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Darren McCammon
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Darren owns ProActive Financial LLC where he provides Financial Planning and Analysis consulting services. In addition to these consulting services, he also manages family investment accounts as well as the yield focused, 50+ Portfolio. Darren's education includes a Bachelors in Economics, an... More
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  • An Overview Of 50+ Portfolio Holding, Eldorado Resorts

    Eldorado Resorts (NASDAQ: ERI) is the result of a recent merger between El Dorado and MTR gaming groups. Together they have trailing annual revenue of approximately $720 million and adjusted EBITDA of approximately $122 million (excluding Silver Legacy). The quarterly report, scheduled to be released March 16th, will be the first one which combines a full quarters worth of operations for the merged entity and should improve visibility into the equity. The combined ERI now has locations in Reno, Nevada (El Dorado casino & 50% of the Silver Legacy); Shreveport, Louisiana (El Dorado Shreveport); Columbus, Ohio (Scioto Downs Racino); Chester, West Virginia (Mountaineer Casino Racetrack and Resort); and Erie, Pennsylvania (Presque Isle Downs and Casino). It is a somewhat geographically diversified regional gaming operation with a combined total 3,300 hotel rooms, 280 table games, 30 restaurants, and 10,000 slot machines and video lottery terminals.

    (click to enlarge)

    Locals and those who can reasonable drive to a resort for an extended weekend getaway are its' primary customers. In this respect it differs for the large Las Vegas and Macau destination gaming resorts such as MGM (NYSE:MGM), Caesars (NASDAQ:CZR) and Las Vegas Sands (NYSE:LVS) who can draw customers from all over the world.

    • Macroeconomics - Recently, a strong report from Isle of Capri (NASDAQ:ISLE) helped to give a boost to itself and other regional casino stocks Boyd Gaming (NYSE:BYD) and Penn National Gaming (NASDAQ:PENN). El Dorado (NASDAQ:ERI) was also up but to a much smaller extent than these better known rivals. Regionals have seen a steady increase in traffic over the last 6 months. Analysts say improved employment rates in the U.S. and lower gas prices ($2.04 average in Jan.) have helped to drive traffic. Overall, casinos in Nevada saw a 7.75% increase in revenue to $953M during January according to the Gaming Control Board. A economic briefing prepared by Applied Analysis for Nevada State bank shows Nevada's 1.7% population growth rate was actually the second highest increase in the country in 2014 (behind North Dakota) and Nevada's visitors volume was up 3.3%. Nevada is doing better, improved employment is helping gaming countrywide and low gas prices are helping regional gamers specifically.
    • ERI may be one of the more attractively valued gaming operations:

    (click to enlarge)

    • If one assigned an 8.5 EV/EBITDA multiple to ERI its' fair market value would be $6.35. This is a 33% gain from the current price.
    • ERI may have an opportunity to consolidate debt and reduce interest expense beginning later this year. The El Dorado part has $180 million in senior secured notes at 8.625% which may be redeemed for 104% of par after June 15, 2015; 102% after June 15, 2014; or 100% after June 15, 2017. The MTR gaming part has $570 million in senior secured second lien notes at 11.5% which may be redeemed at 106% of par after August 1, 2015; 103% after August 1, 2016; or 100% after August 1, 2017.
    • Potential synergies for the combined entity include: reduced overhead expense, increased purchasing power, the merging and cross marketing of customer retention and frequent player databases, and the sharing of best practices in regional casino operations.
    • Insider activity includes purchase by 4 different managers/directors in November of over 50,000 shares ($4.30's range). 13G's showing greater than 5% ownership have recently been filed by PAR Investments, Lafitte Capital, and NGA Holdco, a management owned (Carano/Reeg) investment vehicle.
    • ERI's last slide deck dated 12/2/2014 can be found at My original blog post on the MNTG / ERI merger is located here.
    Tags: ERI
    Mar 04 4:14 PM | Link | Comment!
  • MORL Vs. CEFL: Which Is The Better Choice Currently?

    In the comments section of an excellent article done by Professor Brofman: the question was posed, "whether you think CEFL is a safer bet than MORL when the Fed ends ZIRP? My answer ended up being a much longer than I intended comparison of MORL and CEFL so I thought I would repost it here.

    Hi dannyboy2,

    Neither CEFL nor MORL is a good choice if you believe interest rates are going up sharply, both would lose lots of money.

    CEFL currently is basically a covered call fund. All of the top 10 components are covered call / buy-write CEF's. You could buy SPY, leverage and sell covered calls on it to get essentially the same thing. If you are using a regular account at Interactive Brokers or some other provider with very low margin rates, you could even do this at a cheaper overall cost than CEFL and benefit from the majority of the returns being tax advantaged call premiums (returns on capital). Because the majority of CEFL currently is in covered-call CEF's, it also does not have as much diversity as one would hope. While the CEF's in it do trade at a discount, that discount is not significantly greater than average, and the combined fee's are fairly high (≈2.5%). So I would not call the underlying CEF's in CEFL cheap right now either. Overall, there are better choices available out there right now.

    Covered call funds generally outperform when the market rises gradually and do ok when the market declines gradually. This is because the call premiums make up the majority of the return. When the market rises sharply they make money but under perform the market as the majority of the upside has been sold away via the covered calls (e.g. the market goes up 40% you make roughly 15-20%, half from stock appreciation half from selling the premium). When the market declines sharply, you still get all the decline but it is offset somewhat by the covered call premiums (e.g. market goes down 40% you lose 40% in the stocks but make 10% on the premiums for a net 30% loss).

    Covered calls can really under perform when you get a sharp decline which bounces and is followed by a sharp rise. You take the majority of the ride down, but do not get the majority of the ride back up (e.g. 2008 -2010 period). Covered calls can be a good choice for someone trying to dampen volatility and produce tax advantaged income if they also have the contrary discipline and fortitude to sell them after the market has tanked (despite significant losses) and move into something riskier. Thus they work best as part of a more diversified portfolio, with a written policy on what to do when the market crashes and a little hand holding to make sure you actually do it. It is not easy increasing risk when the market has just dropped 40%+. You have to ask yourself, would you really do it?

    Back to the original question, if ZIRP ending results in sharply rising rates (which I think is unlikely), stocks would likely see a significant drop (low rates having propped them up for years) causing CEFL to also drop significantly. It would also increase the cost of the leverage, hurting returns further. I do not consider CEFL a compelling investment right now and think the index criteria utilized needs to be changed to produce greater diversification, CEF's trading below average discount and no CEF's trading at premium's.

    MORL would also be hurt significantly if ZIRP ending causes a sharp rise in rates or a significant flattening of the interest rate curve (short term rates up but not long term rates). I don't think the sharp rise in rates is likely but the flat curve could happen. That would hurt both the underlying spread business (borrow short, lend long) as well as making the leverage more expensive. If that happens, TSWHTF (The Sh!t Will Hit The Fan), MORL will see a significant loss (SPY probably won't be a safe haven either).

    I think the most likely rate scenario is one small rise in short term rates taking us above 0 then a stop or very long cautious pause. If that doesn't happen and short term rates go up 100 basis points or more in a relatively short period of time while long term rates are held down by poor worldwide economics (aging of population, low oil prices, EU, Japan, China rate cuts effectively imported to the US) you could see a very flat curve or even an inversion. Again in this situation, look out.

    MORL however can handle a muddle along economy just fine (what we have been in since 2009), and declining rates or even a gradual increase in rates ok (provided the rise is both long and short so the curve doesn't flatten further). MORL has a few components which hold MSR's that actually benefit from higher rates (e.g. NRZ, TWO), some which are more credit, commercial paper or special situation focused than rate focused (e.g. CIM, NCT), some which hold significant amounts of actual real estate (e.g NRF, HOT), and some who heavily hedge the agency portions of their portfolio's against interest rate increases (e.g. AI, EFC). So while MORL's largest components are agency paper holding NLY and AGNC, it's more diversified than many seem to realize. All you have to do to see this is compare what happened to MORL vs. NLY or AGNC during the taper tantrum. Essentially, MORL provides twice the yield of it's average component but with less than twice the risk. It is a well constructed ETF that actually adds value. Furthermore, many of the underlying components of MORL are currently trading at significant discounts to book. So in my opinion MORL is cheap right now (as is BDCL). Last MORL has a very low correlation to SPY, so for many people adding an reasonable allocation to it would actually lower overall portfolio risk.

    Note if the above comment didn't already bore you to tears, here is an article I wrote on the YMBC (You Must Be Crazy) portfolio which utilizes UBS 2x ETN's such as MORL, CEFL, BDCL, DVHL, SMHD, SDYL to come up with a fairly well diversified very high yield portfolio:

    Mar 02 3:30 PM | Link | 14 Comments
  • Proposal To Improve The Economy And Provide Jobs: Allow All Corporations The Option To Elect Pass-Through Status

    The US government should change tax laws allowing all corporations the option to become pass-through entities. Simplified somewhat, pass-through entities (e.g. BDC's, MLP's, REIT's) are those who do not have to pay corporate income tax provided they distribute the majority of their taxable income, usually 90%, to shareholders. These distributions avoid double taxation (corporate taxes + dividend taxes) but the receivers have to pay marginal tax rates on them (typically 28-42%) instead of receiving the lower dividend tax rate status (15-20%). The benefits to our society would be significant:

    1.) This would both reduce the machinations companies go through to avoid taxes, and encourage US job formation. Companies hold sizable profits overseas in order to avoid paying US taxes on them. Elimination of the corporate tax allows them to repatriate these funds to the US, returning them to shareholders or using them to fund growth. Shareholders are much more likely to spend or re-invest the funds rather than letting them sit in banks like many companies do. This would jump start the economy by putting the money to work. In economics terms, it would increase the velocity of money. As importantly, companies would no longer have any tax incentives to build factories and transfer patents overseas in order to recognize their profits overseas. This would further encourage US jobs and competitiveness.

    2.) In my, and Economist magazine's, opinion pass through entities provide advantages over regular C-corps for the investor. Many studies have shown dividend paying entities outperforming non-dividend payers. Some have even shown higher dividend payers outperform lower dividend payers on both a nominal and risk adjusted basis. Since pass-through entities must distribute 90% of their taxable income they tend to high yield. Furthermore, this effectively means they need to go back to shareholders (or banks) in order to raise funds for large projects. Thus they must be more selective with projects and able to justify large projects to third party stakeholders in order to access funding.

    3.) If you believe in a progressive tax system, this would ensure fairness. Warren Buffett for instance would no longer be paying a lower average rate on his taxes than his secretary. This is because 90% of taxable income must be distributed and the distribution from these pass through entities would be subject to the same marginal tax rates as salaried or hourly income. Indeed Warren's average tax rate under this system is very likely to be higher than his secretaries. He would be declaring much more income, so a higher proportion of which would be in the higher brackets. However, it would still likely be close to revenue neutral for the government in the short term. Basically a reduction in corporate taxes, especially those paid by the small business owner, would be offset by an increase in income taxes for the top 10% of earners. Longer term it would actually be revenue positive for the government if you believe, as I do, that the change is very likely to lead to a higher US growth rate.

    While passing anything through our legislative branch seems to be a stretch nowadays, I think this is a worthwhile proposal that both could actually happen and would have a significant positive effect on our economy.

    Tags: taxes, economy, growth
    Feb 26 3:08 PM | Link | Comment!
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