-- Posted Sunday, 2 March 2008 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
“Phenomenally accurate forecasts”
With the economy going to hell in a hand basket, you might think it would be easy to make a bundle shorting the shares of some stock that’s getting there fast. We thought this ourselves about MGM Mirage, a savvy casino operator that has bet the ranch on boom times in Las Vegas – and not just boom times now, but more or less forever. But the chart below shows why, even when one is wagering on a sure thing, the path to easy profits can be strewn with banana peels, ball bearings and dog poop. We encountered all three attempting to short MGM with put options in early November. The stock had just slipped below $90 after hitting an all-time high near $110 a couple of weeks earlier, and we were eager to get on board before it really started to fall apart.
The trading idea came to us during a four-night stay at the Borgata last summer, when we were in town for a reunion of Atlantic City High School’s Class of 1967. The place was impressive, to say the least, but that was its problem. There were more night clubs and super-pricey restaurants in the hotel than had existed in all of Atlantic City when the first casino opened there 30 years ago. If the economy were to nosedive, a prospect that we viewed even last summer as a certainty, whence would come the customers to fill Borgata’s endless rows of gaming tables, the Spa Taccore, and no fewer than 13 “destination” restaurants where $100 won’t even cover the tip, much less the tab?
‘F**k You Money’
And there was something else that caught our eye: It was mostly 30-Somethings who had packed the place. Everywhere you looked, they were queuing to cough up C-notes as though it were Monopoly money: behind the velvet ropes that secured Borgata’s chi-chi night clubs; at the $100 blackjack tables; outside the 2,400-seat event center that has showcased Pearl Jam, Sting, Lenny Kravitz and Aerosmith; and at the entrance to the Music Box, a 1,000-Seat theater designed to host more intimate shows. We don’t doubt that there are quite a few 30-Somethings from New York, Philly, Baltimore and D.C. with the discretionary income to live like kings for a weekend or two a year. But it still takes ten of them to equal just one of the mobbed up high-rollers who were the mainstay of the casino business before the bean-counters who now run them arrived on the scene. These were hairy-knuckled types who drew their weekend f**k-you money from shopping bags and shoeboxes rather than cashing paychecks.
Multiply the glitz of Borgata 100-fold and you have Las Vegas: a place where a dozen Saudi princes could be in town on the same weekend and never even bump into each other as they gamble away a billion dollars. But if Vegas has found it much easier than the perennially dumpy Atlantic City to attract high rollers, in times of recession there are not going to be nearly enough of those high rollers to fill the desert town’s 125,000 hotel rooms.
A Flea on Steroids
And that is why we decided to lay in an inventory of put options on MGM stock just after Halloween. But if you look closely at the chart, you’ll see that even though MGM fell initially, turning our put position into an instant winner, just when we were starting to feel good about our profits the stock jumped like a flea on steroids, taking back everything we’d made and more in just a few days. It was just after we bailed out, somewhere near the top of the rally, when MGM really began to fall apart. Had we stuck with the January 70 puts we’d originally bought for $1.15, we could have made as much as 700% on our money. Alas.
The epilogue to this story concerns Friday’s nutty price action in MGM shares. The night before, with the stock trading for around $61, we’d updated our forecast, lowering our bear-market target to 46.89 from 53.47. We made no trading recommendation, although we did identify a Hidden Pivot support at 60.98 that turned out to be a launching pad. In fact, this stock that is so obviously on its way to hell, and which stands to shed another 25% of its value, at least, before hitting bottom, rallied $4.19 on Friday, or nearly 7%. Could anyone betting against MGM have survived such a violent explosion? We doubt it – at least, not if they used a stop-loss geared to their future survival.
The lesson here is that, certain though we may be that the stock market is about to go to hell in a hand basket, and that MGM, on its way down to at least 46.89, will be leading the charge, there is no way a trader or investor can justify buying put options and socking them away for safe keeping. That tactic could well produce a winner in this case, but spread over many trades, and over the long haul, it will most often produce bears who have been very right but who went broke in the process.
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Three Seats Left
The 12 seats I’d allotted for the March 8-9 Hidden Pivot seminar are 75% gone. If you’d like to attend this online event, click here for further details and instructions on how to register. The class will be held on Saturday/Sunday from 9:00 a.m. to 12:30 p.m. Mountain Time. If you want to learn how to forecast stocks and commodities as confidently and precisely as top pros, this is an opportunity you should not pass up.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Sunday, 2 March 2008 | Digg This Article | Source: GoldSeek.com
