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It seems that most of my gaming research and analysis has reached negative conclusions recently. At the same time, that same research keeps leading me back to PENN on the long side. Gaming operators have a liquidity problem. PENN has a liquidity bonanza. Gamers need to sell assets and de-lever. PENN is a buyer with no competition in a buyer’s market. Las Vegas is in serious trouble. PENN has no Vegas exposure but could buy into the market at the bottom. MGM, WYNN, LVS are still expensive. PENN is cheap and a valuation resistance discussion can’t be had until the stock has at least a 4 in front of it. Industry return on investment is dropping like swimming world records at the Olympics. Budgets are being busted and cash flows are declining. PENN’s capex is limited and what they spend on an acquisition (asset or company) will likely be at a discount. Unlike Colony/Station, Columbia Sussex/Aztar, ASCA/East Chicago, MGM/CityCenter, BYD/Echelon, etc., PENN won’t be buying at the top.

In my opinion, the two big themes surrounding this industry are liquidity and ROIC. PENN shines on both. Oh and by the way, PENN also shines on my partner Keith McCullough’s quantitative model.


Our man on the ground in Singapore reported back some interesting tidbits following meetings with government officials, academics, resort and construction companies, and local reporters. There seems to be some concern that LVS will not be able to open Marina Bay Sands by the end of 2009. As of this past week, 55% of the concrete has been poured and the facility is built up to floor 10 of 56. However, construction costs have exploded over the past year in Singapore and labor is tighter than it’s ever been. Marina Bay Sands may or may not open on time. It’s probably too early to tell, but with these conditions I would expect the budget to escalate from the current $4.5bn.

Typical chart of a new casino budget


Three more American gold medals were won in the pool last night, with Michael Phelps adding his 6th, pushing Team USA ahead of the Chinese in total medals by a score of 44 to 37. The Canadians have no medals.

My fellow Canadians and I can stay awake well into the night hoping for a bronze in synchronized diving or whatever it is that has less global competition, but our hopes are just that - hopes. Hope is neither an investment process nor a winning strategy when competing in a global grudge match. Confidence in a repeatable and disciplined daily research regimen is however, and that’s primarily why I come across overly proud of ours every morning.

As you might imagine, my morning thoughts elicit plenty of responses. Usually, the highest octane criticisms I receive land in my inbox within 3 minutes of the note’s distribution. Yesterday, I had one that said “good research, but hard to read”. On many counts, I think that view is fair. I am very aware that my writing style is overly confident.

We’re not in this game to appease personalities. We are in it to win it. If we score, we want you to, alongside us. My teammates are much more humble than I. Thank God for that! That gives us balance. The only way I know how to play is on the edge – that’s why our firm bears the name. I feel “smart” every morning because my teammates are. The underpinnings of the knowledge transfer mechanism in Wall Street Research are changing. Our highest conviction “idea” today, is that we know what this paradigm shift will look like tomorrow.

This morning’s pre market news is looking as light as yesterday’s trading volume did. What remains of the bullish “Trade” formation we are in should play out quietly as we move to the high end of my range. The most impressive moves remain in the deflating inflation “Trade”. The US Dollar’s positive correlation with the US stock market remains the most relevant macro factor to watch. The US$ Index is trading higher again this morning at 77.12, +7.3% since July 14th. Currencies in Asia and Europe continue their decline alongside commodity prices. I am going to bump up the high end of my S&P 500 range to 1316, from 1312 prior. Deflating commodity inflation is undoubtedly bullish in the immediate term. If we test the aforementioned 1316 line, the question will be what matters more from there, global growth or inflation slowing?

On the growth front, Asian markets were weak again on both an absolute and relative basis to global equities because Hong Kong joined Singapore and Japan as the latest Asian economy to report a major slowdown in GDP growth. Hong Kong reported a +4.3% growth rate for Q2, down sharply from +7.3% in Q1 of this year, and well below consensus expectations of a number closer to +6%. Singapore and Japan told us they are both running negative export growth this week, and now the lead article in the Wall Street Journal this morning goes something like ‘US Economic Slowdown Spreading Globally’. Gee, thanks for the proactive prediction ahead of time.

I have been penning my thoughts and themes about Asian growth slowing since Q4 of last year. This was in the face of Wall Street misleading Main Street and then ultimately itself. It was supposed to be “global this time” and the world economies were supposed to “decouple”… remember? In an investment community where I have sat at the most relevant tables of debate, am I proud to have raised my hand on the other side of this macro trade? You bet. If its “hard to read” good research, that’s better than having an easy time reading what was plain bad research back then.

Einstein said, “great spirits have always encountered violent opposition from mediocre minds”, and it’s hard to disagree with that. Ask Michael Phelps how much adversity he has faced in his life. Gold is minted in it.

Have a great weekend,

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ASCA’s liquidity situation reminds me of the U.S. women’s gymnastics team performance at the Olympics. They were in great shape heading into the floor routine when everything fell apart. Facing a much younger competitor in China, they couldn’t even stay in bounds, costing them the Gold. With Ameristar East Chicago about to taking a pounding from a new and improved Horseshoe, ASCA will struggle to stay in the bounds of its credit facility covenants. Of particular concern is the senior leverage covenant restricting the company to 5.25 to 1.00 debt to EBITDA until Q2 2009 when the ratio drops to 5.00 to 1.00. As the chart indicates, ASCA will toe the covenant line and could cross it in any of the next 3 quarters. A Q2 2009 violation is almost a mathematical certainty.

I’ve commented in the past that ASCA has been over earning due to its low but unsustainable cost of borrowing. The company’s entire debt structure is comprised of borrowings off the credit facility currently paying only LIBOR plus 1.625%. Although they did recently fix some of the debt through interest rate swaps. EPS is about to be deflated as ASCA will need to refinance a portion of the credit facility with fixed rate bonds. The rate they pay will be dictated by the proximity to the covenant restriction and the credit environment. Brunswick recently issued $250 million of 9.75% bonds. With that as a proxy, ASCA could experience a 5% higher incremental rate on whatever they borrow, presumably at least $200 million. That’s a 10% hit to EPS at minimum. Remember that the credit facility matures in 2010 and will need to be renegotiated in its entirety before then. I maintain that ASCA could be over earning by 50-100% in terms of EPS.

I believe the company is making a big push internally to cut costs and capex to stay in bounds. The long-term danger of this strategy is declining service levels and deteriorating facilities. Indeed, through termination, attrition, and scheduling cuts, ASCA has reduced its workforce by about 5%. More disconcerting is the dramatic drop-off in maintenance capital expenditures. The company should and has historically spent 5-6% of its revenues on maintenance capex. I estimate that percent has declined sequentially since Q1 2007 and was only 1.7% of revenues in Q2 2008. These levels of cuts will be noticed quickly by customers.

Ameristar may be the first gaming company to fall off the balance beam because of the the credit crunch, but it won’t be the last.

ASCA trying to stay in bounds the leverage restriction of its credit facility

WRC: Bracing Myself

I have a high conviction bear case on Warnaco’s margins. But we’ve got to respect timing. That’s Keith’s job. Unfortunately, momentum favors bulls. His next stop = 54.65.

Allergan (AGN): Staying Long The Headache

My Partner, Tom Tobin, has been in and out of this stock for a long time. Since his portal is still on free trial you can see the AGN call he made last weekend titled "Trading Long Into The Headache Data".

My models have this "Trade" going to $59.34 in the immediate term, at least.
  • AGN short term target $59.34
(chart courtesy of StockCharts.com)

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