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IT'S NO MIRAGE BUT PENN IN VEGAS BABY

Still a work in progress but PENN takes a major step to a Vegas presence

 

 

Earlier today, Penn announced it has purchased all of The M Resort bank debt plus $160MM of subordinated debt formerly held by MGM, from Bank of Scotland for $230.5 million.  Since M Resort's TTM EBITDA is in the "teens" and cannot service its debt, the property has no equity value and therefore Penn effectively purchased M Resorts for $230.5MM.  That said, a few things need to happen before Penn can take the keys and begin operating this property.

 

While Penn was licensed in Nevada this summer when they took a minority stake in a slot manufacturer headquartered in the state, they still need to get a license to operate the property.  According to our sources, securing an operator license in Nevada takes approximately 6 to 12 months.  Until Penn gets licensed, they need to play nice with the Marnell family, who currently holds the license.  It's likely Penn will pay Marnell to operate the property during its licensing period.  We also believe that during this period, Penn will likely file the property for bankruptcy to clear it of any outstanding claims and liens.  The bankruptcy process should be rather painless but is good precaution to make sure that once they take over the property they are free and clear.

 

So what do we think of the deal?  Well, it's probably one of the cheapest ways for Penn to get a foothold in Vegas and takes away any overhang of them doing an expensive 'bad deal.'  While on the surface the purchase price was expensive, it's actually not a terrible deal when taken into account that:

  • The property will be debt free
  • Is brand new and requires minimal capital expenditures for the next few years
  • No taxes will likely be paid any time soon
  • EBITD is at trough levels

In addition, Penn believes that it can operate the property more efficiently and get rid of some of the overpaid executives at the property which will help lift EBITDA.  Over time, Penn will also be able to use this property to cross market and offer their best customers a place to gamble in Vegas a la the Harrah's model.  While we wouldn't characterize this deal as a game changer and it will take some time for the payoff, it seems like a smart strategic move for PENN


The Week Ahead

The Economic Data calendar for the week of the 11th of October through the 15th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - caly1

The Week Ahead - caly2


Shallow Charlatans

This note was originally published at 8am this morning, October 08, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"A modern philosopher who has never once suspected himself of being a charlatan must be such a shallow mind that his work is probably not worth reading."

- Leszek Kołakowski

 

Listening to Bloomberg’s Tom Keene interview Alan Greenspan last night gave me clarity on something that I haven’t quite been able to put my finger on for a long time. On the topic of US economic policy, the world has been transfixed by Shallow Charlatans.

 

Now let’s not confuse the word transfixed with convinced. Per the Merriam-Webster definition, to be transfixed is “to become motionless with horror, wonder, and astonishment.”

 

I became motionless last night – literally - as I was driving home down the Merritt Parkway listening to their discussion, I had to pull over to make sure I wasn’t selectively being astonished. Maybe it was my own personal prelude to listening to what I was hearing. Maybe it was meant to be listened to, rather than watched. I’m not sure. I’m still young enough to know what I don’t know.

 

What I do know is that I don’t surround myself with politicians or sell-side “economists” who are prone to groupthink. After yesterday’s market close I left the office for New Haven’s Owl Shop to have a cigar with some of the most sophisticated European buy-side investors I know. After that, I had a nice dinner at Mory’s with some colleagues who are trying to figure out how to not repeat history’s risk management mistakes.

 

Then, no matter where I wanted to be, there I was… in my car… parked at the Mobile station in the dark…. left in horror with what I thought would be this morning’s headline news…

 

When I woke up this morning, it was still dark… and I was still astonished – but the best news was that Greenspan’s revisionist history from last night wasn’t a top 3 Bloomberg headline. This is progress. Americans aren’t as stupid as the professional politicians who have been pillaging their savings with ZERO percent interest rates purport them to be.

 

HEADLINE: “Greenspan Says U.S. Creating `Scary' Deficit as Borrowing Rises”

 

The only thing that’s “scary” here folks is that an 84 year old man still fails to realize that what he’s scared of are the problems he perpetuated.

 

Even though Keene and Greenspan weren’t focused on it last night, the #1 factor in global markets today is the US Dollar. Yes, that could very well change next month or next year, but for those of us who are accountable to what comes out of our mouths, today’s prices are what matter most.

 

While it’s kind of astonishing to hear a Shallow Charlatan talk about the market when he’s never traded one, this remains the contrarian investor’s greatest opportunity – fading the sell-side and groupthink consensus. Consensus is that QE is a must and Burning The Buck is ok (until it isn’t). Consensus has given birth to some of the highest inverse correlations to the US Dollar that I have ever seen.

 

Rather than being transfixed by the radio or television, take 30 seconds out of your day to stare at this math embedded in correlations to US Dollars:

  1. High Grade Copper = -0.98
  2. Gold = -0.97
  3. Silver = -0.97
  4. Platinum = -0.93
  5. Reuters CRB Commodity Index = -0.96
  6. India’s Sensex Index -0.92
  7. Brazil’s Bovespa = -0.91
  8. SP500 = -0.88
  9. Rough Rice = -0.87

Now the way Keene whipped around his “7-standard deviation” jargon and Greenspan found a way to obscure just about the most basic of algebraic relationships, understand this folks – there are a lot of market practitioners out here who are playing this game with live ammo who get the math. Our job isn’t to talk over you. We have your back.

 

The basic math that I am showing you here is on our immediate term TRADE duration. In the immediate term is where you’ll find critical market risk. Yesterday the US Dollar was up a mere +13 basis points, or 0.13%, and the deleverage on the price of gold and oil were huge.

 

If this government and the Shallow Charlatans that advise it want to pretend that they aren’t perpetuating volatility and systemic risk, they can go do that. But I have a funny feeling that the nasty US Consumer Confidence readings we’ve had as of late (ABC/Washington Post weekly reading down to minus 47 this week) already tell you everything you need to know about Americans and their money – they know a ponzi-scheme when they smell one.

 

My immediate term TRADE lines of support and resistance for the SP500 are now 1148 and 1164, respectively.

 

Have a great weekend and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Shallow Charlatans - greenspan


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Bear/Bull Battle: SP500 Levels, Refreshed...

Finally, after an +11% melt-up, the US stock market perma-bulls are back. Crank up the volume and get them on stage to spew it out. Just like in early April (beginning of a new quarter), the more of them the merrier. An abrupt crash-like correction won’t be possible without their wholehearted participation chasing these prices.

 

Make no mistake, in their guts the perma-bulls that blew up in 2008 are half-baked. They have no competence in calling crashes or corrections so the best they can do is have their hearts and minds hoping for QE year-end bonus-ing. All the while, the world is Burning The Buck.

 

On the heels of Fed Head Bullard literally co-hosting CNBC to talk up QE during the employment report this morning (how pathetic is that?), the US Dollar Index is down again on the day – down for the 16th week out of 19, as US Treasury yields hit all-time lows with 2-years yielding 0.34% intraday.

 

I’m not brave or forgetful enough yet to forget how October of 2007 ended. That’s helped me not get squeezed like I did in September 2007, but it certainly hasn’t made me feel any more confident in the in the said leadership of the American financial system. Sadly, Wall Street has learned very little from its mistakes. Groupthink is as pervasive as it has ever been.

 

The biggest mistake perma-bulls made in October of 2008 is the same one they are making right here and now. Putting 100% of this market’s daily beta in the hands of Bernanke. I don’t know how or why it is that people don’t get this yet. But it will end very badly. Most price complexes that hinge on government supports do.

 

What do we do with all this? Whine, Wait, and Watch.

 

The 2 lines I have been focusing on for US Equities remain:

  1. SP
  2. VIX 20

As we melt up in the SP500, I’m registering an immediate term TRADE line of resistance now at 1169 (another lower-high). As I wait on that to get short, I’ll keep selling things with extremely high inverse correlations to DOWN DOLLAR (I sold our long positions in Corn and the British Pound today).

 

That’s the best I can do. Betting on myself is better than betting on Bernanke. That much I have figured out.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear/Bull Battle: SP500 Levels, Refreshed...  - spxx


4Q10 THEME UPDATE: THE CONSUMPTION CANNONBALL

One of the important caveats within our Consumption Cannonball theme is that the transition to real income growth, from government subsidized income growth, will be difficult. 

 

The numbers released this morning by the Bureau of Labor Statistics confirm our thesis that the private sector is not picking up the slack.  Government employment fell by 159,000 in September while private-sector payroll employment continued to trend up modestly, increasing 64,000.  This resulted in a net nonfarm payrolls decline of 95,000 in September.  The private-sector increase missed expectations while the winding down of census workers and state and local level cutbacks exacerbated the decline in government payrolls.  The private sector is clearly not picking up the slack and the underemployment rate, U-6, increased to 17.1% from 16.7% in August. 

 

The labor market’s worse-than-expected performance in September supports slowing consumer spending and all but guarantees the FED will resume large-scale asset purchases sooner rather than later.

Three key takeaways from today’s jobs report:

  1. More QE is on the way
  2. Inflation will accelerate
  3. The outlook for sub 1% GDP growth in 2011 is looking more likely
  4. Interest rates to remain low through 2011

Lastly, the September report contained a preliminary estimate for the upcoming benchmark revisions showing 366,000 fewer jobs for the year ended March 2010 (30,500 jobs per month).  This is not news – we are proactively prepared for the compromised nature of government data.  The bottom line is that the labor market is not improving fast enough and QE is not helping Main Street.

 

Howard Penney

Managing Director

 

4Q10 THEME UPDATE: THE CONSUMPTION CANNONBALL - lfpr2

 

 


UK and Inflation’s Ugly Head

Conclusion: UK Producer Price Index (PPI) numbers were released today for September and show that inflation will remain a headwind for the island economy over the intermediate term TREND.  We sold the British Pound via the etf FXB today as it hit our overbought TRADE target of $1.59 versus the USD.

 

Input prices +9.5% year-over-year and +0.7% month-over-month

Output prices +4.4% year-over-year and +0.3% month-over-month

 

The elevated levels of input and output prices reflect an inflationary environment that the Bank of England will have to address over the intermediate term TREND. With CPI floating above the Bank’s target rate of 3.0% over recent months, commodity inflation should remain a headwind for the consumer over the next months.  In particular, the country’s energy set-up as a slight net importer of oil over recent years with declining production rates over the last 10 years (averaging an annual decline of -6.7% over this period) should help support upward inflation. As the chart below suggests, imported oil prices have increased steadily since their fall in late ’08. And if we’re right on our call on oil, this trend should continue over the intermediate term.  

 

Cameron’s government is now at a crossroads. Having issued austerity measures (job, wage, and benefit cuts and a further squeeze on the consumer with higher VAT), Cameron and Co. must address the broader economy from a fiscal and/or monetary perspective in the next months.

  1. Go the likely route of the US (and potentially the Eurozone) in issuing some form of QE2, ie printing money which should further inflate prices and depreciate the Pound, and/or
  2. Raise the benchmark interest rate to quell inflation, but risk further choking off growth. 

While we’re not going to speculate on the government’s next move right here, we’d be quick to stay away from an investment in the country.

 

In Europe, we’re currently short Italy via the etf EWI. 

 

Matthew Hedrick

Analyst

 

UK and Inflation’s Ugly Head - pel1

 

UK and Inflation’s Ugly Head - pel2


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