The stock has blown through normal valuation constraints but the catalysts remain generally positive.




1.  Macau is ripping

  • up 18% off a 40% August comp
  • up 60% MTD in September

2.  October should be huge in Macau

  • 60th anniversary of founding of People’s Republic of China is October
  • 9 holiday days this October

3.  Earnings are going higher – We are projecting $295 million in company EBITDAR for Q3 vs the Street at $250 million

4.  Easy monthly comparisons

5.  Stimulus and liquidity boosting VIP

6.  Visa restrictions were loosened

7.  On track for IPO

  • Likely a high multiple 12-14x
  • Resolution of credit issues

8.  Macau is only gaming market with excess demand

  • Beijing controls the visitation spigot but wants growth
  • The high margin Mass business should grow every year for a long time
  • Mass is stable and predictable month to month

9.  Singapore opening in the spring

  • Investors may get excited into the opening
  • Could lead to a lower gaming tax rate in Macau

10.  Easier Las Vegas comparisons




1.  The “rip” is mostly lower margin VIP

  • The Venetian and Sands are primarily Mass market properties
  • LVS lost 5-6% of market share in September MTD versus August

2.  All good things come to an end

3.  The numbers will be higher for Q3 but some of that is hold %.  Both the Venetian and Sands are holding around 75bps above the normal range of 2.85-3.00%

4.  VIP comps are easy, Mass less so

  • Mass be in growth mode too but there are huge supply hurdles on the Mass side
  • 25% Mass table supply growth from December 2009 to May 2010
  • Sands will face a big competitor in Oceanus beginning in late December/early January.  The average analyst has Sands EBITDA up significantly in 2010 despite a new, direct competitor with a significant locational advantage

5.  LVS management not getting too excited about VIP given the volatility and tendency of this segment to “bubble”

6.  Beijing can always tighten visa restrictions again and will do so to prevent “overheating”.  This is good and bad.  Investors shouldn’t get too excited about near term surges or declines

7.  Probably cannot actually float the IPO until November.  Multiples could change in the interim

8.  Mr. Bear cannot really debate this one

9.  A lot of risk associated with such a large capital investment

  • Regulatory hurdles will keep junket involvement low – slows the ramp
  • Will cannibalize Macau operations – VIP tax rate is 30 percentage points lower
  • Will open after Genting
  • Can one really put a 14x multiple (as some on the sell-side have done) on Singapore EBITDA given the risks?  The property hasn’t even opened up yet!

10.  True, but is business really getting better in Las Vegas?  We have not seen any evidence of that




Catalysts and momentum drive LVS, MPEL, and WYNN.  Investors should never lose sight of that.  LVS may be expensive, but it can continue to run as long as the catalysts are positive.  However, at least for LVS, there are some warning signs that won’t matter until they do and then they will really matter. 

  • Mass table supply growth:  This is a big issue for LVS given the business model.  The opening of Oceanus will likely reduce Sands EBITDA next year, even if the market continues to boom.  Moreover, overall supply growth will be around 25% for the first half of 2010.
  • Potential VIP bubble:  Investors have gotten very excited about Macau market growth but most of it is in VIP which is very much a “bubble and pop” segment fueled by stimulus and liquidity.
  • Market share dip:  LVS may lose 5-6% in market share in September due to the VIP market surge.  Venetian and Sands are not getting their share of the market growth.
  • Check those models:  Many analysts are using the wrong share count in their models and target price derivations, forgetting the warrants that were issued earlier this year that are now in the money.  We wrote about this in our note entitled, “CHECK YOUR MODELS” (9/14). “For example, this week, one sell-side analyst upped his price target but is using 659 million shares, instead of the correct 815-825 million shares.  His new $24 price target should have been $19 and his rating should be Market Perform, not Outperform.  Look for that analyst to raise his property multiples even more to justify the rating when he figures out his error.
  • 14x EBITDA?  Analysts know this is a momentum group of stocks.  Target multiples continue to get raised as stock prices go higher.  Target multiples are starting to get to unreasonable levels.  For instance, we saw one sell-sider up his target multiple on Singapore to 14x, the same as his Macau multiple.  14x is high even for Macau but Singapore is not even open.  What about risk? 



For now the catalysts are positive.  In addition to the upcoming monthly Macau revenue growth prints, we actually think the Street is way too low on LVS earnings.  Our $295 million EBITDAR projection is 20% above the Street.  So the Bear thesis, however valid, probably won’t matter over the near-term.  We just want you to be prepared when it does.

Bridging Chaos and Hope

“Let me issue and control a nation’s money and I care not who writes the laws.”

-Mayer Rothschild


If you haven’t yet read Liaquat Ahamed’s “Lords of Finance”, I highly recommend it. It’s a fantastic historical introduction to global central banking, currency crises, and the roots of politicization in the global financial system. The aforementioned quote comes from Ahamed’s chapter titled “A Bridge Between Chaos and Hope: Germany 1923.” Sound familiar?


Please don’t freak-out. Being a Crash Caller in this market hasn’t worked in 2009 and, provided that the US, Europe, and Asia keep money this easy, the Crash Calling won’t start working after one US market down day either. Timing this market’s top will be a process, not a point.


The historical similarities between Germany in the 1920’s and America in the 21st century are loose, at best. That said, from a Global Debtor/Creditor perspective, don’t disregard the obvious. In 1923, as the Germans were blowing their currency to smithereens, Germany was the Debtor and America was the Creditor. Today, the Creditor is China and America is the Debtor.


Yesterday, while our Squirrel Hunter (Geithner) was being You Tubed again, China’s steady handed Central Bank Governor, Zhou, reminded the world of China’s economic priority. When it comes to monetary policy he called “currency stability” the “most important” factor. I’ll take his word for it.


Central bankers around the world have had currency stability as a mandate for over a century. This is not new. What is new is the US Government sponsoring a stock market rally by being willfully blind to it. For whatever reason, there remains a perceived wisdom associated with the Greenspan/Bernanke Doctrines of US Dollar Devaluation. From a historical perspective, it’s shocking that the US Dollar can crash for to the tune of -15%, in less than 6 months, and the US Federal Reserve not even mention it in the FOMC statement!


Lest we forget that it was only a year ago that Alan Greenspan testified to US Congress that there was a “flaw in the model that I perceived as the critical functioning structure that defines how the world works.” I’ll take his word for that too…


One man, one view. Fully loaded with all of the politics you can muster, that’s what America’s currency is hostage to… How’s that for evolution?


That was yesterday. Today, the world will convene at the G-20 meetings in Pittsburgh. What is a global risk manager to do? Bridging Chaos and Hope seems to be a logical starting point…


Let’s start with the Audacity of Hope. No, that is not an investment process. How about we pray? Sometimes that works, but it is hard to quantify! Yesterday’s intraday reversal in the US stock market was a nasty one. Stock Market Operators call yesterday’s move an “outside reversal” (when, intraday, you breakout to higher-highs, but reverse course and close below the prior closing high). In my risk management model, outside reversals are bad.


Right after Bernanke said he would keep rates “exceptionally low” for an “extended” period of time, the Burning Buck proceeded to hit its 2009 intraday low at $75.81. In lockstep, the SP500 REFLATED, hitting her 2009 intraday YTD high at 1077. Then at 2:45PM EST, the music stopped. In the next hour, the US Dollar recouped her losses, and the SP500 got tagged for a -1.5% smack-down close.


Explaining yesterday’s intraday move is where Chaos Theory comes in. I never used to use fractal math in my models. I was actually quite ignorant, thinking that my God-given entitlements as Hedge Fund Dude made my stock picking prowess far superior to any risk management concepts associated with global macro or math (then came 9/11)…


Rather than hope that Mr. Macro tells me what I heard from Bernanke was US Dollar bearish, I simply let Mr. Macro tell me. Real-time prices don’t lie; people do. And I will assure you that I have learned this lesson the hard way, using live ammo.


While there is no Chaos Theory in “Lord’s of Finance”, there are conclusions in economic history that reveal her mathematical prowess. Quite simply, the mathematical conclusions of Chaos or Complexity Theory remind us that there are simple underlying patterns that dominant macro trends. All we people who do “Macro” have to do is find them, before they find the wrong side of our portfolios!


Yesterday’s -1.5% seventy five minute bludgeoning of the SP500’s intraday price was driven by an intraday US Dollar recovery. That’s the simple driving factor of the market right now. Even the poor Johnny Come Lately’s (like Steve Liesman and Maria Bartiromo) have figured this out at this point (someone obviously sends them my notes when I chirp CNBC).


Dollar UP = mostly everything priced in US Dollars down. Dollar DOWN = mostly everything priced in US Dollars up. No, this global macro inverse correlation wont be a perpetual one – they never are. But even the Money Honey herself can figure this out at the bitter end…


In the short term, dominating US Dollar weakness gets the Debtors paid. The Creditors pay the bills. In the long term, look up German Reichsmark and the name Von Havenstein on your Wikipedia, and you’ll see that there is indeed a historical precedent for torching a country’s currency. No, Bernanke isn’t there yet. But he’s -15% closer that where he was 6 months ago…


My immediate term risk/reward for the SP500 remains neutral. I have immediate term TRADE level support and resistance at 1041 and 1079, respectively. In yesterday’s missive I said I might sell everything. I didn’t. But in the last 2 days (in our Real-Time Asset Allocation Model), I have cut my position in International Equities in half and sold down my allocation to US Equities from 10% to 6%. The direction of the US Dollar and Chinese demand remain dominant factors in my macro model. I’ll continue to watch both in order to Bridge Chaos with Hope…


Best of luck out there today,






EWG – iShares GermanyChancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and balanced budget to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy. Merkel looks to be in the driver’s seat for re-election on September 27th, while her coalition partners are less certain.


CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. 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. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.


GLD – SPDR GoldWe bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.  


XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.


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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.




FXB – CurrencyShares British Pound Sterling The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 9/22.


LQD – iShares Corporate Bonds Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.


EWU – iShares UKWe’re bearish on the UK’s leadership and monetary policy to weather its economic downturn. Although we’re seeing improved fundamentals within the country and across Europe we continue to see the country’s financial leverage as a headwind and increasingly the data suggests that inflation is getting ahead of growth. We shorted EWU on 9/9.


DIA  – Diamonds TrustWe shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).


EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.


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.

BBBY: Sales…check…GM’s…check…SG&A Control…check…Cash…check

BBBY reported 2Q EPS of $0.52, well ahead of the Street which was looking for $0.47.  Our model was actually forecasting $0.53 (we had a slightly lower share count).  The magnitude of the upside is noteworthy but the composition and consistency of BBBY’s steadily improving results is even more impressive.  Once again, the upside in the quarter came across all three line items. 


First, same store sales came in at down 0.6%, about 60 bps ahead of the Street.  Whispers were as high as 3%.  If you were trading the stock long into the quarter, then we can see how you might be disappointed.   However, at a near flat same store sales result, the company is well on its way towards positive comps over the next couple of quarters.  Trading sentiment aside (which will only last for about a day!), the topline is still a relative outperformer across much of retail and certainly sufficient to drive earnings growth (proven for the second straight quarter). 


Gross margins were much better than expected, actually UP 51 bps year over year.  This is the first positive gross margin result since the third quarter of 2006! I continue to believe this is only the beginning of margin recovery resulting from a substantially more benign promotional environment, a less competitive marketplace, and tight inventory control.  Management noted that product acquisition costs were also favorable which helped to drive the improved profitability.   Recall that Linens’ heavy couponing began long before the end of 2008 as the company attempted to drive sales as the ship was slowly sinking.


SG&A expense was better as well, with the expense ratio down 98 bps.  We were modeling a 170 bps decline, but instead results were more balanced between margins and expenses. SG&A dollars were essentially flat with last year.  We expect expense improvement to moderate, however leverage will begin to build as sales growth continues accelerates.  Additionally, reduced levels of direct mailings will continue to be a source of expense reduction over the next few quarters.


Finally, the balance sheet was solid with inventories down just over 3%, against total sales that grew by 3%.  Still no debt and a growing cash balance that now totals $1.2 billion (up $450 million from 1Q).  Share repurchase was barely noticeable (more of a token purchase) with the company buying back $20 million in the quarter.  There is close to $900 million remaining under the current buyback plan and I suspect repurchase activity will pick up in the coming quarters.


From here, it’s steady as she goes.  We should continue to expect the comp trend to turn positive in 3Q, gross margin expansion (after 10 quarters of declines), expense leverage, and earnings growth of at least 17% for 3Q and 20+% in 4Q.  Throw some more meaningful share repurchase on top and the numbers will move higher.


I know this is getting repetitive but the bottom line here is this was another solid quarter and BBBY now begins to anniversary easier sales comparisons.   Additionally, while the downturn in home furnishings, subsequent Linens N’ Things liquidation, and industry consolidation took place over a multi year period, so too will the recovery.   So what’s the bear case? Valuation is the most common pushback along with many investors saying, “I missed it”.  Six months from now we’ll be looking back and the stock will be higher. 


And, by the way this is one of the best looking SIGMA charts in all of retail…



BBBY: Sales…check…GM’s…check…SG&A Control…check…Cash…check - BBBY 9 09


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Yesterday the Ministry of Finance announced that it would extend its support for Cinda Asset Management, one of the four primary AMCs set up to absorb bad loans from commercial bank books over the past decade, for 10 additional years. Cinda currently holds more than $36 billion in bad loans purchased from China Construction Bank, an amount equal to more than half CCB’s net assets.  CCB officially has a non-performing loan ratio of 2% excluding “special mention” assets. 


Although no one was surprised that the AMCs life will be extended rather than see massive mark downs hit the balance sheet of the financials they sprang from, the expectation of many observers has been that Beijing would rather see the companies take on new business as agencies which could ultimately allow the debt to be supported without direct government support.  Instead the government appears to be signaling a willingness to allow these pools of zombie assets stagger on without any new plan for recouping losses on these troubled debt portfolios.


As the extension of credit between financial instructions continues to grow rapidly (see chart below) the expectation that the system will be able to support liquidity hinges heavily on government backing for the AMCs . As the Chinese become more acclimated to capitalism, they will have come to recognize that denial can have catastrophic consequences  -with the policy makers and bankers in both the US and Japan providing cautionary examples.


Andrew Barber







Speaking at the launch of Wynn Macau’s initial public offering in Hong Kong, Steve Wynn said, “With this IPO, we’re a Chinese company with Chinese ownership.”  The IPO seeks to raise up to HK$12.6 billion by selling a 25% stake in the Macau business.  Wynn’s Macau business significantly outperformed its Wynn’s Las Vegas resorts during the second quarter, bringing in 32% more revenue and 56% more pre-tax earnings than the US operations.


Local tycoons and a fund have already committed to buy US$250 million worth of the Wynn Macau shares. These cornerstone investors include former Sun Hung Kai Properties chairman Walter Kwok Ping-sheung, Sogo department store owner Thomas Lau Luen-hung, Malaysian billionaire Quek Leng Chan and mainland-focused local fund management company Keywise Capital Management.




Steve Wynn has indicated that Wynn Macau had spent seven months planning a new project to be completed on the Cotai strip and could “take the next step” as early as the spring of 2010.  In April, the company will open an expansion of its flagship project, known as Encore at Wynn Macau.  However, Wynn sees Cotai as an “extraordinary” opportunity and believes that, in their plans for a new project there, Wynn Resorts has a “completely unique idea that’s never been done before”.





Visitor arrivals into Macau rose 6.4% in August from a year earlier to 2.62 million, according to figures released by the Statistics and Census Service today.  50.9% of arrivals were from mainland China, an 8.9% year-over-year increase.  Visitation from Hong Kong rose by 2.9%, from Taiwan by 12.6%, and from Japan by 27.1%.  Arrivals from South Korea and Malaysia slowed by 15.4% and 13.9%, respectively.  For the first eight months of the year, visitor arrivals decreased by 9.6% from the previous year to 14.2 million.

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