One month ago, I showed how customer volumes at MGM can be indicative, even predictive, of stock market declines. While there is no hard science involved in the art of prognosticating trends in capital markets, there is logic behind taking signals from MGM regarding how to trade and invest. In short, MGM is the largest employer in Nevada and customer volumes there can be indicative of how much loose liquidity is available in the economy. The more money available, the more people are willing to gamble with it.
The absolute bottom line reason why the stock market goes up or down is that money is either available or it isn’t. If it’s available, the market can go up but it won’t necessarily do so. If it isn’t available, it will go down, necessarily. Luckily, the actual money supply numbers are always available for anyone to read and show a much more exact figure as to how much money is available in reality. Customer volumes at MGM are less exact as a money indicator. More accurately, they show sentiment regarding the monetary environment. Using the two together can give investors a fairly decent system as to when to pull out your capital ahead of a crash.
If the two indicators together flash green, meaning high volume growth at MGM and high money supply growth, this is a strong buy signal. If the two indicators are in conflict, it’s a time of caution. Either money supply growth is shrinking and people don’t realize it yet, or people are hoarding cash by preference which could cause the market to fall anyway short term. If the two flash red together, get out ASAP.
To illustrate this, let’s use the last three severe crashes in recent memory. Most recently, there was the flash crash of July/August 2011, which had some of the most severe down days the S&P has ever seen. It didn’t last long and the market recovered quickly but it was very scary at the time.
The crash began on July 22. MGM’s most recent 10-Q at the time reported the period ending June 30th, three weeks before the crash began. (Unfortunately, MGM only filed it on August 9th, after the crash was over, meaning it would have been useless as an indicator. Nevertheless, in case it is ever filed before a crash in the future, it is important to see what was happening.)
MGM’s quarterly report, in fact, showed flat volumes for the period ending June 30th, meaning it was flashing red (page 30) (emphasis mine):
Total table games revenue was also affected by a decrease in baccarat volume, which led to a 4 percent decrease in total table games volume compared to the year-to-date period in 2010. Slots revenue increased 3 percent, with a 4 percent increase at our Las Vegas Strip resorts.
A 4 percent decrease in table games volume coupled with a 4 percent increase at Las Vegas strip resorts is close to zero growth, depending on what the absolute numbers are. The crash began three weeks later. The S&P fell from 1,350 to 1,100, 18.5 percent, in less than three weeks. MGM fell from $16 to $10.33 in the same time period, or 35 percent.
Money supply growth, however, was not slowing significantly by the end of July. The broader market fully recovered within 3 months. Only the MGM indicator was going off, which is consistent with the fact that it took MGM twice as long as the S&P to fully recover.
The next most severe crash in recent memory was the flash crash of April 26 to July 2, 2010, during which period the S&P fell from 1219.80 to 1022.58, 16 percent. MGM fell from $16.66 to $9.48, 43 percent. In MGM’s 10-Q reporting up to March 31, 2010, volume reports at MGM showed: (Page 17)
Uncertain economic conditions continue to affect our customers’ spending levels. Travel and travel-related expenditures have been particularly affected as businesses and consumers have altered their spending patterns which have led to decreases in visitor volumes and customer spending. Businesses responded to the difficult economic conditions by reducing travel budgets.
That 10-Q was not filed until May 7th, not exactly perfectly on time for the crash but enough to avoid most of it. It would continue for 2 more months. This crash was much worse than 2011 in terms of length and recovery time, indicating it was much more fundamental than sentiment driven. Not surprisingly, the money supply growth indicator was flashing red as well, as growth was virtually nonexistent right before the crash began. MGM took 8 months to recover, the S&P 7 months. One did not have to wait until May 7th to see what MGM volumes were doing. It was only a confirmation of the stagnant money supply.
But now, let’s look at the ultimate crash, that of September 2008. As you can guess, both indicators were flashing red, very much so. Money supply by late September was not only not growing at all, it was shrinking and so were MGM volumes. From the 10-Q filed on August 11, one month before the crash, for the period ending June 30th 2008 (page 16):
The decrease in table games revenue in the second quarter resulted from a 7 percent decrease in total table games volume. The overall table games hold percentage was within our normal range in both periods and was slightly higher in the current quarter versus the prior year quarter. Slots revenue decreased 2 percent in the quarter, with a 10 percent decrease at our Las Vegas Strip resorts… Rooms revenue in the second quarter decreased 6 percent, with a 5 percent decrease in Las Vegas Strip REVPAR. Average room rates were down 4 percent at the Company’s Las Vegas Strip resorts. Las Vegas Strip occupancy decreased slightly and the Company had approximately 32,000 fewer rooms available at its Las Vegas Strip resorts, mainly due to the Monte Carlo fire.
To be fair, money supply growth for the nearest H.6 Fed report to that 10-Q was released on August 14, 2008, showing zero money growth for the period. Both indicators were still flashing red even at that point, with fair warning for anyone who was looking.
Which takes us to the current 10-Q. What does it say and where are we at with the money supply? If you’ve been following the headlines, MGM is doing fine, even surprising to the upside (page 28):
Results of operations from our wholly owned domestic resorts in the second quarter of 2014 improved compared to the second quarter of 2013, primarily as a result of increased casino and hotel revenues as general economic conditions continue to improve. During the six months ended June 30, 2014, visitor volume to Las Vegas increased 4.2 percent and the average daily Las Vegas Strip room rate increased 6.9 percent compared to the same period in the prior year, as reported by the Las Vegas Convention and Visitors Authority.
Money supply, however, isn’t doing all that great but growth is still there as of last report. All in all, MGM is green but money supply is yellow, turning red. Given the environment at MGM, I would expect money supply growth to quicken in the coming weeks. If it doesn’t, there will be a dramatic reversal of fortune at MGM. The one-week M2 average, in absolute numbers, has been stagnant since early June. As summer turns into fall and business picks up, I expect money supply to pick up once again. Keep your finger on the pulse but I don’t think we’re in any kind of emergency in the gaming sector or the rest of the US equity markets.