I've moved from 81% to 79% cash.
So what are the benefits? The clear positive to the gaming industry of ETS is reduced labor costs. To get an idea of magnitude, roughly half of MGM’s revenues goes to labor. The employee base is not comprised of all dealers, of course. But could MGM improve EBITDA margins by 10% by eliminating dealers? Holding everything else constant, maybe.
The key, as always, is the consumer. If the consumer doesn’t embrace ETS then it won’t happen, no matter how much labor it saves. The cost benefits of cashless gaming were apparent long before SunCoast proved the consumer would adapt. The second hurdle may already be tripping up Excalibur. Nobody wants to lose their job. New technology always displaces and disrupts and ETS would be no different. As the Las Vegas Review-Journal reported, some dealers are vocally not happy with MGM. A total of 40 dealers were let go, although the company did promise to find them jobs at other MGM casinos. I’ve written extensively on the growing influence of labor unions on the gaming industry, particularly if Obama wins the presidency. ETS would be one more issue for the labor bosses to pounce on.
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“I’ll study and get ready, and then…the chance will come”
Those who have proactively prepared for this global financial tsunami are going to be rewarded in the coming months. Repeatable success in business and in life is a function of seizing opportunity when others are preoccupied reacting to what you already prepared for. From US politicians to Japanese bureaucrats to Russian oligarchs – reacting to a global financial crisis will now be their cross to bear.
No, this isn’t an “I told you so” note – it’s a “pay attention to the facts” one. This is not a time to get cute with rhetoric. Global access to capital continues to tighten in the face of slowing global economic growth. We didn’t need Bill Gross to tell us that – this storm’s been pounding the global beach heads consistently for the last 9 months.
In Europe, Jean Claude Trichet continues to tighten capital requirements because he understands that lending bailout money to investment bankers who do not have a risk management process is going to amplify the financial crisis, not ease it. In Japan, the government is talking about issuing another 500B Yen in debt this morning, because they still don’t get it – anytime they see storms, they lever up the boat, and hand one another the bailout pails. In Russia, Putin had to have the government intervene in the currency market yesterday selling down at least $4 Billion in reserves to support the Ruble. The Russian stock market is getting hammered by the geopolitical hurricane vote again this morning, trading down another -4.8%, taking its cumulative losses since we issued our “Fading Fast Money” call on 5/19/08 to -42%!
As ridiculous as the financial market entertainers sound is what it is here in the U.S.A. Our children will look back on CNBC’s most popular shows, “Mad Money” and “Fast Money”, like I do when I read about tulip manias. From China to fertilizer stocks to Brazil, this was the loudest global stock market mania in world history. If you think that’s alarmist, don’t blame me – blame the revisionist historians who will start to reflect on as much with hindsight.
My most recent ‘Hedgeye Portfolio’ positioning (which goes “live” on our Portal this morning at www.researchedgellc.com) has been that cash is king. With yesterday’s -3% US market down move, I took the opportunity to move from 85% to 81% cash. I can assure you that I have taken on my fair share of criticism for suggesting that Wall Street still isn’t “Bearish Enough”, but that’s ok – I’m always up early and ready for a faceoff with the financial gurus of this game. Goldman is downgrading Merrill this morning – gee, thanks. The US Dollar has now moved +10% since its July 14th low. That’s not partisan politics, that’s a financial reality.
“So what do I do now Mr. Mucker”? “What overly confident genius can you offer me this morning from your soap box in New Haven”? I’ll save some of my critics the keystrokes and front run this morning’s predictable run of inbound emails. My answer will remain the same as it has been. Drop the crack berries and the latest “Fast Money” butterfly wing nut technical strategy, and find a repeatable process. Prepare proactively for the next leg of this storm. Warren Buffett will offer similar simple advice – read, and do your own work. If you’re more of an artist with your portfolio, I’ll submit Michelangelo’s view, “genius is eternal patience.”
Speaking of genius, on everyone’s required reading list in this business is “When Genius Failed”, the rise and fall of Long Term Capital Management. Remember that LTCM was born out of the last financial leverage cycle. They had all of the “smart” people that a hedge fund could assemble on one P&L. Bear in mind that a lot of hedge funds are compensation structures, not well run businesses. LTCM blew up, and had to be bailed out by Wall Street. This time around, who is going to bailout the geniuses that created this mess? Hedge funds are blowing up, but so are private equity firms, and sovereign governments. As everything commodities melts down, the cash in the “Sovereigns” coffers is deflating. Who is going to have the liquidity, the understanding, and the patience?
Father Free Money, Alan Greenspan, is on the tape this morning with a predictable answer to these questions – the US Government! Greenspan is on the record saying that it’s time to empower US Congress ala “Resolution Trust Corp” ghost of Christmas past…
Resolution and Trust – powerful concepts, indeed. Maybe people are figuring out that this global market has neither, yet…
Deleveraging is not exactly a compelling investment theme. A terrific balance sheet, excess liquidity, growing acquisition opportunities, and a return focused management team; now there’s an investment thesis. I’m referring to PENN, of course. I’ve made some calculations assuming PENN deploys its excess liquidity into gaming assets and/or companies at 7x EBITDA. The two scenarios assume capital expended to reach leverage ratios of 4x and 4.5x, respectively, both below the industry average at 5x for public gaming operators. PENN’s target leverage is 4.5x so that is the more realistic ratio. In this scenario, ROIC remains constant with EBITDA acquisitions at 7x, although lower multiple opportunities might become available if the company is patient. ROE, however, explodes as PENN adds leverage, up to almost 18% at 4.5x. It might be time to get in now before those missiles are deployed.
More importantly, however, Iowa has been somewhat of a bellwether for the other, larger markets. The hawkeye state’s gaming revenues correlate strongly at 0.73 with the rest of the regional markets. Anecdotally, we have heard August was stronger in the heartland. Could lower gas prices be having an impact? Possibly. It may be too early to call but any positive inflection point could give these cheap stocks a lift. We would focus on PENN and PNK.
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