Another day, another crack in the Eurozone and European Union. Italy voted to reject a constitutional reform proposed by its Premier, now resigned, Matteo Renzi, by a whopping landslide 60-40%. Regardless of the technocratic babble involved in the proposal, it was basically designed to centralize power so Renzi could pass more laws more easily. It’s hard to get anyone to agree, or in this case disagree, on anything by such a massive margin, but what is even more interesting is the systematic errors by pollsters exposed. At most, Italian polls had ‘No’ winning by 55-45%. It was the same with Brexit and with the Trump victory. Pollsters had it all wrong. The tide is clearly anti Euro and will not reverse any time soon. The Eurozone and the entire EU is on borrowed time, not because anything will necessarily happen in the political realm, but because Europeans are simply not for it anymore.
The end will probably not be triggered by any specific political outcome whether top-down or bottom-up, but rather by bond yields. In other words, not by sentiment, but by market necessity.
The fact that Italian stocks did not crash yesterday and that the Euro bounced higher after initially falling, is a gift for anyone who owns European stocks with reliance on Eurozone markets who has yet to sell any stake. For gaming, these include principally William Hill, Amaya, and NetEnt, which doesn’t have big business in Italy yet but is actively investing there. This also includes stocks like GVC, which finally looks to have topped back in October.
Gaming stocks that should be owned right now are American and British companies with little Eurozone business. Because of the Brexit vote, even though the United Kingdom may not actually end up leaving in practice, investors are likely see the UK as relatively insulated and European capital will probably leak there for safety. This should do well for 888, Ladbrokes, Paddy Power Betfair and others, with the exception of William Hill which may get itself involved with Amaya and have too much reliance on the Eurozone.
Crucial to watch in the coming months are Eurozone bond yields. Italy’s may have finally bottomed in August, France and Germany in July, and Spain in September. They will all likely move up together. This is not just a European phenomenon. It’s global. Take a look at this long term chart of American yields.
A 30-year downward trendline is in danger of being broken. It eventually will be broken, because bond prices cannot go up forever. It can be broken any day now. A once in 30-years market event can be a once-in-a -lifetime deal.
The money supply in the Eurozone also just ticked down on a monthly basis for the first time in at least a year. There is no reason to hold any Eurozone-dependent stocks at this time. The turmoil ahead is bound to generate scapegoats as well. As usual, the brunt will be absorbed by the most heavily regulated industries, banking and gambling. More special taxes could be raised as governments find it harder and harder to service their debts, and right wingers will blame the hard times on moral decay and lash out at gaming even harder.
As for Asia, tensions between Washington and Beijing are already flaring even before Donald Trump has taken office. His call to Taiwan, not a bad thing by itself if the purpose of it was to just be friendly rather than to specifically anger the Chinese government, is putting Macau-based US companies in further danger. The crazy Tweetstorm that followed was cringeworthy. A blusterer like Trump will not see the danger here, and even if he does, any negatives absorbed by Wynn or Las Vegas Sands will simply be shrugged off by him as casualties of standing up for “American Exceptionalism”. American tariffs on Chinese goods are coming and what better way to retaliate than by attacking US companies in China? If I were Xi Jinping, that’s what I would do. The coming trade war will also hurt domestic business in Macau, as the middle class will shrink and the gaming mass market along with it, the one sign of life that Macau currently has. Not for long.
US stocks look safe for the next few months but need to be monitored. Same goes for the UK. The one other area that seems relatively safe for now is Russia. That would make Nagacorp a decent choice for stashing some capital. Russia already had its currency crisis it seems, and it looks to have been successfully controlled by possibly the only conservative and relatively sane central banker on the planet, Elvira Nabiullina. Russia also already has high interest rates and very low government debt to GDP, so if Nagacorp can successfully expand to the Primorye region by 2018 as are its plans, the future looks OK for them, maybe even bright. Trump and Putin’s bromance just adds another positive.
Model Portfolio Update
Adding a 5% position in Nagacorp Ltd.
