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US Market Performance: Week Ended 1/9/09...

Index Performance:

Week Ended 1/9/09:
DJ (4.8%), SP500 (4.5%), Nasdaq (3.7%), Russell2000 (4.9%)

2009 Year To Date:
DJ (2.0%), SP500 (1.4%), Nasdaq (0.3%), Russell2000 (3.6%)

Keith R. McCullough
CEO / Chief Investment Officer


I’ve thought the two most compelling acquisitions for PENN were buying PNK or an MGM Strip asset. The pendulum appears to be swinging west all the way to Vegas.

The deal absolutely makes sense strategically. PENN would gain a high quality, well maintained, upper mid property in the premier gaming destination in the country. The Mirage brand is powerful and would bring a destination property into PENN’s portfolio. The cross marketing benefits are potentially huge. PENN’s current properties are widely dispersed with millions of customers in its database. Many of these players are already going to Las Vegas anyway and now they can be incentivized to stay at The Mirage. Harrah’s Entertainment has been very successful with this strategy and is the only company with the geographic diversity to pursue it, until now (maybe).

While we don’t know the price, an acquisition of The Mirage probably works economically. How many gaming companies can borrow over a billion dollars at 1.25% above LIBOR right now? None. We believe PENN would pay between 7.5x and 9x forward EBITDA for The Mirage. Of course, forward EBITDA is a very depressed number so the timing is probably right. We calculate The Mirage will generate $155 million in 2009. At those multiples the deal could be accretive to EPS by 20-25% to a run rate EPS number of $1.50. More importantly, the acquisition would add over 10% to free cash flow.

The previous assumptions assume PENN borrows the full purchase price from its credit facility. There is another, potentially more value added approach PENN could take. As we wrote about in our 7/25/08 post, “PENN: ‘BASSET’ SWAPS AND VALUE CREATION”, PENN may have bought/buying MGM bonds at a steep discount in order to trade them back to MGM in exchange for The Mirage. The transaction would be a “win-win” because PENN takes ownership of the property for less than 7.5x-9x discussed above while MGM retires debt at par. In effect, PENN pays a lower price than MGM is receiving. Thanks to a very lenient credit facility that allows MGM to use proceeds from asset sales to retire subordinated debt, this transaction is feasible.

Either way, the purchase of The Mirage for 9x EBITDA or below looks attractive for PENN shareholders.

Economics likely attractive

Brokers Disdain Toaster Salesmen in Bank America Deal

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Eye On European Bond Yields

On Wednesday German 10-year bonds failed to attract enough bids to place the full €6 Billion the German government had sought, amounting to the second worst auction on record in terms of demand. In contrast France and Spain successful sold a total of around €11.4 Billion of bonds yesterday.

French 10-year bond yields traded at about 50 basis points above Germany, while Spanish 10-year bond yield came in a level over 80 basis points higher, with higher demand. This suggests that investor appetite for higher yield outweighs concerns over relative credit risk.

In the coming weeks, global markets will continue to be flooded with bond offerings as governments around the globe raise money for their respective stimulus packages. It seem likely, therefore, that we will see yields start to inch upwards as supply swoons.

Global equities, particularly those we purchased today (USA and Brazil), should outperform bonds as this perpetually bullish Trend in the Bond market comes under fire.

Matthew Hedrick

Korea Cut - No One cared!

The Koreans cut interest rates to their lowest level ever today – yes, even in The New Reality, “EVER” is a long time.

Both the South Korean Won and the KOSPI (Korea’s stock market Index) reacted negatively to this news. This is an immediate term “Trade” development, but it seems that Asian countries are starting to go through the withdrawal symptoms of any addict – you can only do so much, for so long. An addiction to easy money rate cutting has unintended consequences. Remember, America had this same addiction problem from September to November… not until the USA cut to zero, rate cuts were met with anxieties rather than optimism.

The KOSPI closed down another -2.1% on the day at 1180. From a quantitative perspective this country’s chart (see below) remains broken. Qualitatively, you’ll recall that not everything Asia is China. That’s why we have our long position in China, FXI, paired off with a short position in the Korean etf, EWY.

Keith R. McCullough
CEO & Chief Investment Officer

Eye On The New Reality

A New Home On Wall Street, in…New Haven

Gregory J. Fleming, the former president and chief operating officer of Merrill Lynch & Co., was appointed Senior Research Scholar at Yale Law School, which just happens to be located on the corner of Wall St. and York St. Coincidentally, it is also about two blocks from our offices on 111 Whitney Avenue in New Haven.

Fleming joins the list of ML employees jumping ship after its merger with Bank of America. A culture clash has erupted between Bank of American and Merrill over what many former ML brokers describe as an under-appreciation by their new boss of the broker-client relationships they bring to the firm. This comes in the wake of Bank of America’s CEO Kenneth Lewis proclaiming that ML’s 16,000-strong brokerage group as the “crown jewel” on the day he unveiled the acquisition.

The departure of Fleming, who was slated to run the corporate and investment banking unit, demonstrates Wall Street’s inability to retain talent as Investment Banking Inc. rolls over in the “The New Reality”. On Jan. 5, Robert McCann, head of Merrill’s brokerage and a 26-year veteran of the firm, resigned.

Matthew Hedrick

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