recent currency movements

Big macroeconomic changes that affect the relative investment attractiveness of countries vs. one another can play themselves out in two ways:

–changes in the local currency value of the country’s investable assets, and/or

–changes in the value of the country’s currency.

The easiest way to see this is to look at Japan.  The election of Prime Minister Shinzo Abe and the enactment of wide-reaching policy changes he campaigned on have produced two major effects so far:

-a one-year gain of 60% in the yen value of the Japanese stock market and

–a 20% fall in the yen against the US$.

The net result for a ¥-oriented investor is a bonanza–and more joy than the Topix has seen since the 1980s.  For a $-oriented investor, however, it’s a 28% gain.  That’s not much better than the 22% advance in dollars the S&P 500 achieved over the same span.

Looking more closely into the Japanese stock market, weak-yen beneficiaries (exporters and import-competing firms) have been rocket ship rides; domestic-oriented firms, especially those that use dollar-priced raw materials, have languished.

But this is old news.  What’s happening today?

The big movements I see are in the euro and the US dollar.

Over the past three months, the EU currency is up by 4% against the dollar and by 2% against the yen.  The dollar, in contrast, is down against everything except the Canadian currency.  It’s off by 5% against sterling, 4% against the euro, -3.5% against the Australian dollar, -2% against the yen, and -1% against the renminbi.

I think currencies are reflecting two main things:

–primarily, the belief that the EU is finally past the worst economically and is beginning the slow road back to recovery.  Same thing for the UK, only more so.

–secondarily, loss of faith in the US because of worse than usual policy paralysis in Washington.

The big question for investors of all stripes is whether we are in early days of a trend reversal or whether what we’re seeing is just white noise, or random currency movements that may soon reverse themselves.   The answer has important implications for portfolio positioning.

I’m in the former camp.  This means that in Europe, like in Japan a year ago (but on a smaller scale), I should be shifting away from foreign currency earners and toward users of foreign currency-denominated inputs.  I should be doing the opposite in the US.  So far, I’m only changing my (relatively minor) holdings in European stocks.  But I’m worming up to do more.

the heavy half: internet gambling and Native American casinos

The article in the Wall Street Journal that I mentioned in yesterday’s post contains information about the business of an online gambling company in the EU and about a Native American casino in the northwest US.  It contains one piece of disturbing information.

The article leads with a “shocking” conclusion:  almost no one wins when they gamble.


Didn’t anyone look at a table of the odds on different casino games?  Everything favors the house. )The one exception is poker, where, ex the video game variety, the house merely collects a fee for organizing the game.)   To me, the more surprising information is that over 10% of gamblers–both online and in the Naive American casino–who wer net winners over an extended period of time.

The much more concerning statistic is that in the Native American casino, 2.8% of the patrons were big enough losers that they made up 50% of that casino’s profits.  The next 8% provided another 30% of the house take.

From a purely pragmatic p&l standpoint, this is a potentially dangerous concentration.  From a social/ethical point of view, my guess is that a good chunk of that 2.8% are problem gamblers who should be getting medical care and not be allowed to wager.

The pragmatist would begin to calculate how likely it is that legislative action would bar the casino doors to at least some of these golden-egg-laying geese.  The deeper question, however, is whether gambling is like cigarette smoking.  In the latter case, I think no self-respecting person can be a shareholder–and thereby lower the cost of capital of an ethically unsound business and share in the profits of promoting a fatal addiction.

I have several observations:

1.  Other than online poker, it;’s not clear that online gamblers and frequenters of physical casinos have anything in common.  It’s also not clear that although the games have the same names, that the odds for various online games are the same as those in physical casinos.

2.  A career of living and working with professional stock market gamblers makes me think that some people go to casinos expecting to lose and find that has a cathartic effect. (I’ve always felt casino gambling is too much like work to be fun.)

3.  I’m willing to think that the experience of the single Native American casino studied is similar to what happens in other local casinos around the US.  But I don’t think any of these has much in common with the resort casinos in Las Vegas–and certainly nothing to do with the US-run casinos in Macau or Singapore.

4.  The high roller  business (people who gamble $1 million+ in, say, a weekend casino jaunt) is very different from the low roller business examined in the WSJ article.  We have the clearest view of this in Macau, where companies disclose separately their profits from high rollers and from everyone else.  The everyone elses lose on average around 20¢ of every dollar they bet on baccarat.  High rollers lose 3¢–and have about half of that rebated back to they by the casinos as a condition of getting their patronage.

How is this possible?  High rollers know the rules, have lots of experience and want to win.  Low rollers don’t know the rules, like the atmosphere and want to be entertained.

5.  In the resort casino model practiced in Las Vegas and being implemented by WYNN and LVS in Macau, gambling produces half the firm’s profits.  Rooms, food, shopping and entertainment make up the rest.  So, in a purely pragmatic sense, even if all the large losers are  self-destructively in need of medical help and are barred from patronizing casinos, resort casinos would lose at most a quarter of their income.





the heavy half

the heavy half

I Googled this marketing term before starting to write, just to see how current it still was.  I got a lot of nonsense about the rear ends of different kinds of trucks.  Nevertheless, I’m pressing on.   …a bit outdated, maybe; but still useful.

The heavy half isn’t about weight, and, strictly speaking, it isn’t about halves.  It’s an extension of the idea that consumption of a firm’s goods and services isn’t uniform across all customers.  Some use more, some use less.  But it may turn out–and very often does–that a relatively small number of customers represent a disproportionately large percentage of company profits.  Those customers are the heavy half.


For instance, in its heyday Nokia sold cellphones encrusted in jewels and/or encased in precious metals, mostly through the Vertu brand.  As I understand it, these high-priced phones accounted for about 5% of unit volume for NOK, but over 20% of profits.

Until very recently, and although the full positive impact was disguised through transfer pricing (most analysts had no clue), a luxury goods customer in Japan might have been worth 2x-4x what an affluent American or European one was.  So sales to Japanese customers might have represented 10% of total revenues, but could have been 30% of profits.

Customers in the midwest drink twice as much Coke as those in California.  Supposedly, 20% of the beer drinkers in America consume 80% of the brew.  In these cases, the heavy half is probably also be literal.

The top 20% of US consumers by income buy about half the discretionary items sold here.  The bottom 20% buys almost nothing.

why it’s important

Any well-managed company knows who its heavy half is.  Most don’t want anyone else to know.  They don’t want to alert the competition, for one thing.  But the heavy half can also be a mixed blessing.  If 20% of your customers buy 60% of your products–and there are thousands of them, that’s great.  If one customer buys 90%, that’s potential trouble if it dawns on him how important he is.

For an investor, discovering a company’s customer/profit profile can be key, especially if you do so ahead of everyone else.  It gives you an inside track to forecasting earnings surprise.

why today

Why am I writing about this today?  I read a Wall Street Journal article about the gambling industry recently that asserted that it has a dramatically skewed profit profile.  According to the newspaper, almost all the income comes from about 10% of the customers.

I think that’s wrong. More tomorrow.


(not so) “Happy Meal” convertible bond offerings

Pinky, the more astute of the two eponymous stars of the long-running documentary on genetically engineered miceonce opined that “if they called them Sad Meals, no one would buy them.”  So true.

Wall Street “Happy Meals”

Recently, the Wall Street Journal has been writing about a convertible bond offering technique, known as the Happy Meal, which has come under SEC scrutiny.   It shows what a colorful, inventive but cold-blooded place Wall Street is.

The Happy Meal is/was an offering of convertible bonds, in which the issuer arranged at the same time to lend large amounts of company stock to buyers so that they could sell the stock short.

Got that?  …probably not.

So let’s pull the pieces apart.

1.  A company issues convertible bonds.

Convertibles are bonds with a provision that allows them be exchanged for a specified number of shares of the issuer’s common stock under certain circumstances.  Until they are converted, the buyer collects interest income.

Generally speaking, a company would rather issue common stock or straight bonds, or borrow from a bank.  The fact that the firm is issuing a convertible almost always means these other, more attractive, avenues aren’t open to it.

2.  In the case of the Happy Meal companies, the convertible form wasn’t inducement enough.

Conventional long-only buyers turned thumbs down.  Who would these buyers usually be?  …specialized convertible securities funds, or bond funds looking to boost their returns by holding equities.  They avoid violating the letter of their investment mandates by buying stocks wrapped up in a bond package.

3.  That left hedge funds willing to do convertible arbitrage.

That is  to say, the hedge funds would simultaneously buy the convertibles and sell the stock short.  Exactly what a given hedge fund would do varies.  One technique would be to sell short enough stock to eliminate entirely any effect of stock movements (up or down) on the position–leaving the hedge fund to collect a stream of interest payments.  But a fund could also shade its holding to the positive or negative side.

4.  There’s more.

To sell stock short, you typically borrow the stock from a third party who owns it, using a brokerage firm as a middleman.  In the Happy Meal case, that wasn’t possible–either because there weren’t enough holders of the stock or because holders were reluctant to lend.  So the issuing company itself lent the stock that hedge funds dumped out into the market right after the offering.

What a mess!  A company would have to be really starved for cash, in my view, to contemplate serving up a Happy Meal.

not so appetizing any more

Companies have begun to turn sour on Happy Meals.  Two reasons:

–enough Happy Meal issuers have suffered significant stock price declines after their offerings that simply announcing a Happy Meal issue is now enough to make the common stock swoon, and

–according to the WSJ, a retired investment banker has turned whistleblower and reported the Happy Meal to the SEC.

His claim? …that issuers and their brokers are negligent by failing to disclose in the offering documents  how aggressive post-issue short selling is likely to be.

A concerned citizen, yes.  But one who also stands to collect a bounty under the Dodd Frank Act if the SEC investigation leads to significant fines.  In other words, a vintage Wall Streeter.

Las Vegas Sands (LVS) and Sands China (HK: 1928): 3Q13 earnings

the results

After the New York close yesterday, LVS announced 3Q13 results for itself and for its subsidiaries, Macau-based 1928 and wholly owned Marina Sands of Singapore.

Revenues for LVS came in at $3.57 billion, up 31.7% year on year.  EBITDA (earnings before interest, taxes, depreciation and amortization)  advanced by 45.5% yoy to $1.28 billion.  EPS was $.82, a 78.3% yoy increase.  That figure exceeded the Wall Street consensus by $.05.

During the quarter, LVS repurchased 4.6 million shares of its stock, at an average price of $65.18.  It says it will buy back a minimum of $75 million in stock a month from now on.

LVS also raised its quarterly dividend from $.35/share to $.50, giving a forward yield of 2.8%.


1928 rose by almost 10% in overnight trading in Hong Kong (in a market where other Macau casino stocks were up by 4%-5% or so).  LVS has barely budged in this morning’s pre-market trading.


the highlights


LVS is a convention hotel operator.  Its strength is catering to customers who have, say, $10,000 to gamble during a stay rather than VIPs with $1 million or more.  Its huge investment in hotel/casino capacity in the Cotai section of Macau on the conviction that if Sands built it, customers would come, is beginning to pay off royally now.

EBITDA for 1928 came in at $785.3 million for the quarter, up 61.7% yoy.


Marina Bay’s EBITDA was $373.6 million, up 43.3% yoy.  However, the amount bet by VIP gamblers was only up by 16.9%.  The largest portion of the EBITDA increase comes from the casino “win” (the amount gamblers lose, which is what casinos count as revenue) bouncing back from an abnormally low 1.79% of the amount bet during 3Q12 to a more normal 2.85%.


Down a bit, yoy.  EBITDA in Las Vegas was $87.1 million (vs. $98.2 million during 3Q12).  Bethlehem, Pa brought in $29.6 million (vs. $32.1 million).

my take

At this point, over 90% of LVS’s EBITDA comes from Asia.  That percentage will continue to climb.

Marina Bay is an enigma to me.  …a good enigma, but a puzzle nonetheless.  It isn’t that long ago that Marina Bay and Macau were neck-and-neck in generation of cash for LVS.  But while Singapore has been relatively stagnant, LVS’s Macau EBITDA have doubled.  Has Marina Bay already topped out at $1.5 billion in annual EBITDA?  I find it hard to think this is the case, but I can’t see any evidence to the contrary from the financials.

Macau is booming   …and the market is rapidly developing a large resort/convention segment, which is LVS’s management specialty.


At today’s Hong Kong closing quote, LVS’s interest in Sands China is worth $49 billion.

If we make the (conservative, in my view) assumption that Marina Bay will generate about $1.5 billion in annual cash flow and that we’re willing to pay 10x for that, then the Singapore subsidiary is worth $15 billion.

The same calculation for the US operations (let’s put a cash flow multiple of 8 on it) would value it at about $4 billion.

Total value = $68 billion.  That compares with a total market cap for LVS at yesterday’s close of $58.5 billion.

If these back of the envelope figures are close to correct, LVS is trading at about a 15% discount to the sum of its parts.  Further upside could come from continuing flowering of the Macau operations, which I think is highly likely, and/or a return to growth for Marina Bay.  (I own the stock and am happy to remain a holder.  At some point, I’ll have to trim the position simply because of size, but see no present reason to do any other selling.)