Yearly Archives: 2011

Macau market gambling results for October 2011

November 7, 2011 By in Asian economic development, Casinos, China, Current Market Thoughts, emerging markets, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , , Leave a comment

Last week, the Macau Gaming Inspection and coordination Bureau posted, as usual, the monthly total for the SAR’s gambling revenue.  At 26.8 billion patacas, the take was an all-time high–and a 42.3% year on year gain.  The figures for this year and last are as follows:

Monthly Gross Revenue from Games of Fortune in 2011 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%
Sept 21,244 15,302 +38.8% 194,350 133,237 +45.9%
Oct 26,851 18,869 +42.3% 221,200 152,106 +45.4%

Interestingly, Hong Kong-based analysts didn’t take this as an unambiguously good result.  They point out that, although Golden Week in early October was a rip-roaring success this year, the year on year growth of the market for the month as a whole was the lowest since January.  That’s obviously correct.

They conclude from this that Macau’s wealthy Chinese customers are feeling the pinch of the mainland’s efforts to slow economic growth, and are gambling less as a result.  A corollary, not so clearly spelled out, is that casinos are posting gambling winnings as revenues today that will ultimately have to be written off as uncollectable receivables.  That may also be true, although the bond rating agency Fitch says there’s no evidence of any of this so far. Fitch, in fact, estimates that the Macau gambling market will grow by at least 20% next year, double the rate that the more pessimistic analysts are calling for.

One notable feature of recent months’ results is the market share shift toward the companies with newer casinos, located in Cotai.  This suggests there’s gambling space in other, older casinos that is going unused.  There are any number of explanations for why this may be happening, like transportation bottlenecks that prevent visitors from reaching Macau, or casinos turn away “iffier” credits.  But it’s also possible that we’re reached a phase of market maturity where simply getting to Macau and gambling anywhere isn’t enough.  Some gamblers may be choosing not to go to Macau unless they get a minimum level of service.

If so, we should expect a more sedate rate of growth than the 45% or so we’re experiencing now.  But the more important investment issue may well be to separate winners from losers.  That’s certainly been the case so far in 2011, as Galaxy and China Sands have left other casinos in the dust–especially SJM and MGM.

 

the October 2011 Employment Situation report: not great, but still good

November 6, 2011 By in economics, employment, Employment Situation report, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , , Leave a comment

the report

The Bureau of Labor Statistics released its Employment Situation report for October 2011 before the opening of trading in New York on Friday November 4th.  The report showed continuation of a pattern that has become familiar over the past year.

The economy added 80,000 net new jobs last month.  The private sector added 104,00 new positions; state and local governments laid off 24,000 workers.

The unemployment rate dipped from 9.1% to 9.0%.

That’s good news.

But the economy needs to add well over 100,000 jobs just to absorb new entrants into the workforce.  So the decline in the unemployment rate is probably due to other factors than new job creation.  The figure may have been due to a statistical quirk, or to long-term unemployed persons giving up the search for work (and therefore no longer counted as being in the workforce).  Or it may have been due to the positive revisions made to the September employment figures (see below).

Nevertheless, the evidence indicates the economy is slowly healing itself.

The reporting pattern–private sector gains, public sector job losses– also makes it clear, I think, that any short-term stimulus funds from Washington that goes directly to state and local governments will temporarily stop their layoffs and let the full strength of the private sector shine through.  So the employment figures would likely improve immediately.

The economic issue is whether or not it’s good to do so.  Will it simply prolong a necessary adjustment by previously profligate local politicians, doing the country no long-term good?  The burning question in Washington is, of course, somewhat different.  The political issue  is which party the recipients of such help are likely to vote for in the 2012 election.

the revisions

As you probably know, the Establishment Survey for a given month, from which these job numbers are compiled, is collected over a three-month period from larger corporations and government bodies.  Each month’s initial report undergoes revisions over the two subsequent months, as more complete data are sent in.  Rising revisions tend to be the rule in a growing economy.  So they’re a good sign.

Revisions for August and September are upward.  I think they are the most significant part of this months’ report.

The August figures, which caused a political firestorm and a slump in the stock market, were initially reported as 0 new jobs.  That figure broke out into +17,000 jobs added in the private sector, offset by a loss of -17,000 government workers.  The September report upped those numbers to +57,000, with +42,000 private sector jobs added and (surprisingly) +15,000 in government.  The (final) revision in October boosted the figures further.   The final result is a gain of +72,000 private sector workers and +32,000 in government, for a total of +104,000.  That’s not far from the recent monthly average for job increases, suggesting the original poor figures were not real and simply a statistical accident.

The initial revision for September upped those results significantly as well.  Originally, they were reported as +103,000 new jobs, broken out into +137,00 new private sector positions and a loss of -34,000 government jobs.  They now stand at +158,000.  A very strong 191,000 jobs were created in the private sector, offset by a loss of -33,000 state and municipal government workers.

What makes the September figures stand out is that regular monthly gains of 200,000 or so new jobs would be enough to start the unemployment rate trending downward.

investment implications

The October report shows, I think, that world stock markets were too quick to read the initial poor August figures as indicative of a new, weaker, economic trend.  Subsequent data, not only from the BLS, but also from other macro indicators and from the earnings reports of publicly traded companies, show that the US economy is doing the opposite–slowly gaining strength.

Very recent stock market is showing support for the idea that recovery’s pace is accelerating markedly, through the strong performance of the Materials, Energy and Capital Goods sectors.  I’m reading this as a counter-trend adjustment of relative valuation–meaning only that the spread between continuing market leaders and other stocks had gotten to wide.

The September job additions, however, and possibility that they will be revised up in coming months, suggest that the current move of these three sectors may have a sounder footing than I’m willing to admit.  I’m not changing my stance yet.  I think that I have to pay very close attention to next month’s job report, however.

two important developments in the EU yesterday

November 3, 2011 By in Current Market Thoughts, economics, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , , Leave a comment

short-term interest rates cut

In post-WWII Europe, monetary policy has been dominated by institutional memories of the hyperinflation that plagued the Weimar Republic in the first quarter of the last century.  The hard lesson learned then, and being applied now?–eliminate any whiff of inflation, even at the expense of economic growth.

That’s been the mantra of the German Bundesbank and of its intellectual successor, the European Central Bank.  It’s why the ECB raised short-term interest rates in the wake of the subprime mortgage crisis rather than follow the lead of the Federal Reserve in the US and lower them to try to stimulate economic growth.

…until now, that is.

Two days after assuming his position as president of the ECB, Mario Draghi cut rates by .25% to 1.25%.  He cited the risks of recession and he played down any threat from inflation, which is currently running above the central bank’s target of 2%.

This is good news.  The positive stock market response to this move seems to me mostly a reading that the torch has been passed from the Bundesbank to a new generation of policymakers who will act more in the American mold–rather than to the rate decrease itself.  Again good news.

an ultimatum to Greece

It’s over a year since the Papandreou administration announced that the former Athens government had been falsifying the national accounts for years and that the country was in effect broke.  Bailout talks have dragged on almost interminably.

The Greek negotiating style, as I see it (sitting here in on the east coast of the US), is real hardball stuff and not designed to win either friends or continuing business relationships.  It consists of repeatedly leaving the table after giving the EU the impression that the parties have reached a “final” agreement–and then reopening talks to ask for further concessions a week or two later.

Many companies have told me that it’s commonplace in China to haggle even after formal contracts have been printed up.  I worked for someone who did this all the time.  The idea is to use the fact that the other side has already reported to its bosses that they have a deal as leverage to extract slightly better terms.  But like the death of a thousand cuts, this process goes through many iterations.  So the multiple “slightly betters” can add up to a lot.

In this case, there’s also the issue that a real default by Greece would hurt the EU more seriously than is commonly realized.  The EU wants a restructuring of Greek debt that won’t trigger many billions of euros of credit default swaps its banks have entered into.  To avoid punching another wide hole in the banks’ capital, the EU needs Greece to cooperate.  Greece has used this to its advantage.

Yesterday, however, the EU said enough is enough.  It halted negotiations once and for all.  It says that Greece must accept the latest restructuring package and implement the economic austerity measures that entails.  The EU also says it is starting to make preparations to expel Greece from the EU if it does not.

(In other words, it is figuring out how to prop up any EU banks that become insolvent, either from holding Greek sovereign debt or from foolish credit default swaps.)

This doesn’t mean Greece will finally accept the bailout package.  It may opt to default and be tossed out of the EU.  I doubt it, but I don’t know. At any rate, however, the EU has finally drawn a line in the sand and set a time limit.

The issue will be decided before yearend.  Uncertainty will be over.  Investors will be able to see and deal with the implications of what Greece elects to do.  That in itself is a positive.

investment implications

The one-day read by Wall Street is that both developments are plusses for world economic growth.  I agree.

In addition, investors appear to be thinking that the primary beneficiaries will be the most highly cyclical firms, like capital goods or basic materials companies.  I’m not sure that’s right.  I prefer consumer discretionary and IT stocks.  But I’ve got to keep an open mind, since the business cycle message is being delivered so strongly so far.

what I find strange about MF Global

November 3, 2011 By in Current Market Thoughts, Getting financial advice, Portfolio management Tags: , , , , , , Leave a comment

who MF Global is

In mid-2007 the glow of a multi-year bull market had not yet begun to fade.  That’s when the Man Group, the London listed hedge fund group, divested itself of its brokerage arm, which was renamed MF Global.

Looking back, this seems to me to be a standard move of a firm that is in both a fast-growing business (hedge funds) and a slow-growing one (brokerage):  split them apart to create two pure stock market plays.  That allows the strength of the fast-growing business to be seen more clearly, and hopefully gets that stock a higher PE multiple as a result.

As for the mature business, who knows.  There may be investors who want to hold it.  And in any event, the timing of the split-up seems to have gotten MF Global an initial valuation that was relatively high.

Sometimes these splits work out well for the apparent ugly duckling.  Coach, for example, was a spinoff from cakes and tee shirt maker Sara Lee, where it was starved of capital.  Free of a bureaucratic parent, that company has been a rocket ship ride for a decade.

Not the case here, however.  (For anyone who knows the Man Group well (not me), it might be interesting to go back and see how the management talent was apportioned between Man and MF Global.  My hunch would be that, if anything, MF Global was stocked with lesser lights.)

spreading its wings

MF Global appears to have intended from the outset to reinvent itself as an investment bank.  An early trading stumble highlighted management control deficiencies and brought in private equity firm, J C Flowers, as a shareholder.

So far, while things could have worked out better for MF, nothing so out of the ordinary.

the strange stuff

1.  the Corzine hire

In early 2010, MF installed a new CEO.  The new guy had built a reputation as a very aggressive and successful bond trader during the 1980s.  He’d been booted out of his two previous management jobs, reportedly for being unable to get along with others.  The most memorable moment of his public service career was when he survived a 90 mph crash in his New Jersey state car, which he habitually rode in without using a seat belt.

Tidbits of gossip aside, Mr. Corzine had been an individual star in a young man’s business.  But he’d been out of the industry for over a decade.  And whether he possessed any management talent was at least open to question, though New Jersey voters rendered their verdict forcefully in 2009.

Picking him, it seems to me, is like selecting a 60-something ex-athlete to be the star player on your team, not the manager.  The broad of MF seems to have had no problem with this.  Mr. Corzine himself appears to have been blissfully unaware that it might take some time to shake the rust off talents he hadn’t employed in the current century;  he appears to me to have committed the cardinal sin of underestimating the other side of the trade.

According to Reuters, MF paid Mr. Corzine $14 million + to drive the company into bankruptcy in under two years.

2.  the “Goldman” recipe

Robert Rubin, former Goldman partner, advised Citigroup to dive into proprietary trading when he joined the company board.  Disastrous results.

John Thain, former Goldman partner, expanded Merrill Lynch’s proprietary trading when he took over as CEO.  Disastrous results.

Jon Corzine, former Goldman partner,…     Sense a pattern here?

3.  where were the compliance people, or the CEO for that matter?

Press reports, including this FT post, indicate that a last-minute deal to save MF Global by merging it into another financial firm foundered when MF couldn’t account for large amounts of customer money.  As I’m writing this on Thursday morning, it sounds like someone in MF diverted $633 million out of customers’ accounts and into its own last week in order to cover trading shortfalls.

It’s hard to believe this is true.  Things like this might happen in Madoff- or Enron-land but they simply don’t occur in reputable firms.  Nevertheless, this is what the CME Group, MF’s regulatory supervisor is accusing MF of.

I also find it hard to believe, although I guess it’s possible, that Mr. Corzine didn’t have a detailed daily (if not real-time) report of MF’s overall trading positions.  It seems to me that the “magic” appearance of over half a billion dollars in the company’s accounts should have been evident to MF management almost immediately.

 

I don’t think the entire story has been disclosed yet.  The Wall Street Journal, for example, is pointing out the mismatch between Wall Street analysts’ research and Mr. Corzine’s public statements vs. what we now see as the underlying reality.  Stay tuned.

 

 

 

I’ve just updated Keeping Score for October

November 2, 2011 By in Current Market Thoughts, Keeping Score, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , , , , Leave a comment

I’ve just updated Keeping Score.  If you’re on the blog, you can also click the tab at the top of the page.