MGM customer volumes are falling again. That means the MGM economic indicator is flashing red. Back in July 2014 I introduced this little technique here as one part of a triangle for predicting a shift in economic trends. As the largest employer in Las Vegas and still primarily a Las Vegas company, customer volumes at MGM can be used as a proxy for the amount of money flowing through Las Vegas as a whole. In turn, the amount of money flowing through Las Vegas can be seen as an indicator of overall economic health in the US. If volumes are rising at MGM, credit is rising and boom times are continuing. If customer volumes are falling, credit is falling and the economy may be in trouble.
Due to the pitfalls of using only a single indicator for assessing these trends, I suggested a triangulation approach back in 2014. The second part of the triangle is the money supply coming out of the Federal Reserve, and the third is economist Andrew Lawrence’s Skyscraper Index, which he proposed in 1999. That is, the construction of the world’s tallest building tends to coincide with recessions.
Last week we discussed how the second part of the triangle, money out of the Fed, is already faltering, and this during a time of the year when it typically is not a problem. Now, the third part of the triangle might be in place as well. In a January article, CNN wrote an expose on one monstrosity of a skyscraper, Saudi Arabia’s Jeddah Tower, what would be the world’s tallest building scheduled to be completed by 2020 and standing just over 1 kilometer high. If and when completed, it will put the Tower of Babel to shame. It will cost about $1.4B to complete.
Interestingly, a modern reading of Biblical story of the Tower of Babel can reinterpret the tale as the world’s first recession. Everyone gets together for an enormous construction project, but it is never completed and the economy breaks up again as people return to more earth-bound interests, AKA the consumer sector. In recessions, grand projects get put on hold and people return to their more basic needs. Granted it’s probably not the intended message of the story, but it fits well enough.
Back to MGM, volumes there have been decreasing for the last half year. In its latest 10-K, the company revealed that Las Vegas visitor volume decreased 2% in 2017. Table drop and slot handle together are essentially flat (up less than a tenth of a percent), and with win percentage slightly higher than 2016, it means that ceteris parabus volume is indeed falling not just in terms of the amount of people going through the place generally, but also in terms of the amount of people gambling.
Further, for the first 3 quarters of 2017, Las Vegas visitor volume decreased 1%. For that number to reach 2% by the end of the year means that the pace of decline is picking up. The reason that this hasn’t shown up yet in MGM’s top line is that REVPAR has increased 4%, making up for the decline.
Back in 2016, this wasn’t the case. For the full year, visitor volume increased 1% and REVPAR was up 6% over 2015. And for the first three quarters, volume was up 2% and REVPAR up 7%. So we definitely have an indicator flashing red here. In 2007, as described in my 2014 introduction to the MGM indicator, volumes were flat for the full year, and the next quarter the situation quickly worsened. Things won’t unfold in exactly the same way this time as they almost never do, but customer volumes out of MGM need to be watched carefully when MGM reports its next earnings at the end of next month.
MGM stock was remarkably resilient to Wall Street’s broad-based fall yesterday March 20th, with shares up 0.8% on the day. Clearly, this time MGM is not part of the speculative mania, which back in 2008 was centered on the Nevada housing market that got absolutely destroyed in the Great Recession, and MGM was very close to the center of the action. If we are indeed closing in on the next recession though, I doubt MGM will suffer the same fate as last time falling sub $3. It’ll fall, but not nearly as hard as it did in 2008. Keep in mind MGM is still about 60% below its 2007 all time highs. It’s not going to reach them, and there is no parabola this time. This time the parabola is in the bond markets all over the world.
Still, there is no fundamental reason to keep holding MGM anymore. While top line is up, operating income is down because of higher SG&A expenses indicating possible price inflation and EBITDA is down 16.5%. The biggest reason that MGM had such a great bottom line in 2017 is the Trump corporate tax cut. But since Trump is not cutting spending but rather paying for that tax cut by further tapping the already extremely overextended bond markets, the benefits to corporations are a short term illusion.
MGM had a good run, and it was a good buy back in February 2016. Shares are up 73% since then. There isn’t much more room to run here if any. The US stock market is getting really shaky and profits should be taken. If the boom isn’t over yet, it will probably be over soon. My call is before the end of this year.
