Thursday, February 5, 2009

Jaw Dropping Action in Casinos

I've been a longtime bear in the casinos as they are the intersection of Americana over consumption and discretionary spending. [Oct 3, 2007: A Top in Casino Names? Wynn and Las Vegas Sands] [Nov 1, 2007: China Can't Save Las Vegas Sands - It's Getting Crox'd] Last Vegas is like the great American coal mine in my eyes... canaries from this area tell us a lot about the health of the domestic consumer.

In April 2008 I wrote

Next to go on the food chain will be entertainment - think casinos - Wynn (WYNN), Las Vegas Sands (LVS), MGM (MGM) - it is all going to suffer - that's an "extra" you don't "need".

In [Jul 11, 2008: Gaming Stocks Absolutely Destroyed Yesterday] as pundits told us not to worry because the numbers don't signal a "technical recession" (two back to back negative GDP quarters), I wrote

But let's look at the bigger macro picture - a theme we've discussed many times here. (We're early) And it's getting worse by the month. Thankfully we are not in a 'technical recession' or anything.

gambling revenue in May slumped 15%, with a roughly similar pace of decline in table games and slot machines alike. Things were even worse on the Las Vegas Strip, where total gambling revenue fell 16.4% -- the largest decline yet in 2008, and one that is at an increasing rate as quarter-to-date revenues for the Strip are off 9%. Now, they will bounce, and when the market runs - they will rally. And they'll be an excellent short (again) as there won't be a 2nd half 2008 recovery. Nor a 1st half 2009 recovery.

I mocked the traders running into these names in August 2008 when the thesis of the day was "gas prices are down from $4 to $2.50 - the consumer is saved! it's like a tax rebate!" Sound familiar? Just replace "gas prices" with "baltic dry index" and you can make a thesis work for a few days/weeks - until the bottom falls out.

It is quite a simplistic thinking but it is what it is - look at Wynn Resorts (WYNN) up 10%, MGM Mirage (MGM) up 14%. It is truly amazing how the entire world has changed by a 40 cent drop in gasoline prices ...

These would of been excellent stocks to hold on the short side the past 12+ months. I've been waiting for them to pop to some degree the past month as we moved over to a new portfolio tracking system (where I can finally short individual stocks) so I can get some sort of low risk entry point but they are like dead fish... gasping for any air. No flipping bounces of any merit.

Frankly it sort of stinks to see your thesis play out and you are sitting on the sideline for the fireworks. Many times in 2008 I sat watching similar short calls in other sectors play out thinking "this would really help my performance" but we could not short individual names at the time. On the other hand it teaches one a lesson that the market is often wrong and missing the boat in the short term - these names were holding up relatively well as late as spring 2008.

Adding insult to injurty many times they have rallied on such thesis as: (a) the "worst is behind us" or (b) "the consumers is back due to Bush stimulus" or (c) "recovery in 6 months" nonsense that is spewed every time the bulls need a reason to drive the market up. Then pundits latch onto the "price action" and tell you, you are missing the boat if you don't jump in at that moment. Which leads to capital destruction.

Even I, as bearish as I have been, am amazed at the carnage that is happening... simply takes your breath away considering these were market darlings 15 months ago - Macau baby! MGM Mirage (MGM) and Las Vegas Sands (LVS) are both single digits - even best of breed Wynn (WYNN) is taking massive body blows. Wynn announced yesterday they are cutting wages across the board
  • Casino operator Wynn Resorts Ltd. says it will save $75 million to $100 million a year by cutting all its Las Vegas workers' pay, reducing the hours that hourly employees work and eliminating retirement account contributions and bonuses for 2009. Chief Executive Steve Wynn said Tuesday that his goals with the reductions are protecting jobs and increasing efficiency.
As analysts attack
  • Wynn Resorts Ltd.'s decision to cut Las Vegas workers' pay and eliminate 2009 bonuses, combined other actions, led an analyst to slash the casino operator's price target and another to lower its rating Wednesday.
  • Elsewhere, KeyBanc Capital Markets' Dennis Forst lowered Wynn Resorts' rating to "Underweight" from "Hold" on the cost-cutting actions and high spending at its Encore resort in the midst of a recession. "The skittish investment climate today does not augur well for any gaming company and we are afraid Wynn Resorts' share will underperform over the near term," he wrote.
  • Goldman Sachs analyst Steven Kent said Wynn Resorts' moves were likely appropriate considering the declining room rates on the Las Vegas Strip. Kent anticipates Wynn Resorts will be challenged in Las Vegas in the fourth and first quarters and predicts the company will reduce some estimates.
As always, analysts are there with "timely" downgrades. Thanks guys - where were you a year ago?

[Dec 23: Wynn Encore Casino Struggling to Fill Rooms During Launch]

No positions other than regret not changing to a tracking system that could short stocks about 1 year earlier

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