United States
Another week, another 4.4 million newly unemployed people in the United States. Officially, at least. This doesn’t include the self-employed and those who work in grey markets for cash under the table. Or drug dealers. Don’t forget about the drug dealers.
One wonders why casino stocks in the United States are still at the same levels they were in 2013 when the economy was, you know, actually working. MGM for instance despite the selloff is trading where it was 7 years ago, back when it was doing business. Caesars is still valued at over $5 billion, even though $4 billion on its balance sheet is goodwill that doesn’t really exist anymore, and it has $8.5 billion in debt that can no longer be paid off. Boyd is now leveraged 130%, with goodwill yet to be impaired at 66% of market cap. Eldorado has held stable for the last two weeks like its peers, but fundamentally the futures of all these companies are in doubt.
That’s not to say that the stocks can’t climb from here in the short term. Investors are still looking for excuses to buy, for lack of understanding that economies are not wind-up toys. You can’t just start them up again after they shut down, or keep them going with bridge loans you finance out of thin air with no consequence. With the Federal Reserve shoveling another $370 billion onto the monetary base just this week, assets are going to be pumped up in the short term even if casinos have dismal business prospects and are almost certain to lose money over the next few quarters.
For the next month or two perhaps, the focus will be on the slivers of what seem like good news. Things like online gambling revenues rising because people are staying at home, that sort of thing. That may be true, but it’s an illusion. With millions losing their jobs every week, many staying at home are being funded by individual bailouts. Even if they don’t have the money yet, people are spending as if they do, anticipating they can pay the bill when the check arrives from the IRS. They imagine they will just get right back to work when they are allowed to leave their houses, but that won’t happen.
Increased online gambling revenues will be emphasized and milked by gambling CEOs during upcoming earnings conferences but they are only temporary. Investors will still probably use the news as an excuse to buy anyway. They will stop doing this when food prices rise from imminent shortages and a higher and higher percentage of meager incomes get spent on basic necessities.
The other factor that could bring up US stocks in the short term is news that COVID-19 was never the monster we thought it was after all, which is what I’ve been saying from the beginning of this mess. Apparently, 21% of New York City residents have tested positive for antibodies. 11,267 deaths in the Big Apple so far and a population of 18.8 million, 21% of that is 3.95 million, which means the fatality rate for the coronavirus is 0.285% in the hot spot of hot spots. For that, governments shut down the entire world. I wonder if they’ll do a similar poll in Italy so we can find out what really happened there.
If you’re holding any US casino stocks for a short bounce, I advise being out of them before June 1 regardless.
United Kingdom
The FTSE 100 has been stable for a month now about 25% off highs and firmly in bear market territory, but UK gambling stocks have recovered like a slingshot. 888 is now 8% above pre COVID-19 highs, together with Flutter. GVC is still down 16% since the selloff began, with William Hill and Rank still way down at 50% losses. William Hill and Rank are the safest at these levels. 888 remains a hold, but sell Flutter ASAP if you own it. This recovery in the gambling sector is also fueled by seemingly good news in online gambling revenues. Once again, this juices numbers in the short term but it is not a sign of health. It’s an emergency fuel tank being burned up.
The UK bookies are probably going to see another big leg down soon, my guess is led by Flutter, which has recovered too strongly. William Hill and Rank should be somewhat insulated from the next move down, given their recoveries so far have been absent and they have much healthier finances than Flutter or GVC.
The bigger problem is that over the next few months we are going to start hearing about serious problems in the European banking system. Unlike the broader FTSE 100, and very unlike the gambling sector, UK bank stocks are in freefall. HSBC just keeps plummeting. Royal Bank of Scotland hasn’t bounced at all, and Barclays just barely. UK banks, and all European banks are seriously ill. When Deutsche Bank fails, they’re all going down and the bailouts will be obscene. There could be a giant blowup any day really.
Below are the three major UK banks since February 17. Not a good sign. Something big is brewing in the financials.
Macau
MGM China reported today that Macau revenue is likely down 63% for the quarter. Expect similar numbers across casinos there. Wynn Macau is mulling a dividend cut, and Macau airport tax revenue has been cut in half. None of this is surprising. What will be surprising to many is the tepid recovery, especially among the VIPs. VIPs are VIPs because they are at the head of the Chinese economy, which is export-based. Those exports are going to come down as the dollar falls in real purchasing power and the VIPs are going to have big problems to deal with. We played Macau for a short bounce, that bounce has arrived, and profits should be taken if you have any. I advised taking profits at around $30 in the BJK ETF, and we are close enough. I don’t see any recovery getting us close to previous gross gaming revenue levels any time soon. When Macau investors realize this, they will sell again. Best beat them to the punch and get out now.
Australia
A total of 78 people have died from the coronavirus since the pandemic began. Daily new cases are nearing zero. Australia has this thing under control and stocks should start to lift off over there. Crown Resorts continues to look like a good buy here, recovering nice and steady. It was able to lay off 11,500 workers, not an easy feat, and has secured $1 billion in funding to finish a new casino even though it is still planning to pay its dividend. This is quite weird and I’m not a big fan. Still, Crown looks better than most.
As gold continues to climb to new records in every currency except the US dollar (that’s coming soon), Australia will become more and more attractive for foreign investment, especially because the Aussie dollar is still weak, but the country is chock full of resources. The biggest worry short to medium term though is its housing market. It’s been falling hard since 2017 and has a long way to go. Still, as more problems grip the United States, China and Europe, Australia is going to look increasingly attractive as a safe place to store money. That should help Crown, Tabcorp, and other Australian gaming firms get through this mess better than most, and should put the Australian gambling sector in a very good spot once the virus is gone.
