Vegas, baby

Vegas, baby... Why debt matters... The man in black, in Switzerland... What's Chanos shorting?... A great biotech speculation... What happened last Friday?... Fingers in our face...

Kansas billionaire Phil Ruffin purchased the Treasure Island casino on Monday for roughly $250,000 per room – a total deal value of about $700 million. He was the only bidder for this mid-market Vegas strip casino owned by MGM. Said Ruffin of the deal: "We didn't have to get into a bidding war because there are no credit markets to lend money to other potential buyers. I've got more than a billion dollars in cash, so that made me the only buyer."

MGM's stock rallied on the news. Why? Because most investors didn't know where Ruffin got the money to buy Treasure Island. Back in 2005, he sold the New Frontier casino, an old low-end casino on the strip, for $1.2 billion. The deal worked out to about $1 million per room. The new owners blew up the building in 2007. They planned to build a huge, fancy casino on the property in partnership with Donald Trump. But the financing for the construction never materialized. Now, the site sits empty.

Back in 2005, at the top of the market for casino properties, Ruffin was going to cash by selling New Frontier. MGM, on the other hand, was doubling down. In April 2005, MGM paid $8 billion for Mandalay Bay – a price of more than $2.25 million per room. Then, in 2007, MGM tripled down, starting construction on the $9 billion CityCenter project, the largest privately financed development in U.S. history.

Judging by the price Ruffin paid this week for Treasure Island, the price for casino properties has fallen by at least 80%. That implies MGM is sitting on about a $6 billion loss at Mandalay Bay and perhaps an $8 billion loss at CityCenter. MGM's total shareholder equity is about $5 billion. It is $18 billion in debt. In the next three years, it must repay nearly $3 billion.

Of course, as long as MGM can continue to generate profits from its gaming operations, it might survive its massive debt load. But gaming revenue fell 25% year over year in November. And now Treasure Island is offering rooms for $45 per night – right next door to MGM's properties. Says Ruffin of MGM's predicament: "That's what gets everyone in trouble, they pile on that debt."

In May 2005, I met one of Mandalay Bay's original developers. Only weeks earlier, he received a large share of MGM's $8 billion payment – in cash. I was in Zurich, Switzerland with Steve Sjuggerud. We were meeting with private bankers, asking about their supplies of older European sovereign gold coins.

The developer flew over from Vegas in his private jet with one of his advisors. We sat down at a nice Italian restaurant for dinner. The man was dressed in black from head to toe. He said a grand total of about 10 words at dinner. He wanted to know why Sjuggerud was so bullish on gold bullion coins, particularly older European sovereign coins. He basically grunted the question at us. He wanted to know because he was trying to buy all of them from the same banks in Switzerland. Steve's writing about the coins was making it harder for him to get every last one. Try buying these coins today.

CEMEX, the world's third-largest cement maker, expects a 23% drop in sales to $4.45 billion for the fourth quarter amid the nationalization of its Venezuelan plants and a struggling U.S. economy. Of course, the company hopes Obama's infrastructure spending plan will save the day. It had better: CEMEX is $35 billion in debt. It must spend more than $200 million per year in interest alone. And over the next three years, it must repay almost $2 billion in debt.

The world's best short seller, Jim Chanos, doesn't think even Obama can bail out the infrastructure companies. He's adding to his short positions in construction, cement, and steel companies.

"It will not be profitable to the extent that people think," Chanos told Bloomberg. "People are forgetting that there are always promises of infrastructure plans."

Obama's announcement of an infrastructure stimulus sent the market soaring – the S&P 500 is up 20% since November 20. Chanos believes "it's a bear-market rally." Nucor, U.S. Steel, and AK Steel, some of the biggest U.S. steel producers, jumped more than 68% since the announcement, making them prime for a short.

Inside Strategist editor Brian Heyliger passed us this note today about his next recommendation:

It's a tiny $171 million biotech firm with a new cancer treatment in clinical trials. Insiders have bought more than $6.8 million in stock recently. Phase I trials are already complete, and Phase II are under way. If the trials go well, this stock will triple. If they don't, we can't lose much because the company is trading at the same price as its cash on the balance sheet. It's the perfect low-risk/high-reward setup. I'm sending it to my readers tomorrow.

Heyliger's readers are up 46% in a month on an energy company with bullish insiders. And the insider trade they put on last week is already up 11%. To get access to his next recommendation, click here...

Many folks have asked what happened to the company that was supposed to go into bankruptcy last Friday. Well, so far, nothing. I was talking about General Growth Properties (GGP) – the large, heavily indebted mall owner. GGP didn't repay the $900 million it owed last Friday. But Citigroup didn't sue for collection. So it's a stalemate.

What will happen? Shareholders will get wiped out. It's only a matter of time. Centro Properties, which is in the same business (malls), escaped liquidation yesterday by giving its lenders 90% of its common stock. Whether or not bankruptcy is filed, with asset prices plummeting for commercial property and with no additional credit available, highly leveraged real estate investment trusts (REITs) are going to be wiped out – all of them.

We recently bought puts on GGP's top competitor in my Put Strategy Report. Whether or not GGP liquidates, we know rents will fall significantly in 2009, lots of retailers will go out of business, and lots of malls will be half empty. For REITs spending more on interest than they earned in 2008, this recession will be catastrophic.

New highs: none.

In the mailbag... a few new classics. Why didn't we warn you about Madoff? Why don't we publish complete track records each week? Point your finger in our face, here: feedback@stansberryresearch.com.

"how is it that foks like you did not mention madoff? it might not have triggered the sec (haha) but might have alerted some investors..." – Paid-up subscriber Harry

Porter comment: More than 10,000 private investment partnerships operate in the United States alone. We haven't heard of most of them. And I'd never heard of Madoff before this week. You might recall our newsletters focus exclusively on publicly traded securities – not private hedge funds.

On the other hand, we've been vociferous about why you shouldn't invest in any hedge fund. In fact, in July, I made a $10,000 wager with Joe Dowling, who used to manage a $1 billion hedge fund, that my newsletter's recommendations would outperform a so-called "fund of funds," many of which were invested with Madoff.

"I am a satisfied PWA subscriber and I enjoy reading the S&A Digest and even the Growth Stock Wire, but I am tired of some of the advertising/marketing e-mails I receive almost daily for your publications. I'm sure the triple digit gains that these ads claim are legit but they are isolated hand picked trades. Why don't you ever tell the actual performance of all picks made by the publication. If it is really as good as you want us to believe you should be willing to put that information in front of us at any time, not just once a year on a report card of some sort. Does telling half the story in these publications make you any better than those you criticize for similar actions?"

– Paid-up subscriber Steve J.

Porter comment: No other publisher I know keeps an accurate track record and publishes it regularly. We publish our Report Card every year around January 1. The objective of our Report Card is to show how we do, on average, in a very clear and transparent way. Doing so at the same time every year is fair for our readers and for our analysts. But I would disagree with you about the importance of such measures. How someone's picks do on average isn't as important as how his best ideas perform – because we're all looking for those rare gems.

What I like in a newsletter editor is someone who can bring me ideas I won't find anywhere else – ideas that are important. Take my newsletter's performance this year. On average, my picks haven't done very well. We're down maybe 10% or so. But... along the way, I explained to my readers why GM would fail, why Fannie and Freddie were zeros, how AIG defrauded the entire global financial system, that Goldman Sachs' accounting was baloney, and why the largest newspaper company in America would soon go bankrupt. I also warned about the coming bear market as soon as February 2007, advice I repeated from January through September of this year. And most importantly, the two stocks I "pounded the table" on the most – Budweiser and Verizon – have done great.

So while on average my picks didn't make anyone rich last year, much of the advice I offered was extremely profitable – and you wouldn't have read about it anywhere else. Just looking at the average numbers doesn't tell the whole story.

In regards to our advertising... I never apologize for it. It is how we stay in business. We don't charge a percentage of your assets for our newsletters. We don't charge a dime for our e-letters. Our research frequently contains insights worth millions of dollars. There are firms on Wall Street that routinely charge more than $10,000 for a single report that's similar to one of our newsletters. My point? If you don't like our business model, if you don't like our advertising, we're happy to part as friends. But you're not going to find work like ours anywhere else for less.

"Monetization of debt tied to Gold is inevitable within the next couple years. You are the only media person that has bitten the bullet and told your readers what your solutions were... Franklin said that the pen is mightier than the sword. Most of your readers recognize your no nonsense approach to problems. Now would be a good time to start the discussion among your readers. Wiping out the global economy due to Fiat money inflation does not need to happen if a respected member of the media speaks up and proposes a solution that is inevitable. Devaluation of the dollar to Gold is the only viable solution and will get the world back on the Gold standard with some stability. Surely you believe this... but it needs a spokesman who gets the discussion going. I believe you are that man." – Paid-up subscriber T Petersen

Porter comment: Me? Nobody listens to me.

Regards,

Porter Stansberry

Baltimore, Maryland

December 17, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame