A friend of mine owns a distillery, a connoisseur type of guy. He distills whisky, absinthe, grappa, and other assorted spirits. We usually hang out on Thursday nights and one of those nights he went on about the history of distilling. One detail he shared that stayed with me just for the imagery is that back in the 18th century, when someone went down into the area where primary fermentation was taking place, they would tie a rope around his waist and pull him out if he didn’t come back after a certain period of time. People would routinely faint in there from CO2 asphyxiation and if they weren’t pulled out immediately, they could suffocate and die.
Whether you want to picture a canary in a coalmine or a distiller in a fermentation room, it’s time to check on that bird or pull on that rope. Things could get a little nutty over the next few weeks and months, and the gambling sector could very well take a lead role as indicator. In fact, it might already be doing so.
We just saw three all time records over the last 8 trading days in the U.S. equity markets. The first was the pace of the selloff, the major indexes shedding more points last week than any other week in history. Second, the same indexes gained back more points just yesterday than any other day in history. Notice though, which stocks kept falling despite the record rally – specifically the most highly leveraged and overbought U.S. casino momentum stocks.
Leave that last point to one side though for a second. I didn’t mention the third record yet, which is the craziest of the three. Long term Treasuries rallied so hard that yields collapsed by a higher percentage than any other week in history. There isn’t even a close second place. Last week, yields on the 10Y fell 23.4%, a total of 34.4 basis points on the week. The runner up was the second week of December 2008 at 17.7%. Counting from February 19th, yields on the 10Y collapsed a total of 54 basis points from top to bottom, for a mind-numbing fall of 33% in all of 8 trading days.
I’ve run out of words to describe these figures. They’re just nuts, is all I can really say. I have long maintained, and still do, that this entire market is a gargantuan unfathomable debt bubble. It seems we could now be in the manic end stage of it. That debt markets are rallying so fast and so hard specifically now when the global economy is grinding to a standstill because of the coronavirus and debt premiums should go up, is evidence of a possible blow-off top in bonds in progress right now. The immediate catalyst is that everyone now expects the Fed to cut overnight rates by at least 50 basis points by March 18th at the next Federal Open Market Committee meeting. That almost certainly means it will be done. The Fed does not play chicken with the stock market anymore.
Now let’s get back to those casino canary stocks. You may remember that back in 2007, the year before the financial crisis, MGM served the role of canary, or rather fermentation-chamber-guy-with-rope-around-waist. From the S&P 500 top in October 2007 until just before the major selling begin in September 2008, MGM had already collapsed about 75%. It was in the epicenter of the housing collapse that shook Nevada to its core, worse than any other State. This time, it’s not real estate, but debt generally. So MGM probably won’t be the canary this time. Its balance sheet is not as crazy as some of its peers. MGM was up with the broader market yesterday, about 2%. Not a great sign and it does show weakness, as the S&P was up more than double that, but not disastrous either. What was disastrous through were the regional casinos that have been making big acquisition moves in the recent past like Eldorado. Shares were down 9.5% on the day, despite the biggest absolute single-day rally in stocks, ever. At one point, Eldorado was down over 15%! This was just before the bulk of the panic buying that began in the late afternoon yesterday. So far, Eldorado is down 36% from highs. Would this magnitude of collapse have happened had Eldorado not gotten overconfident and taken over debt-diseased Caesars because Carl Icahn was getting too pushy? (Which I heavily criticized and warned against?) There would have been a decline, sure, but not like this. The stock probably wouldn’t have been so ludicrously overbought in the first place. So far, Eldorado looks like it is playing the role that MGM did in 2007. We’ll see if it continues.
Next we have Penn, which went on an inexplicable 57% rally in a grand total of three weeks earlier this year and just lost almost the entire value of that run in the last week. Like Eldorado, Penn has a lot to digest with Pinnacle and plenty of debt. Not as much as Eldorado took on but still a lot to deal with. The stock was down heavily despite record buying yesterday, failing to catch any kind of a bid as the buying frenzy accelerated into the close. It ended the day down 4.6%. Boyd, too, balance sheet leverage 126%, down 1.9% yesterday and couldn’t catch a bid.
But what looks particularly worrying are the game manufacturers, IGT and Scientific Games. IGT is closing in on its post 2008 lows, down 6% yesterday. Part of that is the coronavirus panic in Italy, but IGT hasn’t been a strong company for years and the effects of a downturn on it should be magnified since it’s higher up in the production chain. Scientific Games, down 2.6% yesterday, extremely leveraged and a financial wreck.
These are the beginning signs of a dead canary. I’m not calling the end of the credit cycle and the start of the next financial panic just yet, but it looks palpably closer now. It is starting to look like February 2020 could very well be this cycle’s October 2007, when MGM began to look for any and every excuse to sell off.
What I will be watching for specifically is the market’s reaction to the Fed’s eventual 50bp (or more?) rate cut probably on March 18. The more of that money that heads directly in to bonds and commodities, and the less into equities, the bigger the chances that we are indeed in a blow-off top situation in the debt markets that is going to bleed directly into price inflation. If the leading momentum gaming stocks discussed above keep falling even after the Fed makes its move, then another critical piece of the puzzle will be in place. Let’s see what happens over the next few weeks.
