Issue 4 - 2/13/08

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"The economy is in bad shape, regardless of whether or not we actually see the requisite of two consecutive quarters of negative growth in the data to 'officially' declare it a recession.
We probably won't know if we are currently experiencing an actual recession until
benchmark revisions to the GDP data for the fourth and first quarters are
released in July, which will be too late to matter."

Diane Swonk
Chief Economist, Mesirow Financial
As quoted from Fox Business

Volume I: Issue #4

See Note below for chart explanation.

Editor's Corner
When Support Becomes Resistance
Ron Rowland - Editor

Global equity markets have been in a decline since October 2007. Most segments were quickly approaching bear market status by late January, when a rally attempt commenced. The rally lasted about two weeks and ran into trouble when major benchmarks approached the former support levels created by the lows of August and November 2007. As often happens, the former downside support levels have now become overhead resistance.

Last week's market decline took the wind out of the sails of that rally attempt by erasing a large part of those gains. Investors looking for the silver lining can take comfort in the fact that the January lows have not been breached yet. However, until the markets can overcome the resistance that stopped the rally last week, they will likely be mired in predominately-negative trends.

Ten-year Treasury yields have been trading between 3.53% and 3.81% since January 24, 2008. Further declines in yields are not expected because the value of locking in current rates for the next 10 years is not very appealing, especially if inflation fears become reality. Investors requiring a fixed income component in their portfolios should consider inflation-protected securities as a means of mitigating the long-term effect of inflation.

Sectors

The beaten-down groups, primarily the Financial and Consumer Discretionary sectors, led the late January rally attempt. The Financials did another about-face this past week, once again leading the downside action. Telecommunications, Technology, and Financials are the three weakest sectors. The January declines also took out many of the defensive sectors, such as Health Care and Utilities, which now find themselves in the middle of our rankings. The Materials sector remains relatively strong amid healthy global demand and industry consolidation.

Styles

Our current style rankings look very similar to last week and are a complete flip-flop from just a few weeks ago. Style differentiation is always less pronounced than for sectors. It can take many weeks before a sustainable shift in leadership can take hold. As such, it would be premature to make major portfolio shifts at this time.

International

Latin America, led by the strength of Brazil, is currently the only global region not exhibiting a negative intermediate trend. Canada, thanks to its vast exposure to natural resources, is hanging on to the #2 spot in our rankings. China is currently the weakest global market, but it appears to be stabilizing. As you probably recall, China was a top-performing market last year, reaching a frothy stage. Corrections after such run-ups are to be expected and even with its large pullback of the past few months, the long-term bullish trend for China is still intact.

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

Pick of the Week
Big Play on Inside Games - PENN
John Schloegel

Penn National Gaming (PENN) offers a unique opportunity at current prices. They have a private equity buy-out on the table for $67.00 per share at something called a "fully financed" transaction led by Fortress Investment Group (FIG) and Deutsche Bank AG (DB). The terms of the deal are such that Penn shareholders will receive $67.00 in cash for each share of Company common stock they own. If the merger is not consummated by June 15, 2008, the per share merger consideration will be increased by $0.0149 per day. There is also a provision that pays Penn $200mm if the deal falls through.

OK, the background on Penn Natl Gaming: PENN is the 4th largest publicly-traded casino operator in the U.S. They have annual revenues of approximately $2.5 billion. They have a focus on slot machine entertainment. The Company operates nineteen facilities in fifteen jurisdictions, including Colorado, Florida, Illinois, Indiana, Iowa, Louisiana, Maine, Mississippi, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania, West Virginia, and Ontario. In aggregate, Penn National's operated facilities feature over 23,000 slot machines, approximately 400 table games, over 1,731 hotel rooms and approximately 805,000 square feet of gaming floor space. In the past week, they opened a brand new facility called Hollywood Casino in Harrisburg, Pennsylvania to rave reviews.

Here's the big question: Why is the stock trading for $49 when there is a deal that is set to be consummated in June at $67?

One word...debt. Well maybe two words: credit crisis.

Fortress, Deutsche Bank, and another private equity firm in on this leveraged buyout, Centerbridge Partners, must have the capability to obtain financing, and the ability to off-load some of the debt to third party investors. This is the nature of the LBO - the tool is to finance a takeover by raising large amounts of debt at competitive prices. If pricing is unfavorable, then it becomes harder to justify the Return on Investment (ROI). The market is placing a legitimate amount of skepticism on the deal getting done.

However, here are some things to consider:

This past weekend, Peter Carlino, Chairman and CEO of PENN, was interviewed on site at the opening of the Hollywood Casino in Harrisburg. He was asked point blank to comment on the progression of the transaction. Answer: "To my knowledge, very well....This is a fully financed transaction, like Harrah's. We had locked-in financing from the outset. Financing with virtually no escape from the banks."

Something to consider: Carlino mentions the Harrah's deal, which was recently completed in January. That was a $17billion purchase (significantly larger than the Penn offer) by Apollo Group and Texas Pacific Group (TPG) and banks in on the deal were Bank of America and Deutsche Bank.

One more thing. Deutsche Bank announced earnings a week ago, and lo and behold, they did not report any write-downs related to sub-prime or other mortgages. Last October, they did report $2.2 billion in write-downs, but the latest report mentions strong risk management exercised during the overall credit crisis. CEO Josef Ackermann was quoted, "Unlike many of our competitors, we are in very good shape and at times like these, when financial markets are more risk-averse, we are set to gain from a flight to quality." The banks' ability to dodge the subprime crisis also allowed it to raise their dividend 13%, which is unusual relative to some other banking institutions doing the exact opposite.

Here's a re-cap: Fortress (and others) offer $67.00 per share for Penn (a premium of 37% over today's price). The bond market swoons on subprime and other related problems. In the meantime, the board agrees to sell, and PENN shareholders approve the deal. Fortress agrees to pay $200mm if they back out. Harrah's Entertainment, the largest casino operator in the US, gets taken out in a private deal for $17billion in January 2008. One of the banks assisting the Harrah's package is Deutsche Bank. They had trouble selling some of the junk bonds, but the deal got done. Fast forward to June 2008, will the debt market get better? Will the "locked-in fully financed" deal get done? Is this a speculative risk worth taking? Would I be comfortable holding PENN if the deal does not take place? You be the judge.

Good Luck.

Note:

Keep in mind that the Pick of the Week is intended for aggressive investors. Don't risk money you can't afford to lose. You will need to decide when (and if) it is time to sell.

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© 2008 AllStarInvestor.com All Rights Reserved. Protected by copyright laws of the United States and international treaties. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. All Star Investor employees, its affiliates, and clients may hold positions in the recommended securities.

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