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We’ve gone through the painstaking details of the credit documents, worked the math, and performed the analysis. In other words, we’ve done the work. The good news: it looks like LVS will probably clear its 7.0x Consolidated Leverage Ratio covenant on its US facility, due primarily to a creative definition of Consolidated Adjusted EBITDA. The bad news: we can’t say the same for the Maximum Consolidated Leverage Ratio in their Macau facility.

As can be seen in the first chart, LVS should make it through 2010 without breaching the leverage covenant in the US facility. At the end of 3Q08, LVS just skated under its maximum allowable leverage under its US facility with leverage of 7.45x vs a 7.5x test. Subsequently, LVS raised $2.1BN of cash through an equity and preferred offering. Total Consolidated Debt is defined as total debt at the US subsidiary level less cash in excess of $75MM. We estimate that net debt goes from $4.15BN in 3Q08 to $2.8BN in 4Q08. The US facility’s definition of Consolidated Adjusted EBITDA also allows for up to $100MM of equity contributions ($50MM per every other quarter) for every TTM period to be counted as an addback to EBITDA. The facility also allows for the addback of interest on its $250MM 6.375% Sr Notes. Therefore our leverage calculation for 4Q08 drops to 5.5x, before climbing to 6.3x in 1Q09. Without the $58MM in addbacks to Adjusted EBITDA, LVS would most likely breach the 7.0x leverage covenant in 1Q09.

Now the bad news. Even if LVS clears the debt covenants in its US Credit Facility, it may not be out of the woods. According to our calculations as seen in the second chart, the company is dangerously close to tripping its Maximum Consolidated Leverage Ratio in their Macau facility and will likely trip the covenant in the 2Q09. Similar to the US Credit Facility, the Macau facility allows for numerous addbacks to its Consolidated Adjusted EBITDA calculation, including (for a TTM period) up to $80MM of equity contributions, $10MM of corporate expenses, $15MM of non-recurring charges, and $10MM in uncapitalized non-recurring expenses in relation to a financing transaction. However, given the current debt balance in Macau, minimum required EBITDA to meet the leverage test would need to grow $220MM over TTM EBITDA in 3Q08 by 2Q09 to make-up for the step-down in the allowable leverage ratio from 4.5x to 3.5x, and by $387MM by 4Q09 when maximum allowable Consolidated Leverage steps down to 3.0x.

Given our views of Macau fundamentals, we believe that despite the opening of the Four Seasons last quarter and newly in-place cost controls, LVS’s Macau EBITDA will only experience modest growth in 2009. The Macau market faces many challenges including player credit, new competition, and visa restrictions. Barring an asset sale, we do not see how LVS can avoid tripping their leverage covenants in Macau. Unfortunately for LVS, the market for retail and condo/hotel assets could not be worse right now.

Anna Massion

Eye On Leadership: 100 Days, Obama's clock starts with S&P 805

100 Days

“He’s the absolute right commander in chief . . . You know whether it was Lincoln, Roosevelt. And, I would say Obama, you couldn’t have anybody better in charge.”
-Warren Buffett, January 19th, 2009 on Dateline

President Obama was inaugurated as the 44th President earlier today and he will be entering office with some of the highest expectations of any incoming President. This is both a blessing and a curse. The naysayers obviously argue that he can only fail given the high expectations that come with being compared to some of the most prominent Presidents in history, as Warren Buffet compares him to above. On the flip side, he has the approval rating, and thus the mandate, to accomplish a great deal in his first 100 days in office – a time period which often marks the success or failure of a President’s term.

Keith and I have spent the last few months reading, discussing and referencing Franklin Delano Roosevelt. In many ways, he is the most appropriate Presidential comparison for President Obama. FDR gained the Presidency in a time of severe economic crisis and inherited the office from a predecessor, President Hoover, that was broadly unpopular.

FDR is one of the more widely studied Presidents in history and while conventional wisdom has concluded that he was a great President, that conclusion is certainly open to debate. The success of FDR’s first 100 days is less open for debate and will provide a framework to evaluate Obama’s early success. If we were to characterize the template of success from FDR’s first 100 days in three words, they would be communication, action, and flexibility.

FDR’s inaugural speech had one of the now most frequently quoted lines from any inaugural speech:

“Let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts.”

Ironically, the power of this line was not recognized until well after the speech was given and the major newspapers of the day did not even highlight this line in their reporting of the speech the next day. Nonetheless, the speech was raved about by the papers and introduced an engaging Presidency that was in sharp contrast from the Hoover Presidency. FDR spoke openly with the media, on good terms, and, even more importantly, communicated directly with the U.S. people primarily via the radio through his Fireside Chats.

The power of communication is obviously difficult to quantify, but can be seen in the numbers of opinion polls and the actions of the public. FDR’s second major speech was his first Fireside Chat. The subject of this speech was the run on the banks that was occurring in the U.S. at the time. In the speech, FDR attempted to explain, in simple terms, the importance of the banking system and in keeping your funds in the bank. In the following line he also went so far as to shame citizens who withdrew money from the banks:

“I can assure you, my friends, that it is safer to keep your keep your money in a reopened bank than it is to keep it under the mattress.”

With this speech, and the confidence it once again gave people in the banking system, FDR reopened the banks the next day and the banking system broadly saw a massive inflow of deposits.

Undoubtedly Obama has among the more impressive oratory skills of any politician we have ever seen on the national stage and his inaugural address from just hours ago will be one that will be reflected on for month and years to come. Beyond this first speech, a significant indication of Obama’s initial success as President will be the willingness of American consumers to reassert their confidence and engage in commerce in the coming months as they did with FDR by putting their money back into the banking system.

Once inaugurated, FDR did not waste his popularity or the political capital that the election had bestowed on him. In his first 100 days, from roughly March 9 to June 16th, 1933, FDR sent an unprecedented number of bills to Congress, which all passed easily. Among the major bills that were passed by Congress during this time period were the bill that created the Federal Emergency Relief Administration, the Civilian Conservative Corps, the Reconstruction Finance Corporation, and the Tennessee Valley Authority. Congress also gave the Federal Trade Commission broad new regulatory powers and provided mortgage relief to millions of farmers and owners.

While there are parallels between 1933 and 2009, we are not nearly in the state of economic crisis that faced FDR as he entered his Presidency. Most notably in 1933, the bank system was effectively frozen, unemployment was near 25%, and GNP over the course of three years had fallen by close to 25%. Clearly, President Obama does not face an economic crisis of the same magnitude that enabled FDR to get broad legislative support for his initiatives, but Obama’s recovery bill, The American Recovery and Reinvestment Bill of 2009, which now amounts to over $825BN seems likely to get passed in the first few weeks of his Presidency.

The final key component to FDR’s success in his first 100 days was a willingness to be intellectually and ideological flexible in looking for and adopting solutions to the economic crisis. As Margaret Ferguson of the Indianoplis Star recently wrote:

“ Roosevelt's greatest strength was that he offered solutions but avoided ideological grandstanding. If a program failed, Roosevelt did not hesitate to reject it and move on.”

Obama has already shown a flexible willingness to work across party lines, which has been emphasized by consistent outreach to his former Presidential Rival, Senator McCain.

It seems likely that Obama’s predecessor, President Bush, saved Obama the unpopular requirement of bailing out the nation’s banking system, although there is some likelihood, at least based on how the stocks of Citigroup (down -18% as of 3pm today) and Bank of America (down -21% as of 3pm today) are trading, that more capital is required. Generally speaking though, Obama now has the opportunity to implement change, which is manifested in his recovery plan to promote a more broad based consumer led recovery, but he has retained the flexibility to tweak this plan as needed.

In his first week of office, FDR left the White House, partly as a shot at his predecessor Hoover who famously told FDR that the President visits no one, and paid a call on retired Supreme Court Justice Oliver Wendell Holmes on the occasion of his 92nd birthday. According to his former clerks Tommy Corcoran and Donald Hiss, Holmes told the President:

“You are in a war, Mr. President, and in a war there is only one rule, “Form your battalion and fight.”

President Obama has followed this advice well. He has formed a solid economic battalion in the way of Summers, Geithner, and Volcker (to name three) and is charging forward with a large and broad based recovery plan. Even the most partisan of Republicans will have a hard time not supporting President Obama over the next 100 days.

Daryl G. Jones
Managing Director



Over the weekend the Melbourne Institute Monthly Inflation Gauge was reported (official CPI data is only released quarterly by the Bureau of Statistics) with a year-over-year growth level of 2.23%. The continuing decline in inflationary pressures leaves more room for Governor Stevens and his team at the Reserve Bank to cut rates from the current 4.25%.

For the Australians declining inflation is a double-edged sword since the collapse of the commodity bubble of 2008 has dramatically dampened short term prospects for the country’s GDP. Q4 import/export price statistics slated for release on Wednesday will provide an insight into how large the impact of declining metal and fuel prices may be.

We have long admired the resolve that Mr. Stevens and his predecessor Ian Macfarlane used in rate policy during the white hot growth of 2006-2008; their policies left the land down under with plenty of room to cut rates. Unlike Brazil however, Australia’s declining commodity export revenues are not offset by massive internal consumer demand, leaving them vulnerable to long term deflationary pressure.

We will continue to watch Australian equities, which we have owned on several occasions over the past two quarters, if only for a short term “Trade.”

Andrew Barber

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SP500 Levels Into The Close

This is getting nasty, and if it weren’t for Gold (GLD) and the VIX not confirming … yet… I’d say we are on the precipice of another SP500 crash. Crash? Yes – the horse and buggy whip US Financials (XLF) are crashing – as they should.

Looking at the chart below, you’ll see my refreshed levels to manage around if we don’t crash. Selling SP500 866 is the dotted red line – that’s where any immediate term “Trade” to the upside runs out of gas. Selling SP500 883 is the new intermediate term “Trend” line – make no mistake, its bearish out there. The US Financials, as a sector, are down -30% for the year to date!

The buy/cover for the immediate term “Trade” line is 803. If you’re in the SP500 crash camp, a 3 standard deviation move in my model will get you SP500 771. That’s another -4% more pain to carry (or risk) if you cover/buy at 803. This Crisis in Credibility has proven to be both well deserved, and painful to the stock market for 2009 year to date, but I still do not think the SP500 will make a lower low versus November’s 752.

Keith R. McCullough
CEO & Chief Investment Officer

Eye On Leadership: President Obama

Transparency, Accountability, and Trust - we like that message, and if only in rhetoric, that's where Obama sides with Research Edge's vision of The New Reality.

Bank of America is no longer America's once vaunted investment banker. Blackstone's lack of transparency is not the new American capitalists interpretation of where this country is headed. Those two stocks are down -19% and -11% today for reasons that are unique to their very own shortsightedness.

Trading down another -9% today, the US Financials (XLF) have already crashed in 2009. Tomorrow that will be yesterday’s news.

For the year to date, we have a developing story of the excesses unwashed meeting their maker. At down -30% for the year to date, in a year that is only 20 days old, today we can say goodbye to the horse and buggy whip thought processes of the leverage cycle past. Goodbye and Good luck.

Before we can “dust ourselves off, and rebuild it”, the SP500 needs to rid itself of the market cap associated with the banking system’s Crisis in Credibility. Everything starts with confidence. Obama has that - and yes, the best things in life take time to build.

We are most likely going to test my downside SP500 support line of 818 in the meantime.

Keith R. McCullough
CEO & Chief Investment Officer

Selling The Brazilian Bull, For Now...

When I woke up this morning to the Russian stock market crashing to new lows (lower than its October low of 549 on the RTSI), I immediately moved to run the risk management math on our position in Brazil (the EWZ etf). While I don’t believe in the nonsensical Wall Street acronym BRIC (Brazil, Russia, Chindia), I very much believe that when my intermediate “Trend” line breaks that an asset can begin to fall like a brick.

That’s my math and I am sticking to it. The reality is that the Bovespa (see chart) finished off a massive +44% move on January the 6th, right after the US stock market locked in its 3-month cycle high up at 941. While the Bovespa’s recent correction has been about the same as that in the SP500, this only means that it has further to fall if mean reversion has any place in the risk management side of the argument.

No, I am not selling Brazil because I don’t think they will cut rates. No, I am not selling Brazil because I don’t think that it will continue to outgrow the rest of Latin America in 2009. I am selling Brazil today, because the Bovespa index broke a critical level in my model at 38,787.

Keith R. McCullough
CEO & Chief Investment Officer

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