MGM May 10 , hope springs eternal, forget the fundamentals!

is a very good example of why you should ignore fundamentals most of the time (by the way EW does that , all the time). We looked at the stock on Feb.6, when it was about $5, wondering where it might go and never looked at it again. This is gambling after all. Well from a high of about $103 it hit a low of $1.81 in March (like everything else), clearly a real bear market. In the meantime capacity in Las Vegas is going to increase by 16.000 rooms or about 12% (mostly Citi Centre, a joint venture between MGM and Dubai World – wondering how your petro-dollars are recycled?). The house take is down by 17%, the number of visitors has fallen about 9% and the average room rate fell by 32% The only shining light here is that gambling is not entirely discretionary, for a good number of participants it is an obsession if not an outright addiction and consequently demand is inelastic relative to income. If you have doubts about this go visit Casino Rama and observe for your self the sad circumstances of the clientele. Sodom and Gomorrah certainly come to mind.  Here is the big picture.

MGM May 10

This could be a full cycle (5-waves from the lows) so it is conceivable that it would go bankrupt some day (there are 31mln shares sold short) but that is still a little down the road , if it happens. The lesson here is that you should completely ignore all fundamental evidence and almost as a matter of principal , like a Pavlov dog if you wish, always buy a stock below , say $3. Here is the detail.

MGM May 10 2

Not quite as good as C , F , CBS, and no doubt many others but there is strong support for this “hold your nose and buy” approach. It worked for Bre-X , NT, Asea Brown Boveri, Ahold. This is the hope factor at work, just do not stick around too long. GM is a definite maybe, maybe not!