The dilution continues - the grand scheme to get this market up on green shoots to dump massive amounts of stock on the public has been executed to perfection. Kudos to D.C. and NYC. [May 12: The Secondary Tidal Wave Continues as Insiders Unload, and Underwriters Cheer]

I highlighted MGM Mirage (MGM) yesterday and if I had been online early in the morning I would of liked to short it over $13 nearer to $14 but by the time I looked at the casino group closely many names were already down 7%+ for the day. Today MGM presented a gift to the shorts with a massive dilution, $1B of shares on a $3B market cap - 1/3rd dilution. Plus another $1.5B in debt to push out their debt obligations further. Keep in mind MGM was in danger of bankruptcy and has $14B in debt... this massive rally has been on hopes they can stave that off. Las Vegas Sands (LVS) is in similar straights although a bit less debt than MGM.

However, what I have been saying is all these REITs, banks, and many other companies now tossing billions upon billions of dilution into the market need to one day be valued on actual profits again. This seems to be a long lost concept... I am highlighting what this analyst has to say because it falls in line with my thinking. But as we all know, thinking has been punished of late.

  • MGM Mirage said Wednesday that it plans to raise $2.5 billion through stock and bond offerings to pay down a portion of its more than $14 billion in debt and that it is modifying an existing loan agreement to strengthen its balance sheet and meet liquidity needs.
  • Las Vegas-based MGM plans to use approximately $1 billion in proceeds from an 81 million public stock offering and a $1.5 billion private placement of senior notes in part to pay off $1.05 billion of debt issued by its Mandalay Resort and itself, that matures later this year, as well as debt issued in connection with its Mirage Resorts and at least $750 million of a credit line. (the latter offering of the debt is simply kicking the can down the road, replacing near dated debt with debt due later in the future)
  • The new credit agreement -- which was amended for a sixth time -- gives the company a little more breathing room. The amendment allows MGM to permanently waive any potential default from the inclusion of the term going concern in its 2008 and 2009 financials. The private placement will include two tranches due 2014 and 2017. The notes will be secured by a first priority lien on the Bellagio Hotel and Casino and The Mirage as well as a first priority pledge of the equity interests in Bellagio LLC and Mirage Casino-Hotel once the necessary gaming approvals are received.
  • Last week MGM recorded a hefty gain from the sale of its Treasure Island hotel and casino in Las Vegas in its quarterly report. The company also reached a deal last month with CityCenter partner Dubai World and the pair's lenders to complete the $8.5 billion Las Vegas project. The CityCenter agreement was welcome news, as some investors and analysts had feared MGM might be on the brink of filing for bankruptcy protection if it could not work out the remaining financing necessary to finish the development.

Here is the key for all the giddy folk who trade on things other than shorts getting squeezed

  • MGM Mirage still faces the challenge of driving shareholder returns under its burden of debt, Bernstein Research analyst Janet Brashear said in a note to clients. We continue to believe that investors should not jump in unless the company comes up with a business plan that begins to create profitable returns as opposed to just staying solvent, she wrote.

The bar is so low in this market that we celebrate solvency... rather than any chance of profit growth in the coming half decade. Green shoots.

Admittedly I've been shell shocked by repeated attempts to short stocks that have been going up 30, 50% a week - never shorted this one but here is one that just went from $2.50 to $14 in a 6 week period. As we stated yesterday, many of the consumer discretionary names were looking to roll over [May 12: Consumer Discretionary Has Been Weak the Past Week] and a worse than expected government report helped push these down further. The irony in the months to come is the news will be the same but as always, some months it will be ignored and some months it will be paid attention to. When the news matters anymore, is anyone's guess - I've been wrong the past 4 weeks assuming it will matter once more. I continue to say the consumer is cooked and bulls do not understand a secular change is on hand. Maybe in 2011 they will understand but not before about 8 more consumer discretionary rallies.

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