October is here, and the clouds are getting darker. The gaming capital markets are signaling that the worst is yet to come for stocks and the global economy. The bear market in casino stocks that began in May is about to spread to other markets and get worse in itself. This is not the time to buy any dips.
This column began 2018 with two bearish pieces, a theme that has continued throughout the year. Stay conservative, because this year was not going to be a booming one for capital growth, and scale out. Cryptocurrencies were going to flatten out, and as it turns out they were already on their way two weeks before 2018 even started. Price inflation was going to heat up again, and it has. There were no obvious buying opportunities except for the United Kingdom post Brexit, which hasn’t happened yet so we’re still waiting on that one. Back on January 2, I wrote:
Eventually, possibly in late 2018, we’ll start to see a positive feedback loop form where interest rates rise and force more borrowing to pay the interest, which raises interest rates which forces more borrowing and so on.
It looks like that process has started. We’re at the very beginning of the first bond bear market in 37 years, so only those in their 60’s and 70’s has ever traded or invested under these conditions. Last week saw the fastest rise in US interest rates since the early 1990’s. Italian rates, Eurozone Ground Zero, are up 82 basis points in two weeks. (Whoops, now they’re up 90, now that I’m giving this a proofread.)
So where do we stand now? It doesn’t look good. MGM is down 22%. Penn has been up and down all year and is now down 7.5% year-to-date. Boyd is down 14%. The VanEck Gaming ETF (BJK) is on the cusp of a bear market, down 19%. Las Vegas Sands is down 14%. Caesars is down 24%. Wynn is down nearly 30%. The Stars Group had a rally earlier this year but all the gains have evaporated.
The UK hasn’t escaped either. William Hill is down 28%. Paddy Power Betfair 27%. Even 888 is down 32%. GVC though continues to be stubbornly resilient, down only 8%. Scandinavian markets haven’t escaped. Even Australian gaming is falling.
The higher up in the gaming capital structure we go, the worse it gets, as it should in any downturn. International Game Technology is down 40%. Scientific Games has been cut in half. If you shorted that one back in January, now is a good time to cover.
Gambling stocks are telling us something bigger is happening than just a gaming stocks bear market, I believe just as they were in 2008. 10 years ago, the large cap casinos like MGM and LVS topped at the same time as the S&P 500 did, but they began collapsing immediately, exposing that something deeper was wrong systemically. The rest of the stock market took another year to collapse. This time gaming stocks have given us a 4 month head start. They topped in May and they have yet to be followed by everything else. Analysts that generally have nothing to say about casino stocks are starting to take notice, too. See here, for example.
While I don’t know exactly what the order will be, I have a hunch the bond market will give way first, followed by stocks as conservative investors chase yield and run away from a falling knife. Money supply growth in the US has been anemic for a year now. A further advance cannot be sustained. The money simply isn’t there.
The only question in my mind right now is not whether the fall will continue. It will. The question is whether it will be inflationary or deflationary. That I’m not sure about, at least initially. But if it is initially deflationary initially, it won’t stay that way. Central banks will respond as they always do with more money printing, but they will not be able to reinflate the economy this time. Any money printing will most likely bleed directly into the consumer side, exacerbating the inflation we are already seeing now.
There is still time to scale out. I believe we have another 2 months or so until things start getting noticeably worse. In December the European Central Bank is going to end its ongoing money printing programs, which will trigger another European debt crisis new cycle and exacerbate the already shaky US bond market. This is all as trade wars will worsen amid deteriorating economic conditions generally and our wise politicians get madder and madder at each other for their own serial amusement.
On the bright side, there have been escapees. There are always a few. Eldorado Resorts continues higher and just spent nearly $2B on Tropicana Casino in Atlantic City. Churchill Downs is up nearly 20% on the year. This just makes them better shorting candidates, or for more conservative traders, hedging options. Fundamentals are about to matter very little as liquidity dries up.
But let’s end on a positive note. When this is all over, those companies that survive with healthy balance sheets are going to be huge winners. Just keep that mind as we batten down the hatches.