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Editor's note: Every couple of months, SuperModels columnist Jon Markman answers his mail as readers implore, "Hey Modelman!" The letters are edited for grammar and may be condensed.

Hey Modelman:

A month ago,

you wrote about two lottery-services providers --

GTech Holdings

( GTK) and

Scientific Games

(SGMS) - Get Scientific Games Corporation Report

-- and gave the nod to Scientific Games. That turned out to be a good idea, at least for now, as GTech hit the skids last week on some bad news and Scientific advanced on better news. Can you update your views on these two?


Let's start with GTech, which was punished recently over two issues. On May 13, it reported that two of its top executives in Brazil face criminal bribery charges and that it faced scrutiny of the matter by the

Securities and Exchange Commission

. This is a big deal because the National Lottery of Brazil is the company's biggest single customer, accounting for about 10% of revenue. The Brazilian government, which is not unaccustomed to scandal, has sued to invalidate its contract with GTech and impose penalties of close to $650 million.

GTech also announced on May 12 that it had lost its online lottery contract in Puerto Rico. The contract amounted to only $20 million of the company's annual revenue, but illustrates the potential for governments to start avoiding GTech in the wake of its Brazilian brouhaha.

Many U.S. analysts pooh-poohed the importance of the incidents in Brazil and Puerto Rico. Deutsche Bank's Marc Falcone said the market had overreacted by slicing 20% off the company's value, as he said the Brazilian risk was well known and Puerto Rico was a minor account. Bulls noted that the company announced the launch of a $100 million stock buyback program on Friday, which would be a major commitment of about 3% of outstanding shares.

But analyst Paul Meeks, principal at Meeks & York in New Jersey, is less sanguine. He told clients a year ago that GTech, which he terms a "cult stock," had been signing unprofitable contracts and warned that its Brazilian troubles would be much more serious than merely losing a big chunk of its revenue.

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"The Street didn't assess the impact of the bribe probe on other jurisdictions," he told me on Friday. "Puerto Rico felt it couldn't go with a company with an alleged bribe on its books -- and there are more problems like that to come."

Meeks adds that another key problem is that GTech so thoroughly dominates the world's "online" lottery business -- the company has a 70% share of the market -- that it has virtually no room to grow. Using the company's own optimistic forward earnings guidance, and assuming that it does not lose its Brazilian contract, Meeks comes up with a $42 price for the stock. It closed Wednesday at $53.35.

The benefactor in all of this is likely to be Scientific Games, Meeks says. A longtime specialist in instant scratch-off games, its acquisition last year of

International Game Technology's

(IGT) - Get International Game Technology PLC Report

online lottery business has put it in the running to replace GTech wherever its rival stumbles. Scientific Games has already won the Puerto Rico contract, reportedly worth $66.7 million over seven years. Meeks says he likes the stock under $20 for a 50% move over the next two years.

Hey Modelman:

What's Mr. P. thinking these days? You haven't relayed his views in quite a while.


Mr. P, longtime readers will recall, is the veteran research director of a prominent hedge fund who has provided his views on market-timing to SuperModels readers for the past four years. He currently thinks the market is in one of the most complex phases he's ever encountered. He recommends that private investors hold cash rather than stocks, to they extent they can.

Although he's a longtime Republican, Mr. P told me over the weekend that he is very disappointed by the political and military misjudgments of the Bush administration and thinks the key reason White House control appears to be disintegrating is that the president "doesn't work at his freakin' job." Mr. P believes that until the world regains its faith in a hardworking president with a firm hand on the country's rudder, it will sell U.S. currency and financial assets.

"This is one of those rare times when there's very little to be gained by having a position," he said. "I don't have a lot of confidence in the market. It is very dangerous. I don't care if I miss some upside. Volatility is rising and it's time to be prepared for the unexpected. No matter how strong the economy is, the confederacy of dunces in Washington seems ready to do everything it can to screw things up. We are short stocks, bonds, the dollar and long oil."

Hey Modelman:

Thanks for the article entitled "

Prepare for the Worst, Market Seer Warns." Michael Belkin is nuts. Now I know it's time to load up on tech.

-- Bob Hagedorn

I always grow leery when articles talk of prophets and ring with hagiographic praise. Since you were kind enough to tell us how prescient Mr. Belkin was when he was right, will you also remind us if he turns out to be wrong this time, and if so how long will you give him? I have been burned so many times by following the advice of bears who assure their audience that this time this stock or market has so many problems, etc.

-- Douglas Peterson

I doubt that we're entering a bear market when the expansion in the jobs market has really just begun.

-- Alan Divo

Why not stick to your strength instead of writing this faddish Belkin stuff?

-- Vic Neiderhoffer

Does Mr. Belkin have a point of view on precious metals -- i.e., gold or gold stocks?

-- Tom Keele


Columns about Belkin always provoke distress. Few readers seem to want to hear a negative point of view on the market. I met him in person for lunch for the first time last week, and asked him how he had learned to take such extreme opposite points of view from the consensus, and to persevere even when these calls were not moving in his direction.

He said his mathematical model of the interconnected stocks, commodities, bonds and currency markets had proven successful at predicting meaningful reversals for 20 years, and gave him faith to make calls that seemed highly improbable. He reiterated his belief that everyone in the world had somehow taken the wrong side of U.S. and emerging-market stocks and bonds, and that as they exited en masse the "deleveraging" process -- answering margin calls and unwinding complex derivatives -- would bring about a crash.

His model suggests that gold and gold stocks also got way too rich, and would counterintuitively decline in tandem with equities this time, providing no shelter. Maybe he's wrong, but at least I have fulfilled my obligation as a columnist to provide an alternative point of view.

Hey Modelman:

The news has been so grim lately. Got any good news to report, any chance the recent downturn will reverse soon?


On Friday, Paul Desmond of Lowry's Reports said that persistent market weakness had caused his outfit's so-called Selling Pressure Index to rise above his Buying Power Index, resulting in an intermediate-trend sell signal -- and ending the bullish outlook his service has held since March 17, 2003.

However, he observes that none of the classic signs of a long-term top were in place before the recent decline occurred. Therefore, he thinks the current highly oversold market is ripe for a sharp reversal that will take stocks back to the top of their 2004 trading range. He said he believes the current correction has been much more extreme than bulls expected only because the 2003 rally progressed without a single 5% correction.

Jon D. Markman is publisher of

StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at At the time of publication, Markman had a position in the following securities mentioned in this column: Scientific Games and GTech.