The world feels increasingly like a structurally faulty roller coaster. There are so many potential fault lines that just seem to keep getting more intense on both monetary and political fronts. Existing political unions are disintegrating, at least on paper if not in actual practical fact. Attempted coups in politically tricky nations are shaking up NATO and could end up redefining the global balance of power. Terrorist attacks are getting increasingly worse especially in Europe, cop shootings are peppering the United States, lead political candidates are set to “declare war” on ISIS whatever that means practically, and the Italian banking sector looks to be on the verge of collapse.
These conditions have to make any investor anxious, which is not necessarily a bad thing. Tempered sentiment is usually good for sustaining bull markets with the so-called wall of worry, and monetarily we are now in a definite boom phase. With the minefield in mind, let’s see where we can navigate for the second half of 2016, which will definitely prove interesting if scary as…Winter is Coming.
United States
The US currently looks like the safest place to put money for the next few months. The dollars are flowing, the markets are breaking new highs, and Las Vegas is right next door to the core of new Federal Reserve money which seems to be amplified in California. We went back into MGM on June 28 and we are now at an 8.6% gain there. Almost any US gaming stock will do well in the months ahead except the ones in existential danger like Caesars. MGM is just easier to hold because it is the least volatile.
The labor market is becoming increasingly tight which is leading to higher wages. This will hurt the low skilled workers even more as they are priced out of the market due to minimum wage laws, but low-skilled workers are not a big part of any economy so the actual unemployment level may be less important now. Higher wages leads to higher spending and recreational activity in Las Vegas. So long as price inflation is below 5% there will be no monetary panic, so it is safe to buy your favorite gaming stocks until that time. When 5% price inflation hits, money will start pouring out of all stocks and into commodities and commodity companies, so when the CPI gauges hit 4% it’s time to sell the gaming sector. We’re not there yet.
Last week the US money supply hit another record, and this during a time when there is usually a seasonal decline. That means the rest of the year should see very strong money increases and lead to very strong stock prices. This will all end badly of course, but not for some months at least.
Politically, there isn’t much danger from either Clinton or Trump on the gambling front. The danger is on the war front. Trump could theoretically do anything without asking anybody, constitutional or not. Trade wars, real wars, etc. Clinton wouldn’t be able to do much because nobody trusts her and she’ll be harassed by her enemy politicians on relatively inconsequential matters that will only slow her down from passing anything. Few would let Clinton act on her own, but few could challenge Trump if he decided to.
Macau
Macau is in an interesting situation now. A look at the Market Vectors Gaming ETF (BJK), which is mostly Macau stocks, shows a bottom forming around January and a brief pattern of higher lows. The picture is not at all stable in China but we may be at a relative island of stability here that could last for the next few months. Monetary trends in China also suggest this, with a big burst in money supply last month, see below:
Some Macau stocks are buyable here though we already have a 3% position in Las Vegas Sands as of June 28th for a 12% gain so far. Wynn may also be an OK pick here, but stay away from Melco Crown for now. There is too much exposure to the Philippines for Melco and the future of the gaming industry there is uncertain given the new political climate. LVS is enough of an exposure which gives some access to what may be a short cyclical bull within a secular bear market in Macau. Trailing stops can be tightened to with 3% of total gains because bad news can come out of there relatively quickly, especially if Trump is elected and decides to start a trade war.
Europe
Europe at this point should be avoided almost entirely, save only companies that are fundamentally very strong. United Kingdom stocks shot up way too high way too fast post Brexit vote, and it smells to me like direct central bank equity buying to calm markets and avoid a panic. This is especially considering the monetary situation in the UK has not improved and still looks quite dire. The Bank of England has refrained from lowering interest rates for fear of what it might do to the already beaten up pound sterling. There is not much more the BoE can do policy-wise for fear of ruining the currency.
One interesting if risky move more aggressive investors may want to try is shorting GVC. I won’t put this in the model portfolio but the stock seems way too high now with a lot of headwinds. Besides an upcoming debt payment, Turkey is rumored to be a big part of GVC’s revenues and that country is going through its own spectacular mess right now with a continually falling currency. It may even break off from NATO soon, especially if it was the CIA that instigated this coup attempt. Who knows, but the language between the State Department and Turkey is not very lovey dovey right now.
Italian banks should really be the European focus right now though. When those go, the Eurozone could easily come apart at the seams.
