He's All In

Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
-Warren Buffett
If the US stock market casino were to shut down for the next 10 years, I am not sure what Warren Buffett would do with his massive exposure to US financials, insurance, derivatives, etc… but don’t worry about that - he’s “All-In”.

Assuming Buffett is paying his new favorite banking friends the lion’s share of the fees associated with a $44B acquisition, is Buffett assuring us that Goldman is officially too big to fail, or too big not to pay? Approaching $200 Billion in enterprise value, is Berkshire too big to fail?
The answers to those questions are very straightforward, so instead of parroting the latest Buffett wager on America, understand not only how he gets paid, but the scenario whereby Berkshire doesn’t. His company is no longer about buying carpet and ice cream companies, holding them for 10 years, and harvesting the cash flows. Berkshire is an All-In, fully leveraged bet, on a levered long economy.
Notwithstanding that my senior thesis at Yale was about Buffett’s strategies and that I respect him tremendously, I have to look at yesterday’s $44B investment for what he called it – a Macro wager. At least he’s trying to make a serious dent in Berkshire’s exposure to the US Financial Service sector. Buying a big nasty railroad company will definitely diversify his holdings. If the commodity market shuts down for 10 years, maybe he’ll sell train rides to the Dairy Queen too.
If you can’t wakeup laughing at the US Financial System’s leadership, you probably aren’t awake. No matter where you go this morning, Warren Buffett and Goldman Sachs will still be looking for $3B in US tax credits from Fannie Mae. This isn’t about “value investing” anymore – at least not the kind that I learned from Graham & Dodd. This is about size.
Newsflash to the legions of Business School students of America who have been brainwashed by the ‘Bigger Is Better’ mantra for the last 3 decades: Bigger isn’t better. Bigger just means that we, the citizenry, really are All-In.
In and of itself, hearing Buffett talk in poker terms is emblematic of our ‘how much money does he make’ crackberry culture. Harvard’s Niall Fergusson ripped into Pepsico’s Indra Nooyi about this at an investment event last night. America needs to seriously wake up and smell the coffee here. The world’s economy is becoming increasingly interconnected at the same time as a bigger American unit of perceived financial wisdom loses credibility.
Today, the one and the only, Captain America, Ben Bernanke will likely drop moneys from the heavens, reiterating the compromised and conflicted message of the too big to fail. Never mind that price of gold ripping to $1098/oz yesterday boys. Oil at $80.34/barrel again this morning? Seriously, don’t worry about that either. You guys are All-In!
If you are amongst the remaining observers of America’s capital markets who aren’t willfully blind, I salute you. Kudlow bashing Obama is no more ridiculous than Buffett bashing Bush. Our politics have taken over the asylum of economic consensus, and that is both a very sad and dangerous thing.
We can’t flip two Democrat Governors for two Republican ones last night and say, “cool”, assuming this is part of the fix. We have to simply stop being political instead of being pragmatic, or the only world vote that matters is going to continue to crush us.
That world vote is issued, real-time, every second, of every day, via the marked-to-market price of the US Dollar. After rightfully respecting the fiduciary responsibility of being the world’s reserve currency during the Reagan and Clinton years (strong dollar policy’s that weren’t based solely on rhetoric), we are gambling it all away.
After all, on the topic of gambling, this is what the Oracle of Omaha himself had to say:
"To quite an extent, gambling is a tax on ignorance. I find it socially revolting when the government preys on the ignorance of its citizenry.”
Interesting advice Mr. Buffett. I hope Charlie reminded you of as much before you went All-In. America’s economic future is fully levered to this ‘All- In’ government sponsored mantra. It’s fear-mongering with a credible threat from the too big not to pay, and you know it. This is the house of cards that American leverage built, and  Brother Bernanke is tee’d up to roll the bones on the Burning Buck at 215PM EST. Rub the rabbit foot.
The immediate term TRADE line for the SP500 remains broken – that line is up at 1065. The intermediate term TREND line has held at 1025. Those are definitively critical lines whereby I suggest you manage risk as those with the perceived wisdom of the American casino place their next bets.
Best of luck out there today,



EWZ – iShares Brazil President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.

EWT – iShares Taiwan With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities We bought low beta Utilities on discount (down 1%) on 10/20. TRADE and TREND bearish.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20 and again on 10/28. The TREND and TAIL lines for the Canadian Dollar remain bullish.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. 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.

GLD – SPDR Gold We 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. We like defensible growth with an M&A tailwind. 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.

XLI – SPDR Industrials Industrials shot up +1.1% on 11/3 because of a monster Berkshire bid. That’s now in the price of XLI. We’ll short expectations for V-shaped recovery.

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. The announcement of further bank stimulus and talk of the BOE increasing its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. The sector is broken from an immediate term TRADE perspective.

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.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. There continues to be no government plan to support it.

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 10/16.

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.


The Macau Metro Monitor. November 4th, 2009.



Macau’s gross gaming revenue recorded a new high last night at US$1.58 billion (MOP12.6 billion), an increase of 42% as compared with October last year, according to the Portuguese news agency Lusa.  Lusa said that provisional figures show that last month’s revenue was greater than the previous record month of August by some MOP1.4 billion.  The good performance in October was certainly aided by the “Golden Week” celebrations for the 60th anniversary of the founding of the People’s Republic of China.



Sands China, the Macau unit of Las Vegas Sands Corp that is hoping to raise US$2.5 billion in a Hong Kong initial share sale, said that earnings might rise 17% this year as casino revenues recover.  The company said, in a draft listing prospectus filed with the Hong Kong stock exchange, that adjusted EBITDAR would not be less than US$802.9 million this year, from US$686 last year.  Cost cuts and rising casino revenue in the third quarter have helped offset the impact of the global economic downturn, the outbreak of swine flu, and visa restrictions for mainland customers, the company said.  The draft prospectus said that Sands Macau’s profit may rise 9.5% to US$192.4 million this year.



Macau’s exports fell by 55% to MOP5.78 billion between January and September compared with the same period the previous year, according to the Statistics and Census Bureau (DSEC).  The DSEC also said that imports for the January to September reached MOP26.45 billion (US$3.3 billion), a fall of 19.3% compared to the value posted for the same period in 2008.  From January to September, exports to Macau’s main markets, the United States, the EU, and China, were down 79.3%, 59.6%, and 45.4%, respectively.


Q3 should be a beat but that is expected. Management will be bullish on the call but big risk remains.


MGM is reporting this Thursday and we, along with everyone else, expect them to beat the quarter.  Given the pre-announced charges, we know the quarter will be messy but "adjustable".  As usual, we expect the management to be "exceptionally" bullish, but they have to be given that the opening of CityCenter "could be the most defining moment in the history of Las Vegas" and a make-or-break moment in MGM history.


We are above the Street in projecting $340MM of EBITDA (including pro-JV share) and margins just shy of 22.7%.  In any event, right now and for the next few quarters, it's really all about CityCenter and cannabalization.  In the meantime, all management can do is cut every possible expense and pray.  If CityCenter is a flop the stock is worthless, it's that simple. Given what's riding on the opening and management's fortunes it's expected that Murren and the gang will be characteristically bullish.



Below are some of our numbers:

  • Las Vegas: Revenues of $1.1BN and EBITDA of $260MM
  • MGM Grand Detriot: Revenues of $127MM and EBITDA of $33MM
  • Mississippi: Revenues of $121MM and EBITDA of $22MM
  • Macau: pro-rata EBITDA of $19MM





General market commentary & Outlook

  • The operating environment...clearly stabilized in the second quarter, but we're not out of the woods. The operating environment, we think, will remain choppy in the near-term however, we see extremely positive signs especially as we go into 2010 or even starting in the fourth quarter but into 2010 and '11
  • The operating environment remains challenging, but we have been pleased with continued signs of stabilization in this market here in Las Vegas and ongoing improvements in our revenues and our margins
  • Our high end business continues to hold up very well, and in fact Baccarat volume was up 17% in the second quarter
    with extremely strongly international play.  We expect our Gaming business will also continue to improve
    particularly as we go into 2010
  • Our FTEs decreased 14% year-over-year in the second quarter and on an absolute basis, FTEs were flat with the first quarter even with company wide revenues up 4%
  • We've achieved well over 600 million of cost savings on an annualized basis.  We still have some of that traction out in front of us, maybe about 20%, 25% of that is still in front of us from a cost saving standpoint, and we're going to continue to look at other ways, but I think we've accomplished quite a bit on that front already
  • EBITDA margins should remain relatively consistent. We believe we continue in the 25% area in Q3


Hotel & RevPAR commentary

  • "Nonetheless, second quarter was better than the first quarter and the first quarter was better than the fourth. We think we'll see that trend continue here in the third quarter and beyond where our RevPAR declines will be minimized as we move forward into next year"
    • It's called easier comps....
  • "We are very encouraged that the meeting planners who seemed invisible for the first part of the year are now being
    much more active and we're seeing signs of recovery in their business, which therefore translates into business into Las Vegas.  And that means we're booking more business in 2010, 2011 and beyond"
  • "As it relates to our room strategy, we do have a clear plan to maximize our occupancy.  But we also are trying to generate rate premiums compared to the market and we have been able to accomplish that.  In the near term, our goal is to occupy our resorts in the mid-90s and we are succeeding on that front"
    • They are maximizing occupancy by chopping rate, and since there are no other public companies that report room rates for anything but the "luxury" end of the market there is no way to really verify the "premium" comment.  In any event, given that so many of the rooms are "comped" the reported rate is "adjustable"
  • "For the remainder of this year, pressure obviously remains on room rates so once again, we'll be down year-over-year but we expect the year-over-year percentage decline to be lower in the third and fourth quarter than we saw in Q2."
  • For every $5 increase in our average daily room rate, we will generate over 50 million in annual cash flows.  And for every 100 basis points improvement in occupancy, we generate nearly 40 million in annualized cash flows.


CityCenter Quotes

  • "The introduction of CityCenter with its unprecedented scale and amenities ... could be the most defining moment in the history of Las Vegas"
  • "As the most highly anticipated development in the Las Vegas history, CityCenter is poised and positioned to secure a disproportionate share of the market from our competitors and drive overall growth in the Las Vegas market"
  • "I want to reiterate our belief that CityCenter, in our minds, would drive growth not only at our surrounding properties, but in the Las Vegas market as a whole"
  • "It's sophisticated and will draw customers from other premium properties, as well as draw new high-end national and international customers into the market from other parts of the world. It will profoundly increase foot traffic to the south side of the strip, which of course benefits MGM Mirage"
  • "At ARIA, we continue to see a steady pace of room bookings with over 132,000 room nights on the books.  We also have over 61,000 room nights on the books for Vdara"
  • "We anticipate 48% of the square footage to be opened in December, and have 84% of the square footage available opened at least by April of 2010"
  • "6.9 billion has been funded to date and we have about 1.6 billion left to complete CityCenter, based on the budget of 8.5 billion.  We have approximately 950 million remaining withdrawn on our CityCenter credit facility, an additional 400 million from prefunded sponsor equity and the remaining funds will come from closing proceeds from condo sales of about $250 million"

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Hyatt’s $1.14 Billion IPO Pricing Moved Up to Today

Nationalization Continued...

Research Edge Position: Short the British Pound (FXB), Short UK via EWU


Our bearish conviction on the UK economy has held steady this year. Even with the UK reporting a sizable jump in its October Manufacturing PMI survey number (to 53.7 from 49.5 in the previous month) and a marginal increase in home prices over the last three months (Hometrack), broader fundamentals remain shaky: government debt continues to expand, leadership in critical positions lacks (think PM Gordon Brown and BOE Governor Mervyn King), and the country’s leverage to the banking sector remains glaringly negative for recovery. We’re comfortable with our short call on the Pound for a TRADE and today we shorted the UK via EWU in our model portfolio as we expect the FTSE to underperform major global equity markets.


The UK Treasury announced today it will inject another 25.5 Billion Pounds of capital into RBS, increasing the government’s ownership stake of the bank to 84% from 70%, while Lloyds Banking Group also received a boost of some 5.8 Billion Pounds. The bailouts continue to call into question the strength of the UK’s banking sector and suggest future handcuffs associated with acceptance of state aid. 


Today’s decisions comes on the heels of a contracting Q3 GDP print of -0.4% in the UK, shocking forecasters that expected a mildly expansionary number after significant government stimulus expenditures over the last year.  Discussion has now intensified over increasing the Bank of England’s current bond purchasing program of 175 Billion Pounds, a topic we should get more color on tomorrow when the BOE meets to discuss rates. We expect no movement in rates from the current level of 0.5%, as monetary tightening would be imprudent given the country’s negative GDP.


We hold that throwing additional tax payer’s money into the banks won’t end well for an economy suffering from ballooning government debt, lack of leadership, and waning investor appetite with rates at historic lows.  The chart below of FXB shows that the Pound is trading just below its shark line, an important line of momentum in our models.


Matthew Hedrick



Nationalization Continued... - Pound a


DG/FDO: Know Thy Customer

As you prepare for the DG/KKR one-two punch of why the dollar store business model is worth your hard-earned capital, turn to Google for a reality check on 'Knowing your Customer."


We're all over this Dollar General IPO for several reasons, not the least of which is that it epitomizes our "Banker Bonanza" theme, where mediocre businesses that went private in the recent LBO wave are now coming to market in a last ditch effort for bankers to get a paycheck.


I can almost guarantee that half of the people who are looking at this deal have never shopped in a Dollar General store. Aside from stating the obvious...that you should get out there and see what you're buying. I'd also recommend checking out non-conventional venues for becoming familiar with the business -- like Google.  Come to think of it, do yourself a favor and see the store first. Otherwise a Google search might scare you away. See our simple search over the past few days below speks for itself.


The fundamental outlook for FDO is not rosy, nor is the stock. DG's bankers better hurry.  The good news for KKR, DG's owner, is that its parent registered as a broker/dealer in 2007, so now it can benefit from selling its own deals. No joke... 


Let us now if you'd like to see our Dollar General Blackbook for more analysis on the issue.


Eric Levine


DG/FDO: Know Thy Customer - 11 3 2009 3 16 09 PM




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