We all should be congratulating the financial management teams (gaming not bank managements) for negotiating significant liquidity, loose covenants, and low rates in their credit facilities. Most of these deals were struck in 2005-2006. Unfortunately, all good things must come to an end. With maturities concentrated in 2010-2011 and capex spending still high, these guys have to be at least a little worried. Do they capitalize on any open credit window to refinance early at significantly higher rates or wait and hope that the environment improves markedly over the next year or two. This will be the classic rate vs. liquidity tradeoff. It’s all about risk management. Given the significant risks (declining fundamentals, higher LIBOR, CAPEX, etc.), the risk averse path may be the road most traveled. I guess analysts projecting 5% borrowing costs in perpetuity need to adjust their models.

I believe low interest rates have allowed these companies to over earn during the past several years. The following chart quantifies the amount by which these companies may be over earning. The analysis is based on the assumption that credit facilities were refinanced at estimated prevailing rates for all of 2008. In many cases the impact is huge. Most at risk going forward is Ameristar Casinos. ASCA’s revolver matures in November, 2010. The interest rate is strikingly low at LIBOR plus 1.63%. The prevailing rate in today’s environment would be 3-4% higher, all due to risk premium, essentially cutting ASCA’s EPS in half. If they opt for long-term bonds the impact will be greater.

Due to its CityCenter obligations, high leverage, and a 2011 maturity, MGM is another company to keep an eye on. MGM could be over earning by at $0.40 or 25% of current EPS. This story has a lot of risk. I continue to be worried about the Las Vegas fundamentals and the coming cancelation wave on the residential piece of CityCenter. Refinancing at the next window has to be considered. Look for significantly higher interest expense definitely not contemplated in analysts’ current estimates.

BYD and ISLE appear a bit scary on the surface but won’t see maturities until 2012 and 2013, respectively.

PENN and WYNN look solid due to low leverage and high liquidity. No worries here.

Risk aversion suggests refis, higher interest expens, and lower EPS


Yesterday, the London Times reported that Starbucks UK and Ireland managing director Phil Broad has resigned. According to the company, Darcy Willson-Rymer, VP of Starbucks Europe, Middle East and Africa, will assume his position. This is not healthy sign for SBUX, and is clearly a sign of the times. Relative to the news flow over the past two weeks, management changes should not come as a surprise.

Consider the following time line:

July 29th - Starbucks Coffee International Inc. appointed Martin Coles as president, replacing Jim Alling. Martin Coles was the COO of Starbucks Corp. The COO position was eliminated.

July 30th SBUX 3Q08 EPS conference call - “I think we want to be very cautious. I think there are signs in the U.K. that are difficult to predict, but there are signs that remind us of what happened here in the beginning of ‘08, and those signs kind of bode downward in terms of consumer spending. We want to be very careful, and in markets like Spain and Greece, specifically in Spain, they are experiencing a very, very tough economy, and in view of that, we want to be as cautious as possible and not over-expand at a time when the consumer may be under significant pressure. But offsetting that, the openings in the last six months or so in Brazil and Argentina, the ongoing success we’re enjoying in Mexico, and although it’s only six stores in Russia, there’s a lot of places where we can make that up. We’ll just see how the year goes.

Aug 8th - Phil Broad, the Starbucks UK and Ireland managing director, has resigned less than a week after he assured The Times that difficulties facing the coffee shop chain in America and Australia had not spread to Europe.

Martin Coles is one of Howard Schultz’s key executives and his return to Starbucks Coffee International Inc. was a disappointment to Phil Broad, if not the end of the road for him.
Martin Coles

China Moves Away From Currency Basket: What Does It Mean?

For one, this is a major shift in China's FX trading policy. They are officially moving to a market based policy of "managed flexibility."

Looking back at the massive moves in the global currency markets this week, we have to consider this Chinese decision as being one of the more relevant factors. The US Dollar Index traded up +3.4% on the week alone, closing at 75.85, catching plenty of global macro investors off guard. Asian currencies we’re under siege.

In plain English, this move by the Chinese is the 1st explicit one that moves them towards a free floating exchange rate. The announcement came on Wednesday, and that coincided with huge volatility in global currency trading immediately thereafter.

Since 2005, the Chinese used "reference currencies" as a basket. In addition to the US$, the major currencies in that basket were presumably the Euro, the Yen, and the South Korean won.

This important decision marks the third of consequence that the Chinese have made since 1997 on the FX front, where they went from a single regulated rate, to a managed floating rate relative to a "basket", to this most recent one.

It is global this time, indeed.
  • Wisdom Trees Chinese Yuan Fund (CYB) Is Breaking Down...
(chart courtesy of


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TED Spread Continues To Signal That Cash Is King

The "TED" Spread is the difference between 3 month US Treasury Yields and 3 month LIBOR. I have attached the chart below to show the implied risks associated with recent spreads widening. Three month LIBOR closed at 2.80% on Friday. In addition to creating a widening TED spread, this is the highest it has traded over Fed funds since 1999.

Despite my being bullish on the US Market's immediate term "Trade", this remains one of the main reasons why I am negative on the intermediate "Trend". Credit risk remains a structural issue. Until this spread narrows again, investors, companies, and countries alike with the largest cash (liquidity) position will win this game of monopoly.

As the TED spread widens, the risk of defaults and bankruptcies continues to heighten. The global bankruptcy cycle is in its early stage.
Research Edge Chart by Andrew Barber, Director

US Market Performance: Week Ended 8/8/08...

Index Performance:

Week Ended 8/8/08:
Dow Jones +3.6%; SP500 +2.9%, Nasdaq +4.5%; Russell2000 +2.5%

2008 Year To Date:
Dow Jones (11.5%), SP500 (11.7%), Nasdaq (9.0%), Russell2000 (4.2%)


The correlations are visually obvious but the chart still does not do justice to the magnitude of the statistical relationship between the price of crude oil and stocks, particularly the cruise lines. The R Square for cruise stocks (CCL, RCL) versus crude prices and the S&P versus crude is 79% and 49%, respectively. Thus, changes in crude explain almost 80% and 50% of the moves in cruise stocks and the S&P, respectively. Moreover, the relationships are highly significant with T Stats off the charts. Kudlow is right. It’s all about oil.

Taking the analysis one step further, changes in crude and the S&P combined explain 90% of the moves in cruise stocks. So to be a hot cruise stock picker all you need to know is where oil and the market are heading. Seems easy enough, right?

Trading cruise stocks right now is a tricky game for your typical consumer analyst. It’s probably wise to stay away, unless you are an oil trader in which case you might as well trade the commodity. Yields don’t seem to matter right now but they will. Yields have held up nicely but I have some serious doubts about sustainability, particularly in on-board spend. More on that later. For now, I’d be patient unless you’re willing to hedge out oil and the market.

Crude driving cruise stocks and the S&P

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