There’s a lot of dangerous-sounding news going on right now in Europe, the United States, the Middle East, and even the Philippines. Don’t get too worried about any of it for now, as we are not currently in or even close to the bust phase of the boom/bust business cycle. Eurozone Starting with the Eurozone, rumors are starting to become more insistent that Deutsche Bank, one of the most interconnected banks in all of Europe, is broke. They’re saying this is Europe’s “Lehman Moment.” Not quite. While it is true, as it is always true, that banks are broke because bank liabilities are always 10 times their assets, there is no immediate danger of a systemic banking collapse in Europe right now, though it will come eventually. The European Central Bank has so much excess liquidity in excess reserves from years and years of money printing that if there was ever any real trouble at Deutsche Bank, the ECB would figure out a way to hand any amount of money over to it, after of course first insisting on no bailouts and saying again and again that every bank is on its own. But in the end they will be rescued, no question. It is unlikely that there is any existential pressure being exerted on Deutsche Bank right now anyway because money supply is still growing in the Eurozone. Severe and systemic banking crises almost always occur when money is tightening, and we are currently on a major upswing. The Savings and Loan crisis of the 1980’s was brewing for years but did not fully unraveled until August 1987 when Congress bailed out the sector for nearly $11 billion. August 1987 happened to be a time when money supply growth had suddenly stopped, leading to the October 1987 crash. Lehman Brothers crashed in September 2008, at the same time of another monetary contraction that had begun in April that year, again leading to a stock market crash. The euro supply in the Eurozone is growing steadily and while Deutsche may have some problems, these problems will probably not lead to any kind of systemic explosion, at least not for another 9 months to a year. Anyone concerned about the gaming sector in Europe need not fret too much right now. Positions can be maintained and major dips bought in any relatively healthy gambling stock and this whole Deutsche Bank business will dissolve away probably until next summer at the earliest. The UK Meanwhile, in the UK, still no sign of any Brexit, no surprise here. Fellow Tory Ken Clarke recently lashed out at his Prime Minister Theresa May for having “no idea” how to extricate the United Kingdom from Europe. In response to this, her office gave the world a timeline of 5 months from now to trigger Article 50. This doesn’t look likely, because it puts the UK in a corner. If the rest of the European Union knows she has a timeline, they will toughen their negotiation stance and call her bluff, giving May even less to work with, and she’ll have to extend the timeline. A timeline is a sign of weakness. If she were strong she would just invoke Article 50 and then let the chips fall where they May, pun intended. Nothing big looks like it will happen in the UK in the next few months (at least 5), so continue to hold any positions in that market as well. Ladbrokes, William Hill, 888, and Rank all look safe, with Rank looking particularly attractive right near 52 week lows. The United States Here is something that could cause some instability, but chances are still low that anything will happen within the next few months. Congress just passed a law allowing September 11th victims to sue the Saudi Arabian government for terrorism. It passed nearly unanimously over President Obama’s symbolic veto, and that kind of agreement in Congress usually means that the bill is inconsequential if you look at the fine print. One lawsuit has already been filed against the Kingdom by one Stephanie Ross DeSimone, suing the Saudi government for material support of the hijackers, 15 of whom were Saudi Arabian citizens. There will be others. The question is, will US courts actually be able to freeze US-based Saudi assets to use as collateral to pay off these plaintiffs if they win? Any reward would likely have to be filtered through the executive branch because we’re playing with fire here. If any Saudi US Treasury assets can be seized without the direct go-ahead of the executive branch, we’re looking at a massive selloff in the bond market from the Saudis before their assets can be seized. This doesn’t look likely right now either. There is probably some kind of safety valve in the bill that will prevent any actual money or assets from transferring hands even in the event that DeSimone wins. This, in order to prevent any waterfall decline in the US Treasury market. US gaming stock positions can be maintained, with a sell target for half the MGM position at $28. Multiyear resistance is at $28.30 and the stock will likely not break through that level on the first try. It looks like it will be a strong winter for MGM shares at least through April, so just let the position ride. The Philippines President Rodrigo Duterte’s rhetoric and actions against the recreational drug industry (both supply and demand side) continue to step up. At this point there’s not much more he can say that would sound more threatening to both drug addicts and drug dealers. This has investors worried about whether Duterte will follow through with shutting down or at least severely damaging the Filipino gaming industry, which he has threatened to do. However, Duterte has already backtracked on shutting down online gambling. He knows where his bread is buttered, and much of the tax revenue he relies on comes through the Philippines monopoly gambling regulator. He doesn’t get much revenue from drug dealers because that is illegal, which is why he can cripple that industry, but doing anything substantive against gaming would hurt the Filipino economy too severely for him to keep his legacy he surely wants as a tough but beneficent leader. A double bottom looks to be holding in Melco Crown (MPEL), the easiest way to gain exposure to the Philippines. A small 3% position looks like a safe play with a sell target just below $20. With the amount of fear now pervasive in major markets around the world, this is when stocks generally climb when the ammunition is there to do so. The money is there and the fear is there, so the wall of worry is firmly in place.
The bull and bear cases for Macau as we near all-time highs
March 13, 2018