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LVS will miss the current Q4 and 2009 estimates but for the first time in a while the Street is not that far off. Our numbers are only 5-10% below the Street’s, and we think that if LVS survives its credit crisis in 2009, 2010 numbers and beyond are probably reasonable. However, we are also aware that given the somewhat binary set of outcomes that LVS faces, and hence “balanced risk-reward” at current stock prices, investors probably aren’t losing a whole lot of sleep about 2010 and beyond.

The incredible volatility in LVS’s stock should provide levels for long and short traders. We’re on the sidelines at this level waiting for the volatility coach to give us an opportunity to jump in the game. In the meantime we’d like to throw out some plays for both bulls and bears.


 LVS is likely to breach the leverage covenant of its Macau credit facility in Q2 2009 unless drastic steps are taken

 The Macau Rolling Chip environment may be decimated by the credit crunch over there.

 In 2007, Venetian Las Vegas promotional spend was 18% of casino revenues, YTD promotional expenses are running at 33% of casino revenues. LVS has just recently started using promotional dollars to lure in slot players, so we believe that promotional spend will probably be around 40% in 2009. Same goes for Palazzo - In absolute dollars, promotional spend at Venetian & Palazzo was $76MM in 2007 and $146MM YTD 2008

 ADR at the Venetian was $259 in 2007 vs. approximately $242 YTD in 2008. Given the weekly STR #s and the offer’s we’ve been getting from Vegas casinos, we believe that ADR will be down about 15% in 4Q08 and deteriorate further in 1Q09. The opening of City Center in 4Q09 isn’t going to help ADR’s recover. We estimate that the cost of cleaning a room is about $70-75, so you can guess where our hotel EBITDA margins are heading

 While the Venetian Macau has been ramping up well during the last 3 quarters, we believe that they will experience significant cannibalization with the opening & ramp up of the Four Seasons


 In 3Q08, Venetian Las Vegas held about 10% and Palazzo held about 16% on table games, costing these two properties about $33MM of lost revenues & EBITDA. Assuming normal hold next year, this easy comparison should soften the blow of lower drop

 LVS has implemented a cost savings program that should save them an incremental $50MM or so in 2009

 We believe that in 2Q-4Q08, LVS had one of the higher commission rates in Macau set at 45% (all-in for F&B credits). With the commission potentially capped at 1.25% or 40% currently, this could provide some margin relief for their properties in 2009

 Sands 1H08 results experienced massive cannibalization as Venetian Macau ramped up and have seen some decent recovery in 2H08 which provides an easy comparison

 With most of LVS’s debt linked to LIBOR and other floating rates, LVS will benefit from the massive drop off in rates -3 month LIBOR rates were 1.09% on 1/16/2009, down from average of 2.9% in 2008

 LVS should have positive working capital in both 4Q08 and 2009, generating an estimated $175MM of cash over the next 5 quarters
o Construction Payables should begin to ramp down
o Accounts receivable should also ramp down as LVS has tightened credit extension to players

 LVS’s credit troubles are with the banks, which are more incentivized to provide the company covenant relief at a “price” than would bondholders.
o Banks have $9.5BN of credit exposure to LVS
o Gaming licensing requirement provide a huge deterrence to banks taking the keys in an event of default
o Lack of a transaction market means that even if Banks took the keys, they probably couldn’t sell the properties

Anna Massion

Eye On Asian Greenspans: Rate Cutting ...

More Easing from Bank Negara Malaysia didn’t won’t accomplish much…

December consumer inflation data released by the Malaysian Department of Statistics today came in at +4.39% year-over-year, well below last summer’s high when CPI seemed poised to enter double digit rates. The central bank took this cue as justification for further rate cuts, lowering the overnight rate by 75 basis points to 2.5% and slashing the statutory reserve rate from 3.5% to 2% effective Feb 1.

But… the benchmark KLSE traded down almost -1% for the day as the investors weighed the prospects of a second government stimulus package.

The big picture for Malaysia is negative, if not awful. As a net exporter of oil and other commodities, the receding inflation figures are a double edged sword –lower prices at the pump come hand in hand with lower prices at the docks. Cooling demand for electronics from developed world economies is weighing heavily on the manufacturing sector.

A second stimulus package or further easing at this stage will likely not do much offset external demand retraction, although further declines by the Ringgit spurred by the rate cut may help shore up some sectors.

See the chart below, which largely reflects the dynamics of stock markets as stealth leading indicators. The “re-flation” rallies we saw in December were largely pricing in the expectation of aggressive rate cutting that we are now seeing here in January. By the time this aggressive rates cutting news is hitting the tape, the marginal buyer has already turned to selling on the news.

Andrew Barber

SP500 Levels, Refreshed

I refresh the math in my models after every 90 minutes of trading. As prices change, I do.

Today’s math reveals a downside support level in the SP500 of 788, and a magnified bearish intermediate term “Trend” – we show immediate term “Trade” rally resistance at 855, and intermediate term “Trend” line resistance overhead (thick red line) up at 879 in the chart below.

Keith R. McCullough
CEO & Chief Investment Officer

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Grilling Geithner, As They Should...

Tim Geithner being either careless or unaware on his personal taxes is not an acceptable excuse. We are seeing an overdue expectation of transparency and accountability put forth in this US Government hearing today.

At the end of the day, however, the gun is at the US Government's head. The political winds associated with the US Financials crashing (XLF) this week will force Geithner into this critical seat to head up the Treasury - the reactive media is demanding a bailout, and so are the banks. Paul Volcker himself just called this “the mother of all” financial disasters. They won’t take the time to find someone else for the job.

In terms of policy, today's Geithner grilling reveals a critical point for the US stock market - and that’s simply one of duration. He is clearly pushing out the expectations for the "fix" - and, importantly, Paul Volcker has his back on that. Understanding that The New Reality team of the Obama administration may very well be trying to set up expectations that they can over deliver on... that doesn't mean the immediate term "Trade" in the US stock market owes them any benefit of the doubt.

Next support on the SP500 is 788. I have been selling strength since the opening bell.

Keith R. McCullough
CEO & Chief Investment Officer

Destroyers of Capital

Destroyers of Capital - asset allocation012109

“If an idiot were to tell you the same story for a year, you would end by believing it.”
-Horace Mann

Herein lies the crisis of confidence that remains with the US stock market. If you want to wake up this morning believing that the market cracked yesterday because of Obama, go right ahead and believe that narrative fallacy – if you just don’t like the man, stand up and blame him – that’s easy enough to do. The reality is that this market is swooning because the Destroyers of Capital are crashing.

I have called this a Crisis of Credibility. I have called Investment Banking Inc. a horse and buggy whip compensation structure. You can call the US Financials Sector (XLF) what you wish. At -36% for the year to date, in a year that is less than 3 weeks old, we can all call this another crash.

Crashes in my models are 3 standard deviation moves within the duration I build into my investment thesis. For others, crashes are simply what happens when they invest alongside professional story tellers – otherwise known as idiots. If that’s a word that’s too hard to read, too bad – Wikipedia says “idiot is a word derived from the Greeks as a person lacking professional skill… in Latin the word “idiota” means uneducated or ignorant person.” In this regard, what would you call Hank Paulson?

The best news this morning is that Hank Paulson, Chris Cox, and hopefully Vikram Pandit are going away. In any other high paying profession – say medical practice – the professional lack of skill of these said economic savants would have them barred. The revisionist historians are pretty good at understanding how Donald Rumsfeld’s ignorance and hubris led is to where we ended up in Iraq – it will not take them very long to lay the accountability cards face up on the purveyors of capital destruction. Hank Paulson and Investment Banking Inc, tag – you’re it.

With the SP500 down a third of what the US Financials are, that still puts them down by a lot for 2009 to date. Yesterday’s -5.3% move came on better than average volume and a breakout in volatility (as measured by the VIX Index). While SP500 805 is still +7% from its November lows, the bear claws have every right to be swiping at anyone who calls themselves bullish – for that, I’d say that in the USA, China, and Gold at least, since late November I am accountable for what I have been saying. In those respective asset classes, I have been bullish, but at very specific prices.

One fund that mimics my daily entry/exit points had me up close to +9% in December, and now down close to -2% for January to date. I will make no excuses for being down for 2009 to date. I get up every morning and do my best to “make the call” – when I lose people money, it’s my fault, not the market’s. My current Asset Allocations model has a 64% position in Cash and a 6% position in Gold.

The Destroyers of Capital have perpetuated a compromised view by taking tax payer moneys and blowing it up in smoke. Whether you call Pandit cutting Citigroup’s dividend to a penny this morning embarrassing, or just more of the same versus expectations is not the point. The point is that these people continue to pay themselves massive compensation structures to not only be un-transparent, but to be un-accountable. Who in their right mind is ever going to trust these people ever again?

The Chinese certainly don’t – a few weeks back, Destroyer of Capital BAC, sold their equity in Chinese banks in their face. When men are desperate, they sell what they can, not what they should. This compromise of the American bankers system’s handshake, sadly, will have long term repercussions. I pray that the Chinese don’t start unloading US Treasuries en masse. Blowing up the last bubble market that remains (Treasury Bonds) might even make me depressed.

This morning you are going to hear the pundit patrol jump on their meme machines and start telling you that the answer is to “nationalize the banks.” Well, that sounds interesting, but take a visit to the Russian stock market, or the Irish one for that matter, and let me know how that goes. Whether you are nationalizing your natural resource enterprises (Russia) or your banks (Ireland), you are the only market’s going down as fast as the US Financials right now. CNBC better be careful what their crackberry entertainers wish for.

Russia broke its October lows yesterday and hasn’t looked back. Trading down another -1% this morning at 509, the Russian Trading System has lost -25% of its value since Christmas, and now even on up days for oil (oil shot up to $41/barrel this morning), the market has NO confidence all over the offer. In Ireland, they moved to nationalize the banking system last week, and inclusive of this morning’s -3.6% drop, you have an Irish stock market that’s lost almost -20% of its value in the last week alone. Them be crashes folks. The Destroyers of Capital are now wrecks on this interconnected global market’s shore.

Brazilian stocks broke my quantitative levels of support intraday yesterday, so I sold them. Managing risk is more about taking small losses before they become large ones than anything else. That’s just a process that I have had to learn the hard way. All of those who did not respect capital, especially your capital, are still in the process of being educated on this front. Illiquidity and leverage are the weapons of mass destruction that Hank Paulson never understood.

China is literally the only major economy in the world that has a stock market that is healthy across my quantitative factors. China closed down, barely, last night taking the Shanghai Index to 1985. There is formidable support at the 1948 line on that index, and there should be. These communists turned hybrid capitalists are the only allocators of capital who own the liquidity associated with a healthy balance sheet…

“Lacking professional skill” or being “ignorant” are no longer acceptable in The New Reality. Be accountable. Be transparent. Have a handshake that people can trust – the “idiots” and Destroyers of Capital are finally being handed their walking papers. For that, we should all be thankful.

Best of luck out there today,

Destroyers of Capital - etfs012109


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

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%