Muscle Flexed? But How Much Muscle?

We had been in the midst of writing the note below that summarizes Russia's increased criticism of the U.S. Dollar as the global reserve currency when we picked up on newswires that Russia may actually start swapping U.S. Treasuries for IMF Debt.  As the dollar continues to fall holders of US debt are rightfully seeking alternative vehicles. Russia has aggressively floated the idea of a supranational currency in the last ten days and countries from China to Brazil have voiced reducing their dependence on the dollar.  While we very much believe "The Burning of the Buck" will have serious implications for global markets, Russia's recent bark (rhetoric) may be larger than its bite. The first chart below is an important call-out, showing the diminutive Russian Holding of US Treasury Debt as a percentage of total US debt.

The broader note below gives more context on this situation.

 Muscle Flexed? But How Much Muscle? - russ1


Muscle Flexing

Russia calls for a new global currency to replace the Greenback. Could rhetoric turn into action? (Yes, per above!)

Over the last week Russian President Dmitry Medvedev has openly questioned the future of the US dollar as the global currency, proposing both a "supranational" currency and the possibility of Ruble-Yuan swaps, a position he broached to western media and as host to an international economic forum in St. Petersburg over the weekend.  And the debate has moved beyond the Kremlin in recent days with IMF First Deputy Managing Director John Lipsky saying that it's possible to take such a "revolutionary" step over time and World Bank President Robert Zoellick saying that China may diversify its holdings.

Here it's important to note that both Lipsky and Zoellick take mild stances, yet the possibility of a replacement currency to the USD is a real one. Yet if we stick with Medvedev's proposition it's clear that even if he doesn't have a firm idea of what a supranational currency would consist of, he does understand  the value of using explicit soft power to heighten existing tensions between the US and China over the value of China's US debt holdings, especially following Geithner's failed trip to win over The Client, China.

But who is Russia hoping will benefit?

Ironically it's Russia who stands to benefit from the current devaluation of the USD, but not by issuing a new currency it can exchange in.  Commodity-rich Russia is a major producer of world's oil supply, much of which is sold and traded in US dollars. As any commodity trader would tell you: when the base currency devalues, more dollars chase the commodity, lifting the price. While we don't discount other factors that play into the price of oil, including supply and geo-political risk factors, at a very basic level, it appears antithetical for Russia to want to replace the USD in the immediate term, as Russia benefits from the Reflation trade!

The chart below comparing the US dollar index versus the price of front month contracts of light sweet crude over ten years demonstrates a pretty accurate picture of the reflation trade. The correlation coefficient (R squared) is -0.8, signifying a high negative correlation between the USD and oil.   Interestingly the more that Medvedev continues to talk down the dollar, the more likely it will continue to plunge = advantage Russia.

Matthew Hedrick

Muscle Flexed? But How Much Muscle? - russ2


Chinese Inflation data was positive; the chatter about trade and production data is even more bullish

CPI data released last evening showed that Chinese consumer prices declined on a year-over-year basis for the fourth consecutive month in May, registering at -1.4%. Producer prices for May arrived at -7.2% Y/Y,  the lowest Y/Y level in decades. With the assumption that rising energy commodity price levels will taper any threat of deflation, the market reaction to the data was uniformly positive.

Last night's rally in Shanghai had less to do with today's data and  more to do with May import and export data scheduled for release by the NBS tomorrow, as well as production numbers to be released on June 11th.  Somewhat absurdly, last night Ming Pao Daily reported that industrial output grew 8.9% y/y in May based on "unspecified sources". That's right, Chinese economic data "whisper numbers" are now driving momentum in Shanghai.

With mounting anecdotal evidence from shipping sources and base metal exporters suggest that the initial flurry of activity after the initial rush of credit stimulus in January and February may be contracting somewhat, not to mention the dearth of reliable data from Central and Western production and transport hubs,  we are frankly suspicious of any and all bullish rumors being promoted by anyone no matter how well placed their sources. 

We are long Chinese equities via the close end fund CAF , and remain bullish on the recovery process there despite peripheral negative data points creeping  into the margin from the credit and commodity markets. There is an old adage, "buy on rumors,  sell on news" - pay close attention to when we make changes in our portfolio in case we decide to heed it.


Andrew Barber




Seasonality Matters

We had two questions this afternoon about the importance of these weekly apparel sales numbers as it relates to seasonality. Good question. We're just coming off the seasonally weakest 5-week period of the year. The period following back-to-school is a close second. Numbers start to ramp more meaningfully in the week we're in right now. This is when weekly datapoints matter more. Thanks for the questions. Keep 'em coming...


Seasonality Matters - SportScan Seasonality 6 09 2


Casey Flavin


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Running The Numbers On Obama And Autos


We were bemused by the Obama administration's choice to run the dismantling of General Motors: Brian Deese.  Mr. Deese, based on his resume, is a 31-year old drop out of Yale Law School (he dropped out to join the Clinton campaign) who was an undergraduate major in political science, and has no ostensible automotive industry, economic, or business analysis experience.  According to a New York Times article on June 1, 2009:

"Every time Mr. Deese ran the numbers on G.M. and Chrysler, he came back with the now-obvious conclusion that neither was a viable business."

Now we are all about running the numbers, we have a ~20 person research team that "runs the numbers" daily, on markets, industries, and companies.  We think we are good at it based on years of experience at many large investment banks, hedge funds, and private equity firms, with educations from some of the top business schools in the world.  This is not to say that conventional experience is always the most appropriate, or that the Research Edge team is better than anyone else, but rather to suggest that having a 31-year old with no analytical experience "run the numbers" on one of the most complicated industries globally is a little disconcerting.

We don't engage in partisan politics in the office or in our analysis, because that is just a loser's strategy, but it is important to objectively analyze decisions made by our elected leaders, so we can have a view of what they might mean for future decisions and/or approval ratings.  Will Wilkinson from the Cato Institute wrote the following about having Deese in the driver's seat (excuse the pun):

"A fresh-faced 31-year-old, Deese dropped out of Yale Law School last year to work for Hillary Clinton's presidential campaign. When Clinton sank, Deese skipped over to the winning ship, impressed everybody who counts, and landed a desk in the White House. The big guns like Larry Summers and Christina Romer are busy cooking up hilariously sunny budget projections while trying to look like they're keeping the economy from collapsing. So Deese, armed with an undergrad degree in political science, finds the GM portfolio and the fate of millions in his hands.

Some are grumbling about Deese's lack of relevant experience. (He has driven a car and once slept in the parking lot of a GM plant!) But the real issue isn't Deese's résumé. The real issue is why anyone should have the power to "rewrite the rules of American capitalism." Unlike Deese, treasury secretaries Paulson and Geithner are men of experience. But what kind of experience could justify the immense, arbitrary power they've exercised in the wake of the financial meltdown? Experience centrally planning the global economy?"

The point is not suggest that Wilkinson, from the right leaning Cato Institute, is correct in his assessment of Deese, but rather that appointing people like Deese to such positions is going to have serious implications as it relates to the credibility of the leader's decision making process.

So far this decision to put a person like Deese in charge of the decision making process behind one of the largest bankruptcies in U.S. history does not seem to be lost on the electorate when it comes to their analysis of the administration's economic decision making wherewithal.  A recent Rasmussen Poll reported that more voters trust the Republicans now than the Democrats by a margin of 45 - 39 when it comes to the economy.  According to Scott Rasmussen, "this is the first time in over two years of polling that the GOP has held the advantage on this issue."   On healthcare, another key issue, the Democrats are also losing steam.  In May they had a 18 point advantage over Republicans and only have a 10 point lead now.

The Democrats appear to be in a position where they have the wrong man running the numbers, or at least an inexperienced one, and therefore the numbers are starting to run against them.  That said, President Obama, more broadly speaking, seems to be retaining his popularity.   On the Rasmussen Daily Approval Index, President Obama is back up to +9, which is at the high end of the range of where he has been for the last three months, despite the meaningful shift in the key issue polls, healthcare and the economy, that are noted above.

We've been expecting President Obama's numbers to weaken for months and they are impressively resilient.  To the extent that Obama and his advisors attribute this resilience to the recovery of the stock market, there will likely be implications in terms of fiscal policy in the coming months that may relate to a continued path of re-flation, or as we are calling it, "Burning The Buck."

Daryl G. Jones
Managing Director


If this trend continues restaurants stocks are not going up!





When we started doing the analysis on this last week our opening line was going to be, "We agree that Starwood looks cheap on a Net Asset Value basis".  Given the run in the stock and the SHO default on Monday (see our 06/09/09 post, "A PROACTIVE DEFAULT"), that statement is probably no longer accurate.  It appears the market is placing a $100-125k per key valuation on HOT's owned and joint venture portfolio.  Other analysts are making the claim that the rooms are worth $150k or more, based on pre-2009 transactions, I guess.  Either way, our point is that NAV is somewhat of a meaningless valuation metric, especially in this environment.


For HOT, most people conveniently ignore the fact that of the 69 hotels in this bucket, not all are wholly owned.  The company says the "majority" of the 22,800 rooms are owned.  We know that they also have $90MM of lease associated expenses in 2009.  In any case, without knowing the details on what's actually owned vs leased and joint venture, any per key valuation we come up with will look artificially too low. 


There are other issues with using NAV.  Since the collapse of the financing markets last fall, there have been very few transactions for assets that are comparable to HOT's "owned" portfolio. Most of the transactions that have occurred are limited service, small, single assets under $10MM in size.  Many of the traditional "NAV" buyers (REITs, PE funds like Blackstone & Colony) are notably absent from the market.  The new buyers that have emerged are distressed investors, and guess what?  These guys only care about cash flow, not a theoretical per key valuation. NAV was a relevant valuation metric in 2006 & 2007 because there were a lot of transactions.  A liquid market doesn't exist right now, especially for large assets, let alone a $2-3BN portfolio and therefore NAV is simply not relevant.

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