In a prior post, I examined the poor stock price performance of gaming stocks in the late 1990s. Similar to now, same store sales declined dramatically but unlike now, total market revenue continued to expand. Another difference between then and now is leverage. Leverage ratios remain at all time highs (see chart #1) and certainly are contributing to all-time low valuations.
  • With a global credit and liquidity crisis, it’s no surprise that one of the most leveraged sectors has grossly underperformed. Strangely, the valuation variance across the gaming sector is low. BYD and PENN own the liquidity in the industry, yet trade roughly in-line with the group. PENN runs at least 3 turns below the average gaming leverage ratio and BYD, while at average leverage, should be able to de-lever faster than the rest.
  • The opportunity is glaring. The companies that risk managed their liquidity and balance sheets smartly (BYD and PENN) are lumped in with the rest because they are gaming stocks. As can be seen in the second chart, PENN barely outperformed the group this year and BYD underperformed. Strange that the factor that has caused gaming to underperform the market so sharply wouldn’t also drive relative value. That’s not sustainable.
Gaming leverage ratios remain at all-time highs
Despite higher liquidity, BYD and PENN lumped in with the rest of the sector

US Market Performance: Week Ended 10/10/08...

Index Performance:

Week Ended 10/10/08:
DowJones (18.2%), SP500 (18.2%), Nasdaq (15.3%), Russell2000 (15.7%)…

October/Q408’ To Date:
DowJones (22.1%), SP500 (22.9%), Nasdaq (21.2%), Russell2000 (23.1%)…

2008 Year To Date:
DowJones (36.3%), SP500 (38.8%), Nasdaq (37.8%), Russell2000 (31.8%)…


Rational people can argue whether Edmund Ho, Ao Man Lang, public perception in the Mainland, etc. are to blame for the tighter visa restrictions. The better question, however, is what is Beijing’s long term goal? Following my meetings, I feel more confident that Beijing is not out to crush Macau. Rather, the goal is controlled and moderate growth. Beijing tweaked and tweaked to no avail until September when it became clear they tweaked too much. The only question now, in my opinion, is when, not if, do they loosen the visa reigns?

Worse case scenario, the three month visa restriction from Guandong stays in place until mid next year when preparations are made for the new Chief Executive to take over. There would be obvious incentive to get the new CE off to a strong start. Just as likely, Beijing could loosen the Guandong visa restriction very soon. This view was espoused by multiple sources, including one that appears to have a direct line to Beijing. Remember that Beijing never formally announced a three month visa restriction. It would be just as easy to not formally announce a return to the two month and even one month restriction.

I don’t hear a lot of talk about Taiwan in the US analysis of Macau. Understanding the Taiwan equation is critical to understanding Beijing’s intentions in Macau. Beijing still holds the ultimate vision of bringing Taiwan into its network of SARs. I’m not sure inflicting pain for an extended period of time in Macau would be the best way to show Taiwan the benefits of an SAR. In this regression analysis, independence is a major factor in the equation and Beijing needs to prove to Taiwan that it can be an independent variable.

With investor expectations near rock bottom, the next Macau catalyst could be a positive one.

Don't underestimate the Taiwan (Formosa) impact


This past week I met with Macau operators, intermediaries (junkets), legislators, developers, and lawyers. After 15 meetings over 4 days in Macau, I think I’ve got a pretty good handle on why Beijing is inflicting so much pain on the Macau marketplace through tighter visa restrictions. At least, I’ve narrowed it down to 9 possible explanations. While my list is not exactly narrow, the right answer is probably a combination of some or all of these. More importantly, though, most of these explanations seem to suggest a finite duration. This is reason enough to be more positive on the Macau marketplace.
Possible explanations for Beijing’s actions:

1. Parent teaching child a lesson
2. Want to control growth but tweaked too much
3. Punishment for Edmund Ho – public comments about Beijing and other issues
4. Punishment for Ao Man Lang scandal
5. Protecting mainland Chinese – public perception that Chinese are losing too much money
6. Americans are making too much money
7. Gaming companies didn’t give enough to Sichuan – Adelson and Wynn gave $5m each
8. Macau government not following through on infrastructure build out
9. Want to set the stage for a strong start with the new Chief Executive next year

Eye On Our Subscribers...

One of the most compelling "Trends" in our business here at Research Edge is the quality, knowledge, and experience that continues to be communicated to us from our subscriber base. The power of networks is viral, and we are grateful for ours. Below is one note that I was given permission to post on the Crash of 87' by Carolyn Leonard:

I have been reading your Research Edge morning take on the market since early summer. I have really enjoyed your advice and your call to cash has saved me some money. I wish I had gone to 97% cash but I did go to 35% which was due to your call.

I am writing to you in response to today's article. I traded at the CBOE as an independent market maker from "76" to "97" I trade the OEX from 1985 to 1995. I was in the pits thru the 87 crash and I can tell you that the pit on a busy day would have about 600 traders, plus clerks, brokers and quote operators. On Black Monday when volatility exploded the pit had about 50 market makers after the opening plus brokers to fill paper plus exchange staff. There was plenty of room to roam the pit if you weren't frozen in your spot by fear. Our markets on the Put side were $10 points wide. The black box traders i.e. Timberhill, Hull trading, the Ritchie group etc. were pulled from the pit because the firms couldn't keep up with the quickly changing vols. The biggest trader in the pit that day was John Stafford. Brokers who had mkt. orders would come into the pit to buy puts and hunt for traders to fill their orders. Stafford stood in the back of the pit near where I stood and in desperation they would come to were we were standing and ask that we change the market to a price we would be willing to sell the puts. We could sell an out of the money put at $60.00 and then make the market $60.00 bid at $70.00 hoping someone would hit our bid. Very quickly with little changing our market became $70.00 bid at $80.00 and so it went until the end of that day. The most egregious pricing anomaly occurred the next day. There was a market order on the opening to buy 500 far out of the money puts, the book had the order and filled it at $65.00 which based on the pricing the market would have had to go down another 800 points. When we came out of opening rotation those puts were trading at $50. I don't know what volatility those puts opened at but I doubt anything has ever traded at that high volatility. It was nothing to sell a 5 point box for 6.50-7.00. Everyone was afraid of being caught either long extra puts or short puts.

I covered some puts on the opening on that Black Monday with the market down 200 some points at $35 the same puts closed with the market down 505 at $120.00 bid -130.00 offer. That's volatility!!!

Best regards,

Carolyn Leonard

Oil : Has "peak oil" peaked?

The International Energy Agency (“IEA”) slashed its 2008 oil demand projections by 240,000 barrels a day and its 2009 oil demand projections by 440,000 barrels a day late last week. Clearly, we didn’t need the IEA to tell us that demand for oil has declined since the price of Oil is over $60 per barrel off its June 2008 peak based on WTI’s close of $77.99 on Friday. The obvious question is, where does Oil go from here?

We believe the longer term supply side argument remains intact. Despite the massive investment over the last five years in exploration, worldwide oil production has not been able to keep pace with demand growth, which ostensibly (along with a weak US$ and inflationary global monetary policy) drove the price of Oil well above its marginal cost. Nonetheless, it is likely that the “Trend” in oil remains lower, in the intermediate term.

In theory, commodities should be priced based on their marginal cost and we believe fundamentally that oil will trade back to that level of $60/$65 per barrel. There is also a case to be made that in a recessionary scenario and in an environment where investors are seeking liquidity due to margin calls, that oil overshoots to the downside.

As oil and other commodities decline, many opportunities will arise that you should be proactively focused on. Howard Penney has been discussing on his portal, and in our morning meetings, the potentially massive benefit on year over year cost comparisons for restaurants. Other industries that are key beneficiaries to declining energy costs are airlines, chemicals, and energy intensive manufacturing industries like paper and packaging, etc…

Attached below are our new levels for Oil:
1. Friday’s closing price of $77.99 is immediate term “Trade” oversold
2. Oversold bounce resistance to be sold into = $90.88
3. Downside “Trend” (intermediate term) target = $71.57

Daryl Jones
Managing Director
Chart courtesy of

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