Camp Roubini

“Charlie and I believe that when you find information that contradicts your existing beliefs, you’ve got a special obligation to look at it – and quickly”
-Warren Buffett
Other than consensus starting to finally become bullish enough, I really don’t see anything in global macro this morning that should stop the upward momentum of anything priced in US Dollars.  We have new highs, a new month, and a New Reality.
After trading down for the 4th consecutive week, the US Dollar is down again this morning, hitting new YTD lows. As we roll out the backward-looking barrels of Alan Greenspan and Larry Summers economic forecasts, the manic media will finally come to realize that they perpetuated one of the most ridiculous narrative fallacies since “Chindia” – the Greatest Depression. The only depression I saw was that of Wall Streeters who missed one year’s bonus.
As Barclays and HSBC print big league profit growth results this morning, you can bet your Madoff that the bankers are going to get paid. The New Reality of Burning the Buck remains: as the US government devalues her credibility, her currency will continue to crater. As the Buck Burns, three core constituencies get paid: Debtors, Bankers, and Politicians. If you’re a Chinese holder of anything US Dollar denominated or an American commoner who saved, shame on you.
With the SP500 lassoing all short sellers of Camp Roubini/Rosenberg, we’re at least seeing one of these one-way economic prognosticators throw in his towel this morning. Nouriel Roubini is long term bullish on world travel. He loves helicopters and flying the friendly CNBC skies of fictional storytelling. Overnight he has made a mea culpa of sorts while speaking in Australia – he is now bullish of commodities!
AFTER the price of copper has moved to +92% higher for the year-to-date (trading at new YTD highs alongside the Chinese stock market this morning), and both oil and gold prices are busting another move to the upside, Doctor Doom is taking a ride on the bullish side! Stick to your new day job of selling market crash books my man – there is this thing called timing that we global market operators care about – professors shouldn’t manage the public’s daily marked-to-market risk.
As the US Dollar hits new YTD lows at $78.14 this morning, the US stock market futures are setting up to register another YTD high. This pre-open setup makes perfect sense to me. After seeing the SP500 close +7.4% for the month of July, Rosenberg bears are finding information on the Q2 earnings season that contradicts their existing beliefs.
Don’t underestimate how many people are out there who were not allowed to be bullish into these earnings numbers. Now that all of those short sellers have been put out to pasture, all they can do is whine about “valuation.” Being short “valuation” in a market that’s building price momentum alongside sequentially accelerating volume and expanding positive breadth, is something we can leave up to the brave. Yes, Mr. Abelson – that’s you again.
Abelson hasn’t mentioned his China bearish thesis in quite some time. However, this weekend he did highlight David Rosenberg’s thoughts on valuation mind you… and at the end of the day, without these guys ignoring their special obligation to look at the facts, this latest rally in everything priced in Dollars wouldn’t have this lasting kick.
Here are 3 global economic facts to add to your existing beliefs this morning:
1.      China’s manufacturing report (PMI) made another new high for July at 53

2.      German Retail Sales improved again in June to -1.6% versus -2.9% last month

3.      UK manufacturing PMI (July) moved into the economic expansion zone with a reading of 51 versus 47 reported in June

I know, I know… some of these numbers incorporate that silly stuff we math guys call derivatives. When rates of change improve, we do recognize them for what it they are – positive relative to expectations. At the end of the day, this investment process is agnostic. If the facts, on the margin, change to the negative… we’ll “have a special obligation to look at it – and quickly.”
My immediate term TRADE upside target for the SP500 is 998 and I have downside support at 975.
Best of luck out there this week,


CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

EWG – iShares Germany We bought Germany on 7/28 on a pullback in the etf. Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last three months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy.

QQQQ – PowerShares NASDAQ 100 With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don’t need as much financial leverage.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP– iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD – SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.

UUP – U.S. Dollar Index
With a +1% move in the USD on 7/29 we shorted the greenback. This is how you earn a return on the socialization of the US Financial system’s risk. We believe that the US Dollar is a leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the US dollar.

XLI – SPDR IndustrialsWe don’t want to be long financial leverage, which is baked into Industrials.

EWI – iShares ItalyItalian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs, at best, that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don’t want to be long of.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.

EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY – SPDR Consumer DiscretionaryAs Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9 and again on 7/22.

SHY – iShares 1-3 Year Treasury Bonds – If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.



Las Vegas Sands Corp has paid US$42.5 million to settle a dispute with three Macau and US businessmen, Jose Cheong Vai-chi, Clive Jones, and Darryl Turok, who had claimed credit for helping the casino operator gain its Macau license in 2002.  The figure was revealed yesterday as part of the company’s US$178.26 million second-quarter loss.  The settlement was reached in June, just before a Nevada jury was to initiate a public hearing on the lawsuit.

The payment, along with a US$151.18 million write-down on the aborted sale of a shopping center in Las Vegas, contributed to Las Vegas Sands’ sixth consecutive quarterly loss. 



In LVS’ quest for cash, the company is marketing the sale of convertible bonds in attempt to raise US$400 million in short-term funding to withstand a cash shortfall and also to potentially restart construction of its stalled resort in Macau.  The package consists of three sets of bonds: A 3-year bond paying 10% annually, a 5-year bond paying 13% annually, and a 10-year bond paying 16% annually.

The bond sale will be linked to the plan to raise US$2.5 billion in a Hong Kong IPO of its Macau operations early in 2010.  Holders of the convertible bonds would have the option to swap the loans for shares in the newly listed company.  The risk of lending to LVS is underlined by the considerable debt the company has already taken on and the impending tightening of debt covenants – the debt to earnings ceiling is lowering to 3.5x.



The total number of H1N1 cases reported in Macau exceeded 200 yesterday.  Ten newly confirmed cases from Saturday to Sunday afternoon took the number to 204. 


THE WEEK AHEAD: August 3-9

We have a full plate of critical economic data on deck for the week of August 3rd. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.   


  • US: ISM manufacturing and Manufacturing Price index data for July will arrive on Monday, as will July BAE Domestic Auto sales and June Construction Spending.

  • EURPOPE: German Retail sales are scheduled for release early Monday morning, as are July Manufacturing PMI data for Switzerland, Italy, France, Germany, UK and the Eurozone in aggregate.  

  • ASIA: On Sunday evening South Korean July Trade data will be released and, after the strong rebound in June industrial production released on Friday, we will be watching for more confirmation of recovering strength there (CPI and FX reserve data are scheduled for Monday).  China July CLSA PMI will be released on Tuesday evening. We initiated a new long CAF position in our portfolio on Friday and, with anecdotal reports of some marginal declines in demand for commodity imports, we will be intensely focused on this data point as a signal.  India trade data for June will be released on Monday; we remain bearish on long term prospects there but are anxious to see if imports are showing signs of stimulus driven demand for raw materials. Singapore July PMI is slated for released on Monday Morning.  

 TUESDAY August 4

  • US: BEA June Personal Income/PCE data will be released on Tuesday morning as will weekly ICSC and Redbook figures. Weekly ABC Consumer Comfort index levels are scheduled for 5PM.  

  • EUROPE:  Eurozone PPI data for June will be released on Tuesday morning.

  • ASIA: The RBA board will meet on Tuesday morning; ABS Balance on Goods and Services data for June will be released in the evening. Although we closed our long position in Australian equities last week it’s no secret that we are big fans of Glen Stevens and expect that he will act proactively despite any political pressure to keep rates low.


  • US: Census Bureau June Factory Orders and Factory Inventory data will be released on Wednesday morning as will the ISM Non-Manufacturing Index for July. Weekly MBA mortgage application and EIA Fuel Stock releases are also on the schedule for the day.

  • EUROPE: Eurozone June Retail Sales data released on Wednesday morning.  July Services PMI for Italy, France, Germany and the Eurozone in aggregate are also slated for released that morning along with the final Eurozone PMI Composite.  The UK has a slew of economic data releases scheduled, including NIESR GDP Estimates, Manufacturing and Industrial Production data for June and HBOS housing data. We still regard the UK as one of the weak hands at the table in Europe and will be watching closely for any marginal changes.

  • ASIA: Taiwan CPI for July will be released on Wednesday morning, as will FX reserves.  Australian Employment data for July will be released in the evening.  


  • US: As we said in last Thursday’s note “When Bad Is Good!” any increase in Initial Claims will add more pressure to the US Dollar and support stock and commodity prices (at time of writing, we are short the dollar via UUP and long gold in our portfolio). Consensus estimated for this week’s reading is a 10K decline from last week’s 584K new claims –we’ll see.

  • EUROPE:  German BBK Factory Orders for June and Italian June Industrial Production will be released on Thursday morning. We are long German equities and short Italian equities in our portfolio and expect German orders to show signs of recovery as Chinese led global industrial demand improvement starts to be felt in Europe’s strongest economy. The ECB has a rate announcement scheduled for 7:45 AM.

  • ASIA: On Thursday evening, the RBA will release a monetary statement as a follow up to Monday’s board meeting. Indian Weekly Wholesale Inflation data is released on Thursdays. With some core component prices rising in recent weeks, we will be watching for any marginal increase from last week’s -1.54% WPI reading.

FRIDAY August 7

  • US: July Payroll data and Unemployment Rate will be released at 8:30AM. The Federal Reserve Consumer credit measure for June will be released at 3PM.

  • EUROPE: Friday’s schedule will continue to test our long Germany/short Italy portfolio thesis with German June Trade and Production data and preliminary Italian Q2 GDP due out on Friday morning.  UK PPI and French Trade data are also on deck.

  • ASIA: We will be pouring through Taiwanese July Export data on Friday morning looking for more signals of increasing demand for consumer electronics and from China. On Sunday, Japanese June Machinery Orders, July M2 and Bank Loan data will be released. Chinese CPI and PPI readings for July are also scheduled for Sunday evening.




We’re not as concerned as most with LVS’s covenant situation for 2009. LVS will cross that hurdle but it will come at a price.


At the end of the 2Q09, LVS was in compliance with its US and Macau credit facility covenants, albeit with little cushion.  As wrote about extensively in “LVS: CREDIT OPTIONS AND OUTCOMES” on February 24, 2009, the covenant levels step down in 3Q09 for both the US and the Macau credit facilities, and continue to step down further in 2010. This is why investors are concerned.

Macau Facility

We believe that LVS will be able to get an amendment in Macau, but at a price and with a “package of goodies” to the lender to boot.  Given the low leverage on the Macau facility and the precedent of recent deals, we think that LVS should secure a fairly favorable deal.  If only Sheldon could deliver on his promise to sell some non income producing assets, the cost would be limited.  However, assets sales are unlikely in this market at the desired prices.  An IPO cannot be floated until Q4 at the earliest but a definitive plan to IPO a minority stake in Macau would give the banks comfort and allow Sheldon still to restart construction on sites 5 & 6 in Macau.  As we wrote about in “LVS: CHINA FORCING THE ISSUE”, Beijing may be twisting arms to get LVS the financing support it needs because they also want to see construction resume by year end.

LVS: A DETAILED CREDIT ANALYSIS - lvs macau covenant

In Macau, at the end of 2Q09, leverage stood at 3.8x versus a 4.0x covenant.  There was $3.2BN of gross debt outstanding, and TTM EBITDA, for covenant compliance purposes, was $827MM.  LVS paid down about $235MM of debt at the Macau subsidiary this quarter.  As a reminder, the leverage test takes into account gross debt vs net debt in the US.  At the end of the quarter, LVS had an EBITDA cushion of $35MM and a debt cushion of $138MM. Of course they also had $473MM of cash on hand at the Macau subsidiary, so real liquidity is closer to $600MM in Macau.  In the 3Q09, the maximum leverage covenant steps down to 3.5x, which means that at $3.17BN of debt, LVS must have TTM EBITDA of $906MM to “clear” the covenant.  We estimate that the TTM EBITDA will be $847MM, presenting a $60MM EBITDA problem for LVS.  Alternatively, LVS can repay $210MM of debt in Macau, which they can do given the cash on hand.   This may buy LVS some time, but the maximum permitted covenant steps down again in 2010 to 3.0x, meaning that on $3BN of debt LVS needs to generate over $1BN of TTM EBITDA. 

With no new properties opening and additional competition coming from SJM (see “OCEANUS TO SINK SANDS MACAU” published on June 28, 2009) and WYNN, we are very skeptical that cost cuts alone will grow EBITDA by 20%.

U.S. Facility

In the US, leverage was 6.8x versus a 7.0x covenant (net debt was $3.1BN and TTM EBITDA was $452MM).  At the end of the quarter, LVS had a $16MM EBITDA cushion and $110MM debt cushion against its covenant.  Next quarter, the maximum permitted leverage covenant steps down to 6.5x.  In 2010, the covenant steps down to 5.5x and continues to step down to 5.0x in 2011 through maturity.  There’s no question that when the agreement was originally crafted, Sheldon was relying on his “unique fundamental business plan by selling off our retail and our apartments and reducing or eliminating all our debt.”  Unfortunately, for Sheldon and other real estate investors, that game of arbitrage worked well until the music stopped and suddenly there were no more buyers at “exaggerated prices”... leaving developers holding the bag. 

LVS: A DETAILED CREDIT ANALYSIS - us credit facility covenant

To that end, we’re projecting TTM EBITDA improving to $490MM (as a reminder, Vegas suffered from very bad hold in 3Q08 and there will be pro-forma treatment for Bethlehem) and net debt of $3.3BN at the US subsidiary level, amounting to leverage of 6.7x versus a 6.5x covenant.

Since the breach is small, Sheldon could cure it by repurchasing up to $800MM LVS’s US bank debt. However, this strategy was significantly deleveraging when LVS’s bank debt was trading at 50% discount to par.  Now that the credit markets have rallied, this strategy will be much less impactful with bank debt trading at 80 cents on the dollar.

We noticed that LVS pulled back (“deferred”) on capital expenditures this quarter, which should have been ramping into the opening of Singapore.  If LVS plans to open Singapore on time, capex will need to ramp up and use some of the $2.6BN of cash that they are currently sitting on.  2010 is the year we are more concerned as the covenant issue gets worse 2010 with the step down.   It will be tough to grow EBITDA with all the new high end product coming to Vegas next year (see “PLENTY OF ROOMS AVAILABLE AT THE STRIP INN IN 2010” published on July 17, 2009).

Chart Of The Day, Month, and Year: Burning The Buck

Andrew Barber and I aren’t smart enough to ignore the simple reality of this chart, so we’ll keep flashing it to you when it makes lower-lows.


Today the US Dollar is down another full -1.3% (yes, for the said world reserve currency that’s a big one-day move!). The buck is making another run at breaking down through the critical level of $78.11 support. Since March, the USD dollar has lost over 12% of its value and the US stock market (priced in Dollars) has reflated to the tune of +48%! As the US Dollar makes new YTD lows, the US stock market is testing new YTD highs.


As Bernanke stares in the rear-view and his stacks of books about the 1930’s, everyone who is looking forward is starting to understand the compromise of America’s conflicts. If America’s financial system is based on an outlook of a man who missed both the crash and the recovery, why trust her currency right here and now?


Below we have refreshed and outlined our quantitative view of the US Dollar. On all three durations (TRADE, TREND, and TAIL), there is one conclusion – the Buck Is Burning. I don’t know what else to say, so I’ll stop writing here.


Keith R. McCullough
Chief Executive Officer


Chart Of The Day, Month, and Year: Burning The Buck - a1

PSS: WMT The Share Donor

Here’s another theme with meaningful impact on the footwear space, which I think helps Payless over the next two years. Wal*Mart has covertly indicated over the past month that it is increasingly downsizing its presence in the footwear space to concentrate on more profitable offerings.


Here’s the math… Wal*Mart did $306bn in the US last year. About 11% of that was apparel, footwear, and accessories. Only about 100bps-200bps was driven by footwear, which suggests about $5bn annually. For what it’s worth, Zappos generated $1bn in gross sales last year. Yes, Zappos is bigger than one might think.


But where Zappos and Wal*Mart don’t compare is on price point – where Zappos is over 2x the $9.98 average price at WMT.  Who does compete? You guessed it…Payless. Check out the table below. It shows that a quarter of Payless stores have a Wal*Mart within a mile radius. 43% have a WMT within 5 miles.


Let’s say Wal*Mart scales down footwear to 1% of sales over 3 years as it cycles through its remodel process. That suggests over $2bn is up for grabs. If I take it a step further and assume that 38% is within reach (within a 3-mile radius), then that’s $760mm. If PSS grabs only 10% of that, it would be a 3% comp alone. At a 30% incremental margin, we’re talking $0.23 per share. That’s off a base of $1.06 last year.


Talk about leverage…


 PSS: WMT The Share Donor - 7 31 2009 10 43 21 AM

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