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Wynn & Amaya Show Reaction to News More Important Than News Itself

TAGs: Amaya Gaming, Editorial, Macau, Nasim Taleb, Rafi Farber, Wynn Resorts

Wynn & Amaya Show Reaction to News More Important Than News ItselfNassim Taleb is the world’s most recognized expert on randomness. Gambling isn’t random, so the whole term “game of chance” is misleading. There are statistical probabilities with gambling that casinos insure against, and gamblers can insure against them too if they’re smart enough. If the house didn’t always win statistically, there would be no gaming sector.

Real randomness cannot be insured against. Taleb gives several examples in his book “The Black Swan” of uninsurable randomness hitting a casino and nearly bankrupting it. First, a tiger attacks Roy of Siegfried and Roy, destroying the casino’s main attraction. Second, a construction worker for the casino is injured on the job, and when he doesn’t get a good settlement he tries to blow up the entire building with explosives. Three, an accountant puts all the casino’s tax returns in a box under his desk for years instead of filing them with the IRS, and four, the CEO’s daughter is kidnapped so he steals company funds to ransom her.

When true randomness hits, it is a good tell of the company’s overall health in relation to its stock price. Wynn was just hit with a Black Swan when one of its junkets ran off with as much as $258M, about 35% of last year’s earnings. WYNN shares fell 10% in 3 days, but quickly recovered to pre-heist news levels. Yes, that quick recovery has evaporated as well, but the fact that it at least happened is evidence that bottom pickers are trying to time an entry here, and a bottom is getting closer. Wynn, after all, has lost a dizzying 75% of its value since March 2014 highs of $246 a share. If this heist had happened back in 2014, the stocks reaction to the heist would have been much more severe.

In fact, we can see all of Macau as hit by a random Black Swan, one that makes the Wynn theft look like a drop in the bucket. The Macau bull market until March last year was fueled by two things: Chinese money printing and a government looking the other way. The Chinese money printing stopped, or at least significantly slowed down bringing on the bust, though that is not random and can be seen as it happens with a decent buffer to prepare. The random event was that the Chinese government decided to choke off Macau at the same time. You cannot insure against overzealous government regulators. It is a random event.

Macau’s reaction in that it sold off so heavily on a government crackdown belied more inherent weakness in the market. The reaction to the news was more telling than the news itself.

If we may take a fresh example from outside the gambling world for a second, look at Volkswagen. Shares collapsed 17% yesterday when the company admitted to cheating on its emissions tests. Perfect randomness for Volkswagen shareholders, totally uninsurable. The reaction in the next few days will tell us a lot about the passenger car market. My call is shares will not recover because the entire passenger car market is flooded with subprime loans, inherently weak and dependent on zero interest rates that cannot last. Reaction to the news exposes the rot spread through the whole industry. Had the car industry been in better shape, this news would not have devastated Volkswagen shares as much.

Amaya just had a brush with randomness of its own when news came out of malware affecting its Eastern European Full Tile Poker and PokerStars players. The virus is hidden in torrents usually on the subject of poker education, and when downloaded allows an opponent to see your hand. Amaya cannot insure against this beyond recommending its players not to download any torrents, or else not to play poker on a computer in which torrents are downloaded.

Amaya shares were not much affected by the news, evidence either that the Malware episode was not that big a deal in the first place, or that shares are fairly priced for the shape the company is in. It’s hard to tell since Amaya’s malware episode was nowhere near the magnitude of Volkswagen’s or Macau’s, but three pieces of news support that Amaya is well priced. First, it ended up not being involved in the bwin.party/GVC deal financing, something I don’t think it would have been able to digest very well, given that it is still chewing on FTP and PokerStars. Second is that it expects to successfully lobby for the opening of the California online gaming market. Since it is the one bribing the politicians for this, it may even secure itself a special crony spot in the biggest State in the Union. Third, it is entering the booming Daily Fantasy Sports niche, which is low overhead and Amaya should do decently there with crossover from its other players.

The one random Black Swan that could affect Amaya beyond this little malware hack, and Yahoo, and DraftKings and FanDuel for that matter, is government regulators declaring daily fantasy sports illegal. One Massachusetts Attorney General is already challenging its legality, and another New Jersey Congressman is asking some House committee to review the legality of the entire industry on a Federal level. Amaya’s reaction to that kind of development if DFS suddenly gets shut down would be much more telling of its fundamentals. DraftKings and FanDuel would obviously be hammered. Yahoo would be something in between.

In the end, the point is that inflated stock prices will be much more heavily affected by negative random news than shares of companies that are more fundamentally sound. Volkswagen’s extreme reaction to emissions test cheating is a warning shot across the bow to anyone heavily invested in subprime-riddled car companies. Wynn’s severe fall from $246 on Beijing’s money laundering crackdown exposed fundamental Macau weakness anyone who watched the Chinese money supply would have seen in advance. Wynn’s now more muted reaction to an up to $248M theft shows that prices are more fundamentally sound at this point and a bottom is closer. And Amaya’s brushing off of malware news suggests that its current position near the bottom of its recent trading range is a decent valuation for the company, considering its upcoming prospects in California and daily fantasy sports.

So if you have a hunch and some evidence of either good or bad fundamentals about a company and a truly random event happens, watch the reaction to the news more than the news itself to confirm your suspicions.

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