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WHAT WE GOT OUT OF THE PNK/ASCA PROXY AGREEMENT

Yes, there was another bid but that was unsolicited as well.  No wonder the rest of the industry players were caught off guard.

 

 

The ASCA/PNK proxy agreement was an interesting read.  It certainly increased our optimism that there could be a competing bid and confirmed our belief that the rest of the industry was a bit caught off guard.  No other bids were solicited so potential buyers such as MGM, PENN, BYD and maybe PE firms were likely unaware.  But there was more including a surprise 2nd bidder (unsolicited), some questionable advice by bankers, a pretty big payout to ASCA management, and a more dismal outlook for 2013 fundamentals than maybe the Street was expecting.

 

Here are our takeaways:

  • CHDN was likely “Bidder 1”.  The Agreement mentioned that Bidder 1 made an unsolicited offer that included stock, had a stock that was near an all-time high, was licensed in fewer jurisdictions than ASCA, and that the acquisition would be transformational to that company.  The only other companies with stocks near all time highs are PENN and MPEL, but we can rule both of them out because ASCA would not be a transformational acquisition to either.
  • ASCA’s advisors convinced the ASCA Board that soliciting other bids would not have resulted in a price significantly higher than $26.50 and would’ve jeopardized the PNK offer due to the a longer timetable.  The advisors felt that no other bids would be forthcoming since ASCA conducted a process to sell the company in 2010 and were unsuccessful.  We would argue that it was a different time and operators are in a much better position financially today.  Moreover, given the reaction in PNK’s stock, ASCA left a lot on the table indicating that higher bids could’ve been successfully solicited. 
  • Other issues brought up by the advisors were that:
    • Bidder 1 refused to release non-public info requested by the Board to evaluate the value of their stock  - Probably due to competitive reasons related to CHDN’s on-line business
    • Pressure from some shareholders wanting to cash out could have put selling pressure on Bidder 1 stock – In retrospect, CHDN’s stock would’ve likely gone up materially. 
    • Bidder 1’s stock was close to all-time highs – We don’t find this relevant.

The advisors also made a claim that investors would not have been appreciative of the tax advantages of a partial stock deal.  This seems spurious.

  • The fact that MGM, PENN, BYD, nor any other operator was involved in the process increases our optimism that there could be a competing bid.  PENN could obviously pay the highest multiple given their future REIT structure and strong balance sheet but MGM could do a deleveraging and very accretive deal while adding additional value through the use of its NOLs.
  • ASCA can still negotiate unsolicited bids until the shareholder vote
  • It is possible that CHDN’s offer of $26 with 40% in stock could’ve actually been superior.  PNK’s stock appreciated 21% the day they announced the transaction and CHDN would’ve no doubt experienced a big increase in the share price as well which would’ve ultimately accrued to ASCA shareholders.  Moreover, the favorable tax treatment for investors receiving ASCA would have to be factored in as well.
  • There are a number of lawsuits arguing that ASCA is not acting in the best interest of shareholders.  We also believe that some institutional owners are not happy that additional bids were not solicited.  There seems to be a lot of pressure on the company to certainly entertain unsolicited bids.
  • ASCA management’s projection for 2013 EBITDA was approximately 3% below current consensus estimates.  We think the sell side continues to be a little aggressive on regional gaming projections for 2013.  Our thesis remains that US casinos face structural (fewer slot players) and economic (highly economically sensitive) headwinds.  Of course, this could argue against accepting stock from a bidder since any fundamental weakness would theoretically accrue to the buyer and potentially hurt its stock price.
  • ASCA spent $6 million on professional fees
  • A whopping $43 million of severance is owed to management


Happy Veggies

“Should I be turned into a vegetable or a happy imbecile?”

-Nassim Taleb

 

That’s a quote from Chapter 3 of Taleb’s book, Antifragility, where he discusses everything from “Crimes Against Children” to the misguided interpretation of “equilibrium” by social scientists.

 

Clearly, Taleb doesn’t like social scientists. There’s a little bit more than a little anger in some of what he writes, but there’s also plenty of truth. Sometimes the truth makes some people angry.

 

Personally, I like socially oriented scientists. I just don’t want them running my money. For that, I don’t need a philosopher either. I need a real-time Risk Manager.

 

Back to the Global Macro Grind

 

The thing that non-market people generally don’t get about risk is that it works both ways. There is no such thing as risk “on” and “off” inasmuch as there is no Mr. Miyagi running the Bank of Japan (yet) either.

 

Risk is always on. It can squeeze you to the upside as fast as it can crash on you to the downside. There is no better example than that in the Land of The Rising Sun itself. Since Bernanke’s Top (September 2012) where he completed his US Dollar Debauchery, the Japanese Yen is down approximately -17%. Since US stocks stopped going down on #GrowthSlowing (mid November), the Nikkei is up +32.4%!

 

The Nikkei (for all the social scientists out there still trying to prove out their Ph.D in Keynesian Economics) isn’t something you can export. During today’s Currency War, it’s what squeezes (and pleases) politicians in the short-term (the stock market), while it impales their people’s purchasing power for the long-term.

 

Enough about that.

 

Why do I keep buying the damn dip?

  1. Fundamental Research: Macro Economic Data in Asia and in the USA continue to improve
  2. Quantitative Signals: my model continues to signal higher-lows of support and higher-highs of resistance

Why make it any more complicated than that?

 

I used to.

 

Then I started reading a lot of books and realized how much I do not know.

 

That’s why the best fundamental framework I can find right now is grounded in Chaos Theory. No, that doesn’t mean I am a philosopher. Neither does it mean I’m turning into a happy bullish imbecile. It simply means I fully Embrace Uncertainty.

 

What does the mean?

  1. I obey the signal, not the noise (Quantitative Signals)
  2. I then attempt to confirm or disprove the signal alongside my team (Fundamental Research)

I know, I keep saying the same thing, over and over and over again. I guess that might make me somewhat antifragile, for now. Then I’ll get clocked, and I will feel shame – then it will be time to evolve my process all over again.

 

As US and Asian Equity markets (our 2 largest allocations in the Hedgeye Asset Allocation Model) move back to immediate-term TRADE overbought, here are some mixed signals to consider amidst your daily noise from the #OldWall:

  1. SP500 immediate-term Risk Range remains tight and trade-able (for now) = 1
  2. US Equity Volatility remains bearish and breaking down relative to 5yr lows; TRADE support = 12.15
  3. US Equity Market Volumes are now trending bullish on up days and bullish (down volume) on down days
  4. US Dollar Index continues to make higher long-term lows, holding its TAIL of $78.11 support
  5. Chinese Equities (Shanghai Composite) are crashing to the upside into a Bullish Formation (2274 TAIL support)
  6. Both our Hong Kong (EWH) and Singapore (EWS) long ETF positions aren’t as overbought as the SPY at 1516
  7. Japan’s Nikkei flashed an immediate-term TRADE overbought signal overnight at the Yen signaled oversold
  8. KOSPI continued to diverge, like Brazil’s Bovespa has, breaking its TRADE and TREND lines of support
  9. EuroStoxx600 was down -0.5% last wk and is confirming an immediate-term TRADE breakdown again today
  10. France, Italy, and Spain have all seen their respective stock markets snap TRADE lines of support
  11. CRB Commodities Index failed, again, at its long-term TAIL risk line of 306 so far this week
  12. Gold continues to look like Treasury Bonds, awful relative to US and Asian stocks
  13. Oil remains the biggest NEW headwind to our Fundamental Research call on global #GrowthStabilizing
  14. US Treasury Yields (10yr) are now confirming a Bullish Formation (bullish TRADE, TREND, and TAIL)
  15. Yield Spread (10s minus 2s) is plenty wide at +174bps this morning; bullish for the Financials (XLF)

There is no “equilibrium” in a multi-factor, multi-duration, Global Macro risk management model. There is no happy place either. Like in any dynamic, non-linear ecosystem, what you want to embrace is the uncertainty of time and space.

 

So eat your veggies, buy red, sell green, and keep moving out there as risk factors do.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $114.96-117.41, $79.11-79.94, $1.34-1.36, 91.63-94.33, 1.91-2.10%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Happy Veggies - Chart of the Day

 

Happy Veggies - Virtual Portfolio


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

THE M3: JUNKET CRACKDOWN; S'PORE CONSUMER SPENDING SURVEY

The Macau Metro Monitor, February 6, 2013

 

 

MACAU CASINOS DECLINE AFTER REPORT ON JUNKET CRACKDOWN Bloomberg, Macau Business

China’s government will start taking action this month to clamp down on junket operators that bring gamblers from the mainland to Macau, the Times reported, citing unidentified people in law enforcement.  The action will involve police operations in six Chinese cities and is part of an anti-corruption campaign led by Xi Jinping, the Communist Party general secretary, the U.K. newspaper reported.  “The squeeze has already started on a small scale, but the operators themselves believe that something bigger is coming within the next few weeks,” The Times quotes an unidentified Macau gaming industry source as saying.

 

SINGAPORE CONSUMERS LIKELY TO CUT BACK ON SPENDING IN 2013: SURVEY Channel News Asia

Consumers in Singapore were less confident in 4Q 2012, signalling a potential slowdown in consumer spending in 2013, according to a survey by global information and measurement company, Nielsen.



Melvin's Market

This note was originally published at 8am on January 23, 2013 for Hedgeye subscribers.

“What if this is as good as is gets?”

-Melvin Udall

 

That’s what Jack Nicholson asked a bunch of depressed psychiatric patients in one of the great scenes in American comedy (As Good As It Gets, 1997). Melvin Udall should be re-casted as a modern day money manager.

 

Obsessive-compulsive about this market, anyone?

 

Back to the Global Macro Grind

 

I don’t yet require psychiatric help, but with each passing day I am feeling more and more like a shrink. “Keith, do you really think growth is stabilizing?”… “This market can’t go higher with all this debt, can it?”…

 

Trust me, it goes on and on and on. I don’t get up at this hour every day to not tell you what I think. The last 2 months have been nothing short of fantastic for stocks – and, this time, the global growth fundamentals actually supported it.

 

Everything has a time and price. So the question remains, with the SP500 up double digits (+10.2%) now from where you could have bought just about anything lower (November 15th, 2012), is this as good as it gets?

 

Let’s start with Global Growth… “I’ve got a really great compliment for you, and it’s true.” –Melvin

  1. ASIA – high frequency growth data has been stabilizing for 3 months
  2. EUROPE – high frequency growth data stopped slowing in November
  3. USA – employment growth has been stabilizing for 3 months and Housing is ripping

What about inflation?

  1. ASIA – most CPI and PPI readings were relatively benign in October-December, but should pop up in January
  2. EUROPE  - since they are still dealing with stagflation, it’s all relative, but Brent Oil was cheaper in November
  3. USA – follow the CRB Index - down hard from SEP to NOV, heading higher, faster, now in January = #headwind

So, if policy perpetuated Inflation Slows Growth… and Food/Energy prices continue higher from here until whenever that whenever is, you have yourself the 1st major macro headwind to growth in the last 2-3 months.

 

If you think you are going to get sustainable (real inflation adjusted) economic growth with $115-130 Brent Oil, you might want to check the tapes on how that consumption growth movie ends.

 

Isn’t it appropriate and ironic, then, as our bailed-out overlords descend upon Davos this week, that the manic media no longer looks to broken sources for “growth forecasts.” They’ve enlisted JP Morgan’s Jaime Dimon this morning instead. He doesn’t have a macro model but is insinuating that the “foundation is set for 4% growth.”

 

Right, right…

 

To be clear, there’s a better chance that hockey is banned in Thunder Bay, Ontario than the USA seeing a sustained 4% GDP growth rate when Oil is above $100/barrel.

 

To Review: there are 3 stages of growth and inflation in our GIP (Growth/Inflation/Policy) Macro Economic Model:

  1. Slowing
  2. Stabilizing
  3. Accelerating

You don’t have to be a brain surgeon to get Muckernomics – it’s all about time and space. Try it on skates (or with a car) and you’ll get it. Cycles are processes, not points. And there are certain levels of inflation that slow growth inasmuch as there are others that help stabilize it (see our Chart of The Day).

 

Accepting this as truth would eviscerate the academic credentials of most Keynesians hanging out on your tax-payer dollars in Switzerland this week. Central planners of the Global Currency War still think that if you debauch the Dollar, you’ll see a meteoric rise in export demand (even though exports are only 9% of the US economy, and falling).

 

Back to Melvin’s Market… higher-highs (and in the case of the Russell2000, all-time highs) are flat out bullish, until they aren’t. If your catalyst shorting this market was Earnings Season, so far that’s what we call being wrong. The Financials led off with borderline excellent results, and now we’re seeing Tech (the market’s worst performer YTD at +2.15%) deliver some early morning bacon.

 

Since Apple (AAPL) is 17% of Tech (as a % of the Tech ETF, XLK), what it does tomorrow on earnings day really matters; especially after Google (GOOG) and IBM ripped last night in the post. Our quantitative signal on AAPL says to do nothing. It’s still in a Bearish Formation (bearish on all 3 of our risk management durations, TRADE/TREND/TAIL), so waiting and watching for the print is a choice.

 

In the meantime, the SP500 is immediate-term TRADE overbought at 1496 inasmuch as the VIX is oversold at 12.19. So a big AAPL surprise to the upside might just give you what Melvin called his last word, “freak” – to the upside. And if they miss, people might just freak-out on that too.

 

If you think this market is crazy, join the club. There hasn’t been anything normal about this for years. Not seeing growth stabilizing when it did might be as crazy as buying is on green is crazy today or tomorrow.

 

Sell crazy someplace else, we're all stocked up here.” –Melvin Udall.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, AAPL, and the SP500 are now $1654-1692, $110.93-112.95 (Bullish Breakout for Oil), $79.41-80.14, $1.32-1.34, 87.71-90.61, 1.82-1.91%, $482-528, and 1475-1496, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Melvin's Market - Chart of the Day

 

Melvin's Market - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
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