Call Us - We're Hiring

“If you don’t have time to do it right, when will you have time to do it over?”
-John Wooden

Hurry up offenses and hail Mary passes, here we come – those who did not proactively prepare for this crisis of confidence in the US Financial system are going to pay the inevitable price again this morning.

I say again, because this is not new. At every turn, Wall Street didn’t get it this year. “Buy the dip… “… “the Bear Stearns bottom is in”… “this is a buying opportunity”… You will certainly hear those all too familiar ring tones of the perpetually bullish this morning, but since less of them will be employed, you’ll at least hear more muted volumes of their reckless rhetoric in the months ahead.

Lehman has filed for bankruptcy, and John Thain has thrown Singapore under the bus, selling out to Bank of America well below the Government of Singapore’s “strategic investment” price – at least he got paid! The 94 year old Merrill Lynch charging Bull logo is sold to the only bidder. I said it last week, and I’ll say it again this morning – in times of liquidity crisis, reactive management teams sell what they can, not what they should. What they are left with is called illiquidity, and in some cases, bankruptcy.

I could go on and on about the proverbial puck that everyone is staring at in the corner this morning, but I will save that exercise for CNBC’s revisionist historian savants. The goal of this game is to go to where the puck is going next, and that’s what we have been proactively preparing for here at Research Edge since I left Wall Street at the end of October of 2007.

I am moving my immediate downside target for the S&P 500 to 1196.86. We have an 84% cash position, and we are hiring. That’s it. That’s my morning call. Please forward all resumes to our President and Director of Research, Brian McGough, at

We are proactively prepared to service our clients with the best research platform, people, and process in the industry. We have zero counterparty exposure, and we are looking to help you wherever we possibly can. Our main phone# in New Haven, CT is . Please let us know where we can help.

I am getting on a train to New York City right now to meet with those interested in seizing this opportunity to re-build the trust that Wall Street has lost.

Best Regards,


It’s easy to see why AC is susceptible to demand shocks. The Atlantic City Convention and Visitors Authority released a survey that showed easy parking was the top reason customers chose to visit the city. Gambling, restaurants, nightclubs, retail, beaches; not as important. Pennsylvania, a smoking ban, high gas prices, and a tough consumer environment have all contributed to declining gaming revenue in AC. When parking is your top lure, you are defenseless in the face of these threats.

Parking the top draw? Not good enough

Goldman (GS): "For good and valuable consideration"

The early open of trading in Crude oil futures coincides with an extraordinary net-trading session for ISDA jurisdiction OTC derivative contracts to allow major banks to trade out of their Lehman Brothers exposures amongst themselves conditional on a bankruptcy. This could be a simple coincidence driven by the simultaneous less-severe-than-feared impact of hurricane Ike on coastal refineries and offshore drilling platforms. It could, however, also be intended to allow listed market participants the liquidity to adjust their holdings in the wake of major banks selling into the OTC oil and gas markets as they scramble to cut exposures across the board.

On one hand this second scenario makes some sense: people don’t sell what they SHOULD during a crisis – they SELL WHAT THEY CAN. Unwinding exposures in the oil market could potentially allow banks that are long commodities to raise quick cash to offset other exposures.

At this point it remains nothing but idle speculation on my part. There appears to be unusual volume in the early trading session.

PS -the title of this post comes from the second sentence of the ISDA Lehman Effectiveness Protocol

Keith has obviously been negative on Lehman and Merrill for months now. Note that he remains short Goldman (GS) in the Hedgeye Portfolio. He thinks that if the stock breaks down to his immediate target price of $147.43, the $100/share line comes into play. We are fully aware that few agree with our positioning here – that’s why the short interest in GS remains shockingly low at 3.5% of the float. Complacency is not an investment process, however.

Andrew Barber

(chart courtesy of

US Market Performance: Week Ended 9/12/08...

Index performance:

Week Ended 9/12/08:
DowJones +1.8%, SP500 +0.8%, Nasdaq +0.2%, Russell2000 +0.2%

September 08’ to date:
DowJones (1.1%), SP500 (2.4%), Nasdaq (4.5%), Russell2000 (2.6%)

Q308 To Date:
DowJones +0.6%, SP500 (2.2%), Nasdaq (1.4%), Russell2000 +4.4%

2008 Year To Date:
DowJones (13.9%), SP500 (14.8%), Nasdaq (14.7%), Russell2000 (6.0%)

Ike Stinks

Very tough weekend for lots of good people in the Gulf States. I don’t intend to foolishly translate hurricane destruction to making money on stocks. That’s absurd. But to better arm you with insight as to whether or not companies you care about are exposed to the region, we ran the math and highlighted the outliers.
Click to enlarge.


I like Dale Black’s answer to The Question we posed to gaming companies a few weeks ago. As a reminder The Question was (and still is):

Cost of capital is rising across the globe and returns on investment in the gaming sector appear to be falling. How does this impact your long term view of the industry? If this is the new paradigm what are your long term options for capital allocation?

  • Rather than dismiss the current difficult environment, Mr. Black acknowledges higher cost of capital is here to stay. Future projects will be judged assuming a higher borrowing cost than those prevailing during last few years of easy money. ISLE’s recent goals have included improving financial flexibility and matching future expenditures with the flexibility afforded the company in the new credit facility. The focus will be on improving operations of existing properties while reducing the leverage ratio one to two turns over the next 18 months. Mr. Black’s assertions are borne out in the numbers in the first chart. I calculate ISLE could reduce leverage to 5x in 2 years.
  • This sounds a lot like the Argosy plan from the late 1990s. For the younger folks, ISLE’s current management team successfully turned around Argosy Gaming at that time. They are off to a solid start with ISLE, despite the difficult environment. Mr. Black has to be one of the most underrated CFOs in gaming as he restructured the balance sheet to effectively provide liquidity until fiscal 2013. Despite the very high leverage, ISLE has no significant debt maturities until that time. Leverage should consistently decline as capex is curtailed. See chart #2. Operationally, ISLE just reported its FQ1 ended July 31st which was the first decent quarter in some time. Margins were clearly a focus and it showed.
  • Management seems to be saying and doing the right things. Moreover, there actually could be some upside to the EPS estimates due to continued margin improvement. I see only downside EPS possibilities for most of the other gaming operators. While the ISLE story certainly has some potential, I’m not sure the stock does over the near term. Forward EV/EBITDA is around 7.5x which, while not expensive, historical precedent shows could go as low as 5x. At that multiple, I could buy PENN which maintains an underleveraged balance sheet at 2.5x versus ISLE at 7x.
ISLE's goal is to deleverage by 1-2 turns in 18 months. This looks attainable
CapEx story looks promising

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.