invaded
Two sovereign states, with no mean loss of life –
‘Fore Dearborn now his impotence paraded
In guise of hovering above the strife.

Yet now, “’Gainst principle and judgment acting”
The W taxpayer cash distributes,
Rather than show the world his Bone has Backing.
For defense – nothing. Seventeen bil’ for tributes.

Detroit, the People wish Ye Merry Yule.
Of Last Resort, we’re now the Greater Fool.

Moshe Silver
Research Edge LLC

Chart of The Week: Volatility Breaks

While the hearts and minds of the obvious are getting all beared up, volatility continues to break down. This week’s crash in the VIX was a critical one in our macro model, and it should not be ignored.

The VIX was down -17% on the week, following its -9% week over week fall in the week prior, taking its 2-week crash to -26%. This is why the shorts are being squeezed most materially where they were making most of their money in the months prior – small caps.

This week alone the Russell 2000 had a +3.8% move. With the larger cap Dow being a proxy for “liquidity”, and closing down -0.6% on the week, the real liquidity needed in the US market place was that for the shorts to cover in illiquid small cap shorts.

Everything that matters in our macro models happens on the margin. On this margin, volatility is declining at an accelerating rate, while positive breadth continues to expand. If you add some volume to this Christmas cocktail, you have yourself a relative performance party that few can afford to miss.

Our breakdown level for the VIX is now $51.15 – see the chart below – that’s the bear hunter’s bulls-eye, where support has quickly morphed into stiff resistance for a growing community of consensus bears.

US Market Performance: Week Ended 12/19/08...

Index Performance:

Week Ended 12/19/08:
DJ (0.6%), SP500 +0.9%, Nasdaq +1.5%, Russell2000 +3.8%

DEC08’ To Date:
DJ (2.8%), SP500 (1.0%), Nasdaq +1.9%, Russell2000 +2.8%

Q408 To Date:
DJ (20.9%), SP500 (23.9%), Nasdaq (25.9%), Russell2000 (28.5%)

2008 Year To Date:
DJ (35.3%), SP500 (39.6%), Nasdaq (41.0%), Russell2000 (36.5%)

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ASCA, BYD, LVS, MGM, and PNK all have potential debt covenant issues in 2009. BYD and MGM are in the unique position of having the combination of sufficiently lenient credit facility covenants and significantly discounted subordinated debt. Both companies can de-lever by borrowing off their credit facilities to buy back discounted sub debt and retiring it. Both can also sell assets and use the proceeds to retire sub debt subject to certain conditions.

By way of example, MGM borrows $100 million from its credit facility and buys $154 million par value debt trading at 65. The company would have to pay taxes on the gain of $54 million at the ordinary rate, say 35%. Thus, on a net basis, MGM would be deleveraging at $35 million ($54 million less taxes of $19 million) for every $100 million in bank borrowing used to repurchase sub debt. Nobody likes to pay taxes but the penalties of a covenant breach are much more severe.


Galaxy and SJM, the Hong Kong listed Macau stocks, have been ripping as of late with the US listed Macau stocks doing quite well in their own right. Rumors of Beijing loosening visa restrictions have been the main catalyst. Unfortunately, those rumors are probably unfounded. We still believe visa restrictions will ultimately be loosened, but not until mid to late 2009 when the new Macau Chief Executive takes the wheel.

There is potentially a touch of good news on the visa front. Beijing appears to be allowing higher frequency visitation to high net worth players identified by the casinos. This should certainly help the direct credit business but is not the visa panacea sought by investors.


Today French, Belgian and German market regulators extended bans on the short selling of financial equities - on the heels of Switzerland’s Thursday announcement on the same ban for the Swiss stock exchange (SWX). At least 13 European countries followed the lead of the US and UK in September in adopting a ban on short selling. UK, Italian, Dutch, and Austrian bans will expire in the next six weeks; Belgium and Germany said they will extend their bans till late March.

Both the US and China let their temporary ban on short selling expire. We view these as positive capitalist decisions that will benefit the marketplace. In 2009 we’re looking to be long capitalist nations that proactively manage their economies. The EU’s consensus on short selling confirms our bearish views on the region.

Matthew Hedrick

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