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PENN: “BASSET” SWAPS AND VALUE CREATION

Gaming companies have a problem. Business risk is high, balance sheets are highly leveraged, credit markets are closed, and liquidity begins to dry up in 2010. PENN has a different problem. While PENN maintains the best balance sheet and liquidity to make a value creating acquisition, gaming companies are probably unwilling to sell assets or their companies at the bottom. There may be a solution: a bond for asset (“Basset”) swap. Theoretically, PENN could buy discounted bonds in the open market and trade them back to the Issuer in exchange for an asset, presumably a casino/hotel. PENN effectively buys the property at a discount and the seller deleverages at par. It seems like a win/win situation; maybe not for the bank who holds the credit facility, but certainly for the direct counterparties.

Conceptually, swapping discounted bonds for a coveted asset makes a lot of sense. There are a couple of issues, however. First, the covenants in all indentures and credit facilities senior to the purchased bonds cannot restrict the use of proceeds from asset sales. Second, as with most casino asset sales there are always tax issues. It is unclear whether the seller would be able to make a tax free exchange but that would certainly seal the deal.

In the following table, I’ve outlined a generic analysis of how this transaction would look to the buyer and seller assuming no covenant or tax issues. Clearly, PENN benefits from buying a property worth 10x EBITDA for 7.5x. The seller sees its leverage fall 4x to 3.3x and is now in a better position to obtain new liquidity from the credit markets.

This is by no means an exhaustive study of “Basset” swaps but it does indicate that there may be options for PENN to expedite an attractive acquisition. Alternatively, the company will be patient to get what it wants at fire sale levels. Presumably, potential sellers will get more desperate as we approach the beginning of what could be a gaming liquidity crisis beginning in 2010. PENN seems to be alone in dealing with this high class problem.

Hypothetical "Basset" Sale

Missing BRIC's In The Walls: Russian and Brazilian ETF's

The Russian Stock Market lost almost -6% of its value today, and now the RSX is chasing its consensus momentum ETF friend in Brazil (EWZ) down to the bottom of the July performance barrel.

These levered plays on commodity inflation are down -21% and -22% since mid May, when we made our "Fading Fast Money" call (see chart).

It may be time to call your broker and ask them what exactly resides within these ingenious ETF instruments.

KM
Charts by Andrew Barber, Director - Research Edge, LLC

Republicans Are Going To Love This Picture

Post the Berlin love fest yesterday, and plenty of Republican distaste. We thought we'd highlight the similarities between Hollywood's finest and rock star Bon J-Obama.

Keith McCullough & Andrew Barber

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Charting Japan: Breaking Down - Short It

The Nikkei in Japan lost another -2% overnight closing down at 13,334. Fundamental and quantitative factors in Japan continued to break down this week. Yes, I know Japan is “cheap”, but I also know that this is still the world’s 2nd largest economy, and that it wont be forever. With each passing day, the Japanese government puts themselves in a higher probability position of losing global market share.

I highlighted yesterday’s abysmal export data released by Japan, so I won’t rehash that note. I will however remind you that this is an island country that continues to pander to the socialist demands associated with economic stagnation and deteriorating population growth.

The Nikkei is broken. I have a near term downside target of 12,501.

*Full Disclosure: I am short Japan via the country ETF (EWJ)
KM
(chart courtesy of Stockcharts.com)

A Bull Market In Volatility Remains

One of the most obvious bull market “Trends” remains that in volatility. As measure by the VIX Index, I see significant support at the 21.54 line, and potential for a massive breakout if fear can creep back into market psyche.

A close above 24.03 would do the trick – I see no reason why we can’t retest my prior capitulation target level of 31.

Be careful out there.
KM
Picture: http://assetbuilder.com/wp-content/uploads/2007/10/071015.jpg

US CONSUMER CONFIDENCE - KEEP A TRADE A TRADE

CRB Commodity Index prices fell -13% since the 1st week of July, and the S&P 500 had a +88 point move from the mid July low. Is that going to improve consumer confidence? Uh, yeah!

The Michigan Consumer confidence for July improved in July, coming in at 61 vs. 57 expected. Stocks, fortunately, are discounting mechanisms of the future however, not trailing data. Now that the 1st round of inflation deflating and shark bite short squeezing has passed, I expect consumer confidence to fall again in August.

The confidence "Trade" was up. Keep a trade a trade. The confidence "Trend" remains negative.
KM
Picture: http://ameglegal.files.wordpress.com/2007/04/foreclosure.jpg

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