Macau gaming, January 2010–a chance to see two different investment universes

Yesterday morning, a European news agency reported that overall gaming revenue in Macau was up 63% year on year and 24% month on month.  This result was far ahead of market expectations.

In the US market, WYNN was up 5.9% and LVS rose 10.4% in an overall market that was up 1.4%

In the Hong Kong market overnight, the market reaction there to the same information was that 1128 (Wynn Macau) gained 2.3% and 1928 (Sands China) 4.0%, while the Hang Seng index, up .14%, barely moved.

On the face of it, I think that one should have expected that the positive reaction in Hong Kong to have been greater, since that’s where favorable news is concentrated.  The stocks of the parents, WYNN and LVS, should also be affected by their substantial operations in Las Vegas (admittedly not doing very well at the moment–though, with the completion of MGM Mirage’s City Center all the bad news is probably out).  LVS is also about to start up its gaming business in Singapore.

I find the differing price action noteworthy (I own both WYNN and 1128, and a family member owns LVS) but not too surprising.  I ascribe it to three factors:

1.  two different sets of investors with differing universes of stocks to build a portfolio from,

2.  differing investment preferences or risk profiles in the two markets,

3.  different information sets–this is oversimplifying, but I think S&P 500 investors know a lot about casino gambling but almost nothing about Macau.  Hang Seng investors, on the other hand, know a lot about Macau and very little about American-style casino operations.

We’ll have to see how this case plays out in terms of price action before drawing firmer conclusions, but this isn’t an isolated phenomenon.

Australian mining companies Rio Tinto and BHP Billiton each have two types of shares–ones that trade in London and ones that trade in the local market.  They represent identical ownership interests in the same company, but their prices can show substantial deviation from one another for months on end.  Why?  The same reasons as I cited above.  In particular, if the A$ is strong and £ weak, the London shares will outperform and vice versa.  Weak £ makes a US$ revenue stream more attractive.  A strong A$ means higher labor costs in Australian mining operations, therefore lower profits.

The lesson here is that while information may fly around the globe almost instantaneously, one also needs to know how the data will likely be interpreted in a given market.  You may be a brilliant chess player, but if everyone else is playing checkers you may end up not doing so well.

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