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Macau earnings on tap, why to sell into strength

TAGs: Editorial, Macau

This week may be the last week to lock in Macau profits until the winter. If you still own Macau stocks and haven’t at least lightened positions to keep some profits, I suggest doing so on the upcoming earnings reports. Wynn, Las Vegas Sands, and MGM are all reporting earnings this week. Whether they beat or not is not really the issue, but rather what happens next.

Macau earnings on tap, why to sell into strengthThe sentiment surrounding Macau right now is quite bullish, and these are good conditions for at least lightening positions. Wynn is right near its 52-week high, by itself a technical signal that will trigger at least some selling by technicians who look at nothing but chart patterns. Beyond the technicals, we have the ongoing monetary situation, with dollar supply growth bottoming out around mid-to-late August at dangerously low levels. Even if Wynn doesn’t decline through the whole month of August, it is very unusual for a major to trend higher when the dollar supply is not growing. If you sell now, there is a small possibility you won’t dodge any significant decline, but the chances are miniscule that you will be missing any significant rally.

What if Wynn beats estimates? This will likely cause a brief pop in the stock where you can probably take profits at a slightly better price. Some stocks always beat estimates. Wynn has been 50/50 since 2014. In 8 of 14 quarters since 4Q2013, Wynn has beaten EPS estimates. That’s a rate of higher than 50% through one of the worst bear markets that Macau has ever seen.

There have been no major attacks against the VIP market this quarter in China save an off-the-cuff warning from a junket firm about moving money around, so there aren’t likely to be any major downside surprises here. The downside surprises are more likely to happen in mid-to-late August, when the monetary situation reaches its trough. We are likely to see a sharp but quick selloff in almost everything. If you’re a Macau fan, the time to buy for at least a short term trade will be then, not now with Macau stocks near 52-week highs.

As for revenues, Wynn has only beaten 5 out of the last 14 quarters, so a beat in revenues will push the stock even higher than a beat in earnings. Taking a longer view though, Wynn is back to where it was revenue-wise before the 2014 collapse, and this I believe is what is making investors bullish.

The best and most conservative earnings trade for Wynn at the moment I believe is to hold until earnings, assuming both a revenue and earnings beat, and then to sell into strength on the announcement, whether beat or miss. There are too many headwinds into September to justify holding the stock through the whole month of August. For those who do not want to lose their positions and don’t trust themselves to be able to get back in at an intermediate low, I suggest simply buying a few puts that will hedge against any decline going out to mid-October.

As for LVS, it has beaten earnings estimates only 6 times over the last 14 quarters, and only 3 out of 14 for revenues. A beat on both could bring it closer to its 52-week high of $66.22. The best and most conservative trading option for LVS I believe is the same as for Wynn. Hold it until the earnings announcement, assuming an EPS and revenue beat, and then sell into strength. Even if LVS does not decline through August, the chances of it trending higher though August are very slim.

As for MGM, it looks to me to be the biggest sell of the three majors to be reporting earnings this week. I also expect a beat for MGM on earnings, and maybe revenue. The US is currently in the boom phase of the business cycle and the monetary decline that has taken place since April will not be a factor in its earnings reports. MGM has beaten earnings estimates in 9 out of the last 14 quarters, and revenue has beaten 7 out of 14, with two estimates in line.

MGM just hit a new 52-week high yesterday, so there is no reason – fundamental, technical, or monetary – to hold it through August. I suggest liquidating MGM entirely on the earnings announcement, whether a beat or miss, and then checking back in September. You are unlikely to miss any rally if you sell now. At worst you’ll miss a few points, which are not worth the risk of holding under these conditions.

A brief word on the current monetary situation. There are two developments of interest that could affect equities on a global scale, the dollar being the world’s reserve currency. First, the dollar index is approaching major support levels at 92.

Macau earnings on tap, why to sell into strength

If and when the 92 support zone is broken, there is no further support until around 80. That’s a possible 13% fall in the dollar index, and it could happen in less than a year, just as the rise from 80 to over 100 happened in the space of about 7 months. A move like this has the potential to spike price inflation and cause the public to question the long term viability of the dollar. Regardless of what this does to the Yuan, such questions are never good for equities anywhere.

Secondly is the stagnating money supply. We are about to encounter the seasonal low in dollar growth. It could bottom out at anywhere between 0% and 1.3% quarterly growth in August. Whatever the low, it will be between those rates based on the numbers released by the Fed in recent weeks.

Here’s the interesting thing though. A stagnating dollar supply, from a supply and demand perspective, should strengthen the dollar. But the dollar is falling. If we don’t see some kind of jump in August as dollar growth reaches its low, then the dollar could be in more fundamental trouble than it now may seem. No large cap stock is safe when the dollar falls under such circumstances. The play in such a situation is gold, silver, and commodities, not equities.

Conclusion – expect earnings beats in the major Macau stocks this week, and sell into strength. It may be your last opportunity to lock in profits before a likely August decline. And keep your eye on the dollar index and the 92 level.

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