Scaling Up The Japanese Debt Mountain

We walked through Japan's debt as a % of GDP in our Friday note. Here it is pictorially. Andrew Barber put together the Japanese bailout years overlaid with the debt mountain from 1.

This is one of the ugliest long term macro cycle charts in the world. The US Government better be very careful not to repeat this scary movie.

*Full Disclosure: I am short Japan via the ETF (EWJ).

Lehman (LEH): Selling What He Can, Not What He Should...

Lehman closed up +1.4% on Friday, on low volume, and high rumor traffic. This weekend the London Telegraph is joining the band and issuing thoughts about the timing of Dick Fuld's next move.

Clearly, something needs to happen at LEH before they report the upcoming quarter. The question is what is it going to be? Fuld has compromised himself and his firm on many levels. The long term damage to the Lehman name may be irreparable - the short term decision he makes will simply expedite or stall the inevitable.

The Telegraph is speaking to the speculation that's been in the market place for basically the better part of August. Lehman's stock has actually acted OK in the last month as a result (see chart). Will Fuld sell to the Korean's, the Chinese, Abu Dhabi, Qatar, or all of the above? Who knows... what I do know is that Fuld has virtually no leverage at the ‘Monopoly’ board dealings because he levered himself up to the gills.

You know how the game of ‘Monopoly’ goes. When you're going under, you sell what you can first - not what you should.

If the stock fails here, we're going to be looking at a fast -23% worth of downside until I see any support.
  • LEH failing to break out through $16.38 is very bearish. Short Term "Trade" downside to $12.37.
chart courtesy of

Integrity what?

A few months back, when we held our "Bankruptcy Cycle" conference call, I had plenty of feedback suggesting that I was wrong in concluding that we are early in the cycle. A good debate is what gets my feet on the floor in the morning, and on this front, the facts continue to play into our thesis' favor...

Integrity Bancshares filed for bankruptcy this week, taking the number of belly ups to 10 on the US banks chart. I have attached the old one below, and my analysts will have the new one on Tuesday, but the point here is that there is very little integrity in this US Financial banking system that you can hang your hat on right now. It all started at the top, with Bear, Citigroup and Lehman – now the avalanche is moving downhill.

This week, the Federal Deposit Insurance Corp (FDIC) told us that they were nervous – they’re definitely going to have to tap into ole uncle Hank (Paulson) for some of that liquidity he has at the US Treasury. They have identified 117 banks at risk. It was not too long ago that Sheila Blair's team (she's head of the FDIC) had an estimate that was under 10!

Times are a changin' out there folks. As cost of capital rises, globally, and access to capital continues to tighten, locally, there is plenty of tail risk remaining in the USA - don't forget that there are almost 8,500 banks in this clear and present danger line of fire.

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August Divergences Paving The Way For American Capitalists?

In our Friday morning investment team meeting, I asked whether or not anyone could make sense of the continued divergence between mid/large cap stocks vs. their small cap brethren... With the S&P 500 -12.6% YTD and the Russell2000 only down -3.5% YTD, this remains a critical question. Can the divergence hold? Will small caps underperform in September and revert to the mean? Etc…

Hindsight is always crystal clear… now that virtually every US "strategist" is back pedaling on their expectations for large caps to outperform in 2008, there are a few, but simple question to ask yourself - are we seeing the insulated US centric American Capitalist emerge out of this financial mess in small cap outperformance? are large caps the best way to play the "its global this time" Wall Street narrative of yesteryear on the short side?

Until proven otherwise, I think the answer to both of these questions is yes. There are a variety of other stylistic factors to consider in terms of explaining the smaller cap index outperforming big brother, but I will leave those for another time. With crisis, opportunity is always born. Here’s to the new American leadership that is forming on Main Street.

Charts below courtesy of, showing the Ausgust scorecard: SP500 +1.2% vs. Russell2000 +3.5%.

US Market Performance: Week Ended 8/29/08...

Index performance:
Week Ended 8/29/08:
Dow Jones (0.7%), SP500 (0.7%), Nasdaq (2.0%), Russell2000 +0.3%

August 08 Final:
Dow Jones +1.5%, SP500 +1.2%, Nasdaq +1.8%, Russell2000 +3.5%

2008 Year To Date:
Dow Jones (-13.0%), SP500 (12.6%), Nasdaq (10.7%), Russell2000 (3.5%)



Let’s face it. 2009 lodging estimates need to come down. I know I sound like a broken record but the data continues to deteriorate. A stronger dollar, weakening global economic conditions, and creeping room supply may finally touch the Teflon Don of Starwood’s portfolio: New York City. Starwood maintains the highest exposure to NYC of all the major hotel companies. As can be seen in the first chart, NYC represents about 7% of total owned hotel rooms and 16% of owned hotel EBITDA.
  • The same conditions that pushed hotel demand much higher than the national average (see 2nd chart) are now moving against the lodging environment in NYC. The dollar recorded the highest monthly gain in 15 years in August and global GDP growth is slowing rapidly. Since 1/1/07, the dollar index fell 15% to the end of July 2008 while international visitation to NYC grew over 20% against the backdrop of strong global economies. Meanwhile, the spread of NYC RevPAR growth vs the national average remained significantly positive throughout the period in the range of +5-9%. I believe the recent sharp reversal of the dollar and slowing global economies will narrow that gap considerably, and quickly. Considering the recent national RevPAR trends, this is not good for the NYC hotel market. August RevPAR probably fell 1% nationally.
  • In my 6/26/08 post, “NOT BEARISH ENOUGH? NOT EVEN BEARISH”, I estimated that 2009 lodging company EPS estimates were too high on average by 30%. At the time, the consensus HOT estimate was $2.92. Two months later, the consensus estimate has fallen 25% to $2.19. Unfortunately, the data has deteriorated further and forward looking indicators are worsening. I now think 2009 EPS estimates need to be reduced by another 25% and EBITDA by about $150 million. We’ll probably have to wait for the next “beat and lower” quarter come October to actually see the reductions.

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