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BYD is up 20% after announcing the postponement of construction on Echelon. I’ve thought for a long time that Boyd had some levers to pull to increase shareholder value and this was one of them. PNK also has options. Management certainly has the financial incentive. As can be seen in the chart, the in-the-money value of CEO Dan Lee’s options fell from a peak of $36million down to $2million.

What can they do? Unlike BYD before today, PNK actually maintains decent liquidity. However, there is significant negative equity value in the stock associated with expectations of future projects. I believe if PNK just announced the intent to sell the AC land, even at a loss, even with the tax ramifications, the stock would go up. AC costs PNK about $15-20 million a year. Given the relative strength of the LA and TX economies, Sugarcane Bay is not a terrible project but ROI is likely to be low. I’d prefer to see PNK try to negotiate with the State to postpone Sugarcane Bay but develop Baton Rouge. I’m still constructive on the South County St. Louis project (fully financed).

Oh I almost forgot the best shareholder creating option of all: selling the company. There is only one buyer out there. A PENN/PNK deal sure seems to make a lot of sense.

Incentive in place to increase shareholder value


A few years ago Shuffle Master made a disastrous turn away from its pure lease model. The company began selling “lifetime licenses” for its shufflers and proprietary table games (PTGs) and converting existing leased product to one time sales. SHFL dominated these two segments and was foolish to sacrifice its pricing power. Unfortunately, it’s a long, painful journey back. Short term profits must be sacrificed for long-term recurring revenues, profits, and predictability. As can be seen in the chart, it appeared for awhile that SHFL was willing to make the sacrifice. YoY units sold declined for both shufflers and PTGs for 2 straight quarters last year. A bad inflection point occurred in the January 2008 quarter that carried into last quarter.

Some will make the replacement cycle argument that SHFL can obsolete its own products, thus forcing a more recurring revenue source. However, the health of the business is sometimes masked by quarterly unit sales that pull future earnings forward. I prefer the predictability and transparency of a pure lease model.

This stock will be interesting when the rate of change in shuffler and PTG units sold starts to decline again. This stock will be really interesting when units decline and SHFL meets and beats earnings expectations.

EWW (Mexican ETF): Staying Short...

When I think about the ramifications of a US consumer spending recession, I always think about Mexican GDP correlations. Revisiting my "Shorting Mexico" note from 6/18/08, the only thing that has changed in between then and now is that my outlook for unlevered future US growth has deteriorated.

Despite the short squeeze rally in global stock markets in July, the EWW (Mexican ETF) stands out as having underperformed. I have been using a stop loss of $54.78 for EWW, and that price was never realized in either of the two snap July rallies. This is an outright bearish negative divergence.

My near term target on the downside for the EWW is $51.65. Take a look at the long term chart attached, and tell me if you want to be long this call option if I am right on the economic cycle.

*Full Disclosure: I am short EWW in my fund.

  • EWW
chart courtesy of stockcharts.com

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TAGS: A Lesson In Key Customer Risk

Here’s a scary one. Tarrant Apparel Group, maker of private label apparel brands for department stores, was probably not happy with Mervyn’s Ch 11 filing. Mervyn’s is an 8% customer, and accounts for about $20mm in revenue. Not good when you consider that allowance for doubtful accounts was only $453k last year. Let’s say this business is lost at a 25-30% incremental margin, then that equates to about 2-3 points in margin. TAGS, unfortunately, has margins of only 0.9%, 94% debt to equity, and the majority of its debt due over the next 2 years. On one hand, I think that it is no wonder the market cap has nearly evaporated. On the flip side, there has been little meaningful change since Mervyn’s troubles became apparent. I’m no expert on this name, but I thought it worth pointing out.
Yes, Mervyn's exposure has been coming down. But it's still significant, and allowance for doubtful accounts has not budged.

Trichet's Chart: European Inflation Fighting

Euro zone inflation for the month of July surprised me to the upside this morning, coming in higher than July than June by 10 basis points at +4.1% year over year growth.

The chart that we put together below underscores the mapping of Trichet’s decision making process (raising nominal rates in line with reported inflation). Bernanke has chosen to roll the dice, and let inflation run away from the Fed funds rate, by a significant margin.

Inflation needs to be fought. Central bankers around the world are gaining credibility by the day by doing so. The US government should realize that it is global this time, and do the same.


No doubt the weak US dollar has contributed to an influx of international visitors to Las Vegas this year. “The US is on sale” is a phrase I’ve heard countless times. Jim Murren, President of MGM MIRAGE, recently said that 30% of Bellagio’s customers are now international. Those international customers are likely providing well over 30% of revenues to the property. Foreign visitation is great for the Las Vegas model over the long term for a variety of reasons. The problem is that domestic weakness has been masked somewhat by the effects of the weak dollar. By my calculations, Strip revenues were inflated by 5% in 2008 from the weak dollar. What happens if the dollar strengthens and the consumer remains soft? This is a very plausible scenario if the Fed gets serious about attacking inflation and is one more reason to be cautious on Las Vegas.

Weak dollar drives international visitation

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