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03 AUGUST 2009



We’ve seen forward earnings growth expectations go from 6-11% over the past month.  Yes the group has run meaningfully. But 11 to 20% over 3 months is not out of the question. Do you want to be short into that? Be my guest.


For those of you that have never seen the parody about the 1970s fictional metal band, go to YouTube and search for ‘these go to 11.’  It kind of speaks for itself.  Unlike Nigel Tufnel, I am not focused right now on modified Marshall amps, but on consensus earnings growth expectations for the next 12-months.


Why? Well, because it matters more than ever with a 15% run in the MVR vs. a 10% run in the market over the last month. Is the outperformance justified? My opinion is that it definitely is. Math does not lie. We’re seeing the rate of earnings growth accelerate into the back half. We can all say ‘yeah the market already knows this, and the group is trading at a 15x p/e.’  But the reality is that we’ve seen forward earnings growth expectations go from 6% to 11% over the past month.  Yes, the market knows this, but here’s a novel thought… With excess SG&A cuts, ridiculously easy comps, and fall/holiday ordering plans down in the double digit range (setting up for firm inventory position and higher GM%), can forward growth expectations pierce 20% within 3 months?  The answer is Yes.


These go to 20? 


That, my friends, is not yet in the stocks today. Do not get me wrong. McGough is not a blind bull oblivious to the factors impacting consumer spending (and retrenchment) over the next 2-3 years. But we’ve got more good news to come from the EPS picture before any big downside calls on the group make sense to me.

RETAIL FIRST LOOK: "THESE GO TO 11" - Conensus EPS NTM chart short term

RETAIL FIRST LOOK: "THESE GO TO 11" - 90 Day stock revisions long term



Some Notable Call Outs

- In a move sure to challenge Wal-Mart’s low-price leadership, Kmart is selling a 24-count box of Crayola Crayons for $0.20 this back to school season. Kmart’s price is 20% below Wal-Mart’s price of $0.25! If you’re not into the buying the iconic yellow and green box, then head to Office Max for a box of Schoolio von Hulio crayons for $0.01 (yes, a penny). This certainly seems like the making of “crayon wars” to me.


- While many bankruptcy cases in the retail sector have resulted in liquidation, there are a few exceptions. On Friday, after just four months of Chapter 11 protection, Sportsman’s Warehouse announced the court approved the company’s reorganization plan. The outdoor retailer’s emergence from bankruptcy is a result of a capital infusion from private equity firm, Seidler Equity Partners. Interestingly, Cabela’s mentioned last week that it was gaining market share from a competitor operating under Chapter 11.


- Over the past few weeks, I’ve highlighted several companies that are experimenting and using social media sites/Twitter to promote brands and to connect directly with target consumers. However, the power of the Internet and “crowdsourcing” is now being used in a new way. Let me draw your attention to Groupon, a marketing company uses the power of the masses on the Internet. Groupon sends out daily e-mails with a deal that offers a product or service at a discounted price. The business relies on the collective purchasing power of a group of interested consumers, hence the name Groupon. Participating merchants pay a commission, which makes the service a viable business at a time when so many online ideas are interesting but not profitable. For the deal of the day to work, a minimum number of people have to buy it. That “crowdsourcing” encourages subscribers to tell their friends, family and co-workers. As word spreads, the selected business gains exposure. While the service currently operates in about 14 cities, expect the “buzz” on this one to grow quickly. After all, the viral nature of the Internet and the consumers’ appetite for a deal could not intersect at a better time than now.



- Vendors can perhaps breathe a little easier over CIT - The group’s profitable factoring business, Trade Finance, on Friday got a boost when $1 billion was earmarked to fund the operation, a move aimed at proving to vendors that CIT has the money to fund clients’ needs.  In a letter to clients, John Daly, president of Trade Finance, wrote that “CIT Trade Finance is one of the nation’s oldest providers of factoring and financing services. The companies that have placed their confidence in us — our clients — range from family-owned and -operated manufacturers to global publicly traded corporations. We believe we have sufficient liquidity to meet our obligations and our clients’ needs while our parent company implements its restructuring plan.” CIT Trade Finance “remains open for business. We are actively reaching out to and working with our clients to ensure they continue to access our services needed to run their business. Credit is being checked, invoices are being collected and funds are being remitted,” Daly emphasized. <wwd.com/business-news>

- Vietnam apparel industry to improve working conditions - Better Work Vietnam has begun offering new services to apparel enterprises in Vietnam’s southern provinces, helping them improve working conditions for more than 700,000 workers and boost the competitiveness. Tara Rangarajan, Program Manager of Better Work Vietnam, said: "Better Work Vietnam looks forward to working as partners with Vietnamese apparel enterprises, workers, and the Government of Vietnam to make sustainable improvements in labor conditions. The goal of our work is to find practical solutions that will decrease costs for project participants, enhance factory competitiveness in international markets, and reduce poverty among Vietnamese apparel workers, their families, and communities". Initially targeting apparel factories with more than 200 workers located in Ho Chi Minh City and neighboring provinces," said Nguyen Van Tien, chief labor inspectorate of MoLISA and chair of Better Work Vietnam’s Project Advisory Committee. <fashionnetasia.com>

- British retail organization giants combine - The British Fashion Council (BFC) is the latest organization to become a member of the trade association UK Fashion and Textile Association(UKFT). "UKFT’s aim is to be the ‘single voice’ of the fashion and textile industry, representing businesses of all sizes – whether they be a small design-led company or a multi-million pound organization. Having the BFC on board adds further depth on the design side and enables us to work more closely on initiatives that will help designers be better placed to develop sales both in the UK and overseas and receive first-hand guidance on national and international issues that will affect them," said Peter Lucas, chairman, UKFT. Harold Tillman, chairman, BFC, added: "The BFC promotes leading British fashion designers in a global market, supports emerging talent to showcase and develop their businesses and organizes events, including London Fashion Week and the British Fashion Awards, to support these goals and strengthen the UK’s reputation for developing design excellence. <fashionnetasia.com>

- Annual report of sport participation - The annual report is out from the Sporting Goods Manufacturers Association. The report details participation trends in sports and provides insight into what sports are growing and what sports are hurting. Here are some interesting figures: (1)  The biggest increase in participation in team sports in 2008 was ultimate Frisbee, up 20.8%. (2) Hunting and target shooting with a handgun was up 10.7% and 13.9%, respectively, this year. (3)  There were 17 million people playing table tennis last year, a 15.5% increase from 2007. (4)  The worst decline in participation in team sports in 2008 was roller hockey, down 15.4%. (5)  Last year, 15% of cheerleaders and 29% of gymnasts were male. (6)  Last year, 6% of tackle football players and 18% of paintball players were female. (7)  Archery participation was up 7.7 percent. (8)  Skateboarding participation was down 7.4% in 2008 and is now down 20.8% since 2000. (9) Interest in the UFC might be skyrocketing, but mixed martial arts participation actually went don 1.4% last year. That has nothing on boxing, which is down 42.3% as compared to participation in the sport eight years ago. (10) Lacrosse has long been called the fastest growing sport in America, as it has grown 117% since 2000. Still, only 1.9 million people played lacrosse in 2008 compared to something like slow pitch softball, which had 9.8 million participants. <cnbc.com>

- Footwear companies saw shares plummet in 2008, so for many in 2009, there’s been nowhere to go but up - But even as shares grew in percentage, few firms saw their stock prices return to the levels seen at the beginning of last year. Here’s how the retailers tracked by Footwear News stacked up in the first half of 2009, ranked by percentage of change: Dillards 133%, Sears Holdings Corp. 72%, TJX Cos. 54%, Nordstrom Inc. 49%, JC Penny 45%, Bakers Footwear Group 39%, Foot Locker 39%, Collective Brands 24%, Shoe Carnival 23%, Dick's Sporting Goods 22%. <wwd.com/footwear-news>

- German Retail Sales Unexpectedly Slump for Second Month on Unemployment  - Retail sales in Germany, Europe’s largest economy, unexpectedly dropped for a second month in June as rising unemployment prompted consumers to trim spending. <bloomberg.com>

 - A Gap and Levi Strauss jean factory in Africa is illegally dumping chemicals - A factory that makes jeans for Gap and Levi Strauss is illegally dumping chemical waste in a river and two unsecured tips where it poses a hazard to children. The scandal was uncovered by a Sunday Times investigation into pollution caused by a plant in Lesotho, southern Africa, which supplies denim to the two companies. Dark blue effluent from the factory of Nien Hsing, a Taiwanese firm, was pouring into a river from which people draw water for cooking and bathing. The firm was also dumping needles, razors and harmful chemicals such as caustic soda at municipal dumps that have attracted child rag-pickers as young as five in search of cloth fragments to sell for fuel. Many of the children, who work for up to 10 hours a day, complain of breathing difficulties, weeping eyes and rashes. <theretailbulletin.com/news>

- Van Heusen looks to expand retail presence in India - Apparel brand Van Heusen from the Madura Garments group is looking to implement an extensive retail expansion plan by opening 25 exclusive stores this year and 65 more stores by the end of financial year 2012. The brand wants to have a pan-India presence and reach 50 tier-I and tier-II cities. The average size of the stores will be 200 square feet and the flagship stores will cover 7,000 square feet. The company is planning most of its stores on high street locations because it does not want to be dependent on malls. The company will have stores in four different formats – men, women, V Dot for youngsters and a combination of all of these.  <indiaretailing.com>

- Private label beauty manufacturer purchases large stake in Lucy B Cosmetics - Absolute Amenities Inc., a Riverside, Calif.-based private-label beauty manufacturer headed by Jackie Applebaum, has purchased a stake in Lucy B Cosmetics for an undisclosed sum. Baldock and Sacchi are remaining with the brand and are creative directors as well as president and vice president, respectively. “The creative person really has to be free to be creative, and then there is the other side of how do you make the business run,” said Applebaum. “You can’t build a house unless you have a strong foundation. That is my job to build the foundation. It’s Lucy’s job to build the beautiful house.” Applebaum said she could provide Lucy B Cosmetics with the back end and financing needed to grow the brand beyond its current distribution of roughly 270 U.S. doors, including Anthropologie and QVC. She added the brand’s focus on specialty stores wouldn’t change and estimated it would generate $3 million in retail sales in the first year of her involvement. The Lucy B Cosmetics assortment contains 22 stockkeeping units that use ingredients from Australian flowers and colorful graphics evocative of the Australian landscape. <wwd.com/business-news>

- Sport Supply Group, Inc. said it has acquired certain team sports assets from Har-Bell Athletic Goods of Springfield, MO - Bryan Tucker, Owner of Har-Bell, will be employed by SSG as will his existing sales force in Missouri. Sport Supply did not assume any liabilities in the transaction. Terms were not disclosed. <sportsonesource.com>

- Highline United making progress in footwear - Executives at Highline United may have stepped into the footwear arena quietly with soft launches in 2008, but they are now gearing up to draw major attention to their portfolio of brands. The New York-based firm, whose brand roster includes United Nude, Ash and Luxury Rebel, along with licensing agreements with Miss Sixty and Tracy Reese, formally debuted in June with a launch party at its 7,600-sq.-ft. Chelsea showroom and is making a concentrated push to attract department stores and better independents with its mix of bridge women’s footwear.“June was our coming out party,” said Highline United President Matt Joyce, who has held top sales and merchandising roles at Nordstrom, Via Spiga, Kenneth Cole, Nine West and Steve Madden. “We wanted to make sure we brought in the product correctly, are taking care of our customers and have [footwear] that is viable for the future.”The company, named after New York’s newest city park, an elevated and out-of-service railway called the High Line, began showing capsule collections at last summer’s FFANY and WSA shows and has spent the last year building a mix of brands targeted at retailers looking for bridge-priced footwear that has been designed and sourced globally.“We have people in Italy, France, China, the U.K. and Russia,” Joyce said. “It’s a global mentality [and] it gives us the opportunity to get a broader view rather than just see what’s happening in [one place].” Early goals for the company, said VP of sales Scott Kaminsky, include building each of the brands and positioning the firm to become a long-term and dominant player in the industry. <wwd.com/footwear-news>






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. 

Early Look

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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

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%