Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Supercharged Small-Caps

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I've noticed that the IWM refuses to budge, even in the face of general market weakness. For instance, right now the QQQQ are down about 0.7% whereas the IWM is virtually unchanged.

Below is a line chart of the IWM, SPY, and DIA on an intraday basis for the past 120 trading days. As you can see, the IWM has defied any push downward. Since I am short mostly small caps, I certainly hope this gap gets erased.


Gaming Industry: Long GPIC, Short ASCA (by Dave Pinsen)

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Hey fellow Slopers,

Happy New Year.

On Wednesday evening, I mentioned to those on the market neutral trade notification e-mail list that I planned to short Ameristar Casinos Inc. (ASCA) and buy an equal dollar amount of Gaming Partners International Corporation (GPIC) on Thursday. It turned out that there were no shares of ASCA available to short Thursday, but there are options available for it, so you can establish a synthetic short position in ASCA.

Ameristar Casinos Inc.1 (ASCA), headquartered in Las Vegas, owns and operates casinos eight casinos spread over several states in the U.S. In August, the company announced that it was looking to be acquired, sparking a rally in the stock, but earlier this month the company announced it was no longer seeking to find a buyer — presumably, because it couldn't find a willing one at whatever price it was seeking.

Ameristar has an Altman Z"-Score of about 0.26, according to Short Screen (recall that Z”-Scores below 1.1 indicate financial distress). It also has a current ratio of 0.46.

Gaming Partners International Corporation (GPIC), also headquartered in Las Vegas, is a picks & shovels play on the casino industry: it manufactures casino tables, roulette wheels, gambling chips (including ones embedded with RFID microchips), and sells its products worldwide.

GPIC has Altman Z-Score of about 5.9, according to Short Screen. Recall that Z-Scores above 2.99 indicate financial strength. It also has current ratio of 3.91.

In addition to the contrast in financial strength, GPIC has a more attractive valuation than ASCA. Since ASCA has significant net debt, and GPIC has significant net cash, an enterprise value/EBITDA comparison seems appropriate. GPIC has an enterprise value/EBITDA of 2.93 versus 7.83 for ASCA (trailing twelve months, in both cases).

1Which apparently hasn't gotten around to building its website yet, and has its domain parked with Network Solutions.

Disclosure: No position in either of these stocks currently. My current brokerage doesn't allow synthetic shorting, so I haven't placed this trade yet. I may move the account to a firm that allows synthetic shorting, and place the trade there, but I won't be able to do that for at least a week.

Has Silver Finally Peaked?

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Although shorting silver has been a fool's errand for many years (said the man who sold his bullion brick at $9 per ounce), I still want to share a few charts. First, this chart of SLV shows the price mashed up against a very long-term price channel.


Second, a chart of the commodity itself, measured over decades, shows we are pushed up against a fan line. In the past, a rapid price ascent pushing against a fanline preceded a hearty fall.


Third, a cautionary chart – below is ZSL (the ultra-short on silver) in percentage terms. It is down something like 95% since its introduction.



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Slope is one of the most popular, well-traveled blogs in the world of finance, and it's certainly the one with the most active comments section. Recently, however, there has been some behavior that has been disquieting to female Slopers and, unfortunately, has even caused some to leave the site permanently (Leisa springs to mind, since she was a vital member of the blog).

I am not conscious of any of my own behavior that is encouraging this kind of thing (e.g. posting of provocative avatars, racy links, offensive language), but I haven't been doing enough to curtail it. I want Slope to remain very open, but we should at least have enough decorum to not offend the women here on the blog.

I guess what I'm asking, as politely as I can, is to behave better. It's a lot more fun in here if there's someone besides just me and Iggy.


A Golden Opportunity (by Runedge)

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A truly amazing opportunity lies before all investors.  For those like myself who were on the wrong side of the first leg down in housing, we quite possibly have an opportunity to still enter the trade.


Possible and probable are words often used by attorneys.  It’s possible you can burn yourself with a cup of McDonald’s coffee but not very probable you can sue for 2 million dollars (only 1 million).  So as we venture in 2011, the question investors really need to ask is do you see home prices falling more or have they bottomed and begun to move back up.  The highly probable answer is they have another leg down anywhere from 20% to even 40%.  


“Some of the most cyclical parts of the economy like housing for example are already very weak and they can’t get much weaker.”  – Ben Bernanke December 5, 2010 60 Minutes interview.


Truly astonishing that the above comment is from the Chairman of the Federal Reserve.   Housing is really no different than the equity market and we all know that markets never get it right.  They overcorrect either to the upside or the downside.  To keep things extremely simple, one need only look at the chart below of historical home prices going back to 1890.  Since 1997 homes prices have risen 83%.  That’s mind boggling and no different than the tech bubble.  There’s no reason Apple should have traded at 75 in March 2009 but markets over correct.  Irrational prices happen and that is when bottoms are put in.  Wealth is transferred.


Peter Schiff in a WSJ op ed was quoted “In January 1998 the 10-City Index (Case Shiller) was at 82.7. If home prices had followed the 3.35% annual 100 year trend line, then the index would have arrived at 126.7 in October 2010. This week, Case-Shiller announced that figure to be 159.0. This would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line.”


We have already seen the past few months, home prices accelerating to the downside faster than expected.  If we truly believe that homes prices will over correct as do equity prices then you must seriously look at a long term short sided trade in the financials. Banks do not have the capital to sustain another leg down in housing.  Currently banks are letting homeowners not make payments for over 12 months (much longer in many cases) and do not even send a delinquency notice.  The simple truth is their earnings are diminishing yet their hits to their balance sheet are growing.  Right now they are simply trying to reduce their balance sheet at the rate that income can offset.  The entire US economy as a result is held hostage.   The top four banks alone (JPM, WFC, C, BAC) hold over 400 billion in second lien credits (second mortgages).  This is an entire other shoe to drop that in the first leg down in housing really did not affect the need for added bank capital.  


We’ve been conditioned to think the Fed will simply bail out the banks but there comes a time where even the Fed must face reality.  The Dallas Fed recently published a paper that accepts the harsh reality that the market, not the government, may in fact be the only solution to the housing crisis.  In this article I don’t even touch on issues facing the banks from securitization fraud, put back risks, robo signing and the already massive level of shadow inventory yet to hit the market.  I’ll leave you with two very scary statistics.  

1 – Should home prices drop just 5% more then another 8 million homeowners will be underwater. The Dallas Fed study is quoted “36% of defaults are strategic.”  The homeowner can make the payment but because they are underwater decides it’s not the best business decision.  


2 – Mortgage rates have moved up in very short order recently.  Should this continue rates alone will force home prices lower.  In the past 6 weeks, rates have moved up enough that monthly payments on a $300,000 mortgage have gone from $1,462 to $1,585.  In other words that buyer can now  afford a $278,000 mortgage.  


The probability for a major leg down in housing and the financial sector is highly probable (and always possible).

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