capital flight and brain drain (II): Greece

what would Greek exit from the Eurozone look like?

I mean what happens in general terms, not the nitty-gritty details of how a sovereign debt default and currency devaluation would be put into place.

Several things would occur, I think:

1.  Greece would stop making principal and interest payments on its sovereign debt and open negotiations with creditors for new, more favorable, terms.

2.  The country would force conversion of all cash held by Greek citizens or Greek companies into a new currency–call it the drachma.

3.  Greece would prevent reconversion of drachmas into foreign currency.  It might ban citizens from holding foreign currency outright, for example.  It would certainly make it illegal for anyone to transport foreign currency in and (especially) out of the country.

4.  It might institute a crawling peg (a specified daily weakening of the exchange rate) or some other mechanism for continuing devaluation of the drachma vs. the €.

how would Greek citizens react?

This default/devaluation path is well-defined.  Look at Mexico in the early 1980s as an instance.  Knowing the roadmap far in advance, what can Greek citizens do to defend themselves against loss of wealth?  Again, the moves are pretty standard:

–move cash holdings to a bank outside of Greece

–raise cash locally–either by selling assets or by borrowing from a local bank (in the hope that your debt will subsequently be devalued)–and move that out of the country, too


Businesses would presumably be thinking of similar measures.  In addition, they would likely begin to drag their feet on paying for stuff bought from Greece, while accelerating payment deadlines for Greek customers.

what about investors?

They do pretty much the same.  They extract cash.  They stop making new investments.  Yes, they study what they might like to buy once devaluation occurs, but otherwise they sit on their hands.

taking a very long time…

…makes the situation worse.  While uncertainty remains high, an increasing number of citizens are likely to make and execute capital flight plans.  And the flow of new investment in the country drops to a trickle.  So the country sits in neutral and idles.

effects on the rest of the EU?

I perceive a sharp difference between the local reaction to debt problems in Italy and Spain, on the one hand, and Greece, on the other.

I think the former two have made it clear they accept responsibility for their weak economic situation and are taking action to fix their problems as quickly as they can.  In contrast, Greece seems to me to believe that its sovereign debt is basically an EU problem.  Its strategy appears to be to implement no reforms and instead bargain for ever better terms.

If that’s an accurate representation, one could argue that the contagion effects–the adverse impact on Spanish and Italian bond markets–of Greece leaving the Eurozone (and, presumably the EU) shouldn’t be severe.

In an investment world dominated by short-term chart-oriented traders, however, I don’t have a lot of confidence other investors will see things my way.  I certainly wouldn’t want to bet the farm that I’m right.

capital flight and “brain drain” (I): what they are

a Guatemalan airline

I got my first practical exposure to the phenomenon of capital flight when I started to work on Wall Street.  It came from a creative colleague at work who gave me a prospectus to read for a bond issue from a Central American airline.  Kind of like a puzzle, he asked me what I thought was unusual.

I had no idea what was going on…

…until he pointed out four things:

–the company was family-owned,

–it bought planes outright rather than leasing them (a much more expensive way of operating),

–it would sell perfectly serviceable planes when they were two or three years old and replace them with brand-new ones, plowing all the firm’s cash flow into this effort (again, very inefficient), and

–the planesalwaysspent the night in foreign airports, mostly in the US.

On the surface, this behavior seems crazy.

But think about it.  Most of the family wealth was tied up in the planes; they spent most of their time outside the country.

Perfect in case of a sharp change in the political winds.  And not obvious enough a move to catch the sitting government’s eye.

The airline was the family’s vehicle for capital flight (no puns intended).

two sides of one coin

“Brain drain” is the term coined in the UK for emigration of its highly skilled and educated citizens to the US after World War II.  It has become synonymous with the flight of human capital in general.

The term “capital flight” typically refers to the flight of financial capital.

why does capital flee a country?

Three main reasons:

–political repression, actual or feared

–limited economic prospects in the home country

–high taxes, either on current earnings or on accumulated wealth.



In the early 1980s, China announced it would not renew the UK lease on Hong Kong.  Therefore, the colony would revert to Chinese rule in 1997.  The UK then said it would not grant citizenship to anyone in Hong Kong (because they wouldn’t like the harsh UK climate).  So Hong Kong citizens began to look for other places in the Commonwealth to obtain passports and shift their wealth.

economic prospects

Emigration from Europe to the US post-WWII is a prime example of this phenomenon.  New Zealand or the Australia of twenty years ago might be others.


There has been a steady flow of people out of high-tax states in the US like California and New Jersey into neighboring areas like Nevada and Pennsylvania, where levies are lower. For decades, Ireland has attracted multinational corporations by offering very low tax rates.  One of the planks in the electoral platform of Mr. Hollande, the new head of government in France, was to raise income taxes on yearly earnings of over €1 million to 75%.  Reportedly, real estate agents in the UK have seen a surge in interest in London residences from French buyers.

fighting capital flight:  closing the borders

Generally speaking, there are two ways to stop capital flight/brain drain:  fix the problems that are causing the flight, or forcibly prevent capital from leaving.

Practically speaking, then, there’s only one way–closing the borders.

For financial capital, a government does this by limiting the amount of foreign currency a holder of the domestic currency can buy, or the amount of local currency he can transport out of the country.

For human capital, a country can restrict the ability of citizens, or their families, to leave.  In addition, a potential emigrant has to have someplace to emigrate to, which can make this issue a lot more complicated.

Tomorrow:  the situation in Greece.






Facebook’s first day

I’m writing this at about 3pm, so the trading day isn’t over.  Several aspects to the FB IPO are already notable, though.

The stock opened at $43 and quickly reached a high of $45.  It then dropped to the IPO price of $38, where it met stiff resistance.  It now seems to be settling in at around $40 (note: I have a limit order in for today a tiny amount at $38.25).

1.  The day before yesterday the underwriters announced that the FB offering would be increased by 25% from an already hefty size.  This virtually always has the effect of tempering any first-day appreciation of the stock.

We should assume this was the main purpose of the move.

It isn’t clear if in this case the number two reason was:

–to accommodate holders chomping at the bit to sell or

–to ensure that the stock wouldn’t reach a crazy-high price in the first few days of trading and then collapse.

2.  The extra stock comes predominantly from selling shareholders, not from new shares issued by FB.  Normally that’s a bad thing, because the market argues (reasonably) that employees and venture capital investors know a lot more about the true worth of their firm than the rest of us do.

But the dynamics of this case aren’t so crystal clear.  The more new stock that’s issued by FB itself, the more Mark Zuckerberg’s margin of voting control over the company shrinks–and the less able he is to sell shares in the future and still maintain his voting majority.  This is not a worry for today or tomorrow, but Zuckerberg may have been quite happy to encourage employees or early investors to sell more.

3.  It’s not well-known, but underwriters have a short period of time in which they’re legally permitted to “stabilize” the price of a new issue (read:  step into the market and prop the stock up so it won’t fall below the IPO price).  That appears to have occurred with FB shortly before noon.

…not a great sign.  It raises the question of what will happen to FB next week, when the stabilization period expires and underwriters can’t stabilize anymore.

4.  The stock didn’t open until around 11am.  “So what,” you say.  That’s normal for a “hot” IPO.  Historically, that’s true.  But the brokerage industry trade association, FINRA, changed the IPO rules late last year so buyers can only place limit orders (that is, ones that specify a maximum price) before the first trade.  This eliminates market orders (ones where the buy price is open-ended) and should make the process of finding an initial market-clearing price much simpler. So a ninety-minute delay before opening is a lot.

5.  There are continuing reports of problems with trading in FB.  No one seems to know why.

WYNN’s 1Q12: good gaming revenue, bad gaming luck

the report

WYNN reported 1Q12 earnings results after the close of stock trading in New York on May 7th.  Adjusted earning per share were $1.33 ($152.0 million) for the period, down by about 4% from the $1.38 ($173.4 million) the company earned in the opening quarter of 2011.  Actual net was down by $21.4 million, or 12% yoy.  The forced redemption of Aruze USA’s 22.5 million shares in February explains the smaller decline in the per share figures.

Wall Street was not impressed.  The stock had been declining somewhat already from the intraday high of $138+ it achieved early in the month, on the announcement that Wynn Macau had received a government go-ahead for its new Cotai casino.  The apparently weak earnings kicked the decline into overdrive.

The report even prompted a comment from the normally reliable Financial Times–which appears not to like the gambling industry much– to the effect that it might be the canary signalling bad times ahead in the Las Vegas casino coal mine.

The reported earnings don’t tell the whole story, however.  The reality is that WYNN had a good quarter, not a bad one.

drop vs. take:  i.e., gross revenue vs. net

What casinos count as revenue is not the amount wagered by customers.  Rather, it’s the portion of total wagering “held” or “won” by the casino.  That is, revenue is the amount customers lose on their wagers. This means casino revenue is not only a function of the amount bet but also of “luck,” or random variation away from theoretical or historical winning percentages.

Such variations–plus or minus–rarely show up in slot machine results, since there are so many transactions in a quarter.  But they often do with table games, especially in the high-roller segment that WYNN specializes in.

WYNN’s 1Q12 earnings comparisons in both Las Vegas and in Macau are skewed unfavorably because of such random factors.

Las Vegas

EBITDA was $100.9 million in 1Q12 vs. $132.1 million in 1Q11.

Table games drop was $654.4 million in 1Q12 vs. $634.0 million in 1Q11.  Win percentage was 22.8% in 1Q12 vs. 30.4% (historically, win has been between 21%-24%; on the 1Q12 conference call, Steve Wynn said he’d never seen a win percentage this high in his casinos).  because of this difference, win was $149.2 million in 1Q12 vs. $192.7 million in 1Q11.

At a 30.4% win percentage, this year’s results would have been $198.9 million.  So the comparison would have been $49.7 million more favorable had WYNN been able to repeat the same extraordinary luck it had last year.


VIP gamblers bet $33.5 billion (!!) at Wynn Macau’s tables during 1Q12.  This is up 14.6% year on year (partly due to Wynn Macau converting some mass market tables to higher-profit VIP use). Win percentage this year was 2.59%, down 10 basis points from 1Q11’s 2.69% (the normal range is 2.7%-3.0%).  Slightly worse luck in 2012 than in 2011 clipped $33.5 million from the subsidiary’s win.


Had WYNN had identical luck during the first quarter this year as last, revenue–and EBITDA–would have been $83.2 million higher.  On such an apples-to-apples basis, EBITDA for WYNN as a whole would have been up 17% instead of down by 3.5%.

Other stuff: hotels

Macau continues to boom.  Hotel occupancy is up to an extraordinary 91.3% vs. 88.6% a year ago.  Room rates are up 5.5% to $324 a night.

In contrast, in Las Vegas, a city drowning in empty hotel rooms, WYNN’s push to higher room rates seems to me to have met serious resistance.  The company achieved a room rate of $255 a night in 1Q12, up $5 from 4Q11 and $15 from 1Q11.  But customers balked.  Occupancy dropped from 85% or so, to 79.3%, yoy.  Greater spending on food and entertainment by less price-sensitive customers made up for this.  But my guess is that WYNN won’t be raising rates again for a while.

my thoughts

The stock is very close to its 52-week low.  The PE multiple is now a reasonable 18x this year’s earnings, with, say, 15%-20% growth in prospect for 2013.  In addition, about 90% of the market cap of WYNN is explained by its interest in Wynn Macau, despite the recent selloff in that equity in Hong Kong (by panicky Europeans, I think).  This leaves the company’s slowly recovering Las Vegas holdings–plus its big management fees from Macau–substantially undervalued, in my view.

I’m content to hold the WYNN shares I have.  At today’s prices I’d purchase LVS, 1128 or 1928 before I’d buy more.

Warren Buffett has been selling INTC–should we? //the INTC dividend

Buffett’s INTC buy

Institutional money managers are required to disclose their equity portfolio holdings to the SEC each quarter in a filing called a 13F. (The 13F is not to be confused with the 13D, a filing the SEC requires ten days after anyone not an institutional investor acquires a 5% of any class of securities (equity or debt) of a public company).

In its 13F filing for the December 1011 quarter, Berkshire Hathaway indicated that it had bought 11.5 million shares of INTC, worth over a quarter billion dollars, during the period.

In its just-released March 2012 13F, the company says it held only 7.7 million INTC shares at the end of the quarter–meaning it sold a third of its holding in the interim.  As points out, Buffett added roughly the same dollar amount to his holding in IBM.

What’s going on?  Should we follow the Buffett lead?

my thoughts on the recent selling

1.  Mr. Buffett makes no secret of the fact he feels he doesn’t have a deep understanding of technology nor is he comfortable with large tech holdings.  He likes financials like GEICO, instead.  IBM, a steady grower that sells a branded set of services on a recurring subscription basis through a large sales force, is much more his style.

2.  My guess is that, at least implicitly, Buffett has put a dollar size limit on the INTC position because it’s in an industry he’s not an expert in.  He’s trimming to keep the position from getting too big.

3.  Coming at INTC from a slightly different angle, the company is a turnaround story.  To me, at $20 a share, the stock was so cheap that it didn’t matter too much whether the company’s efforts to reinvent the PC ( or at least clone the Macbook Air) and crack the mobile market will be successful.  At $30 a share, in contrast, it seems to me that a buyer/holder is betting that ultrabooks are a hit and that designing bespoke cellphones for carriers will work, as well.

I feel no strong urge to buy at today’s level, but I’m content to wait and see what happens.  Mr. Buffett seems to me to be acting in line with my general analysis.  He wants to continue to make the positive bet–or else he would have sold everything–just not a big one.

4.  Stock picking is like baseball, in that it’s the season’s average that counts, not a given at bat.  Even the most successful professional equity managers are wrong at least 40% of the time (the industry cliché is that 55% right/45% wrong = genius, the reverse proportions = unemployed).  So riding on anyone’s coattails on a single decision is a risky position. Think:  Albert Pujols.

the INTC dividend increase

On May 7th, INTC announced its board of directors had upped the quarterly dividend to $.225 from $.21.

I’m pleasantly surprised.  This is the fourth boost to the payout in less than three years.  My picture has been that 2012 would be a flattish year, before a reacceleration earnings during  2013.  I thought the company might wait until November or December to decide on a dividend increase.  That’s because dividend decisions are never made in anticipation of future profits.  They’re always backward-looking.  They’re made based on what earnings already booked will support.

I take the board action as an indication INTC’s current business is going better than I’d anticipated.


a quick look at DIS

a little history

I became reacquainted with DIS in late 2009 when the company bid for Marvel Entertainment, which I had been a shareholder of for a couple of years.  Several things struck me about DIS that made the investment case more compelling than I expected:

1.  A new chairman, Bob Iger, was steadily reenergizing a company that had suffered for years under complacent and bureaucratic management, as happens with many mature firms.

2.  Although the price being paid, $4 billion, seemed pretty full to me, I knew Marvel would benefit from DIS’s stronger distribution.  And I also saw that Mr. Iger wanted to build the attractiveness of the Disney brand to boys, so Marvel had an “extra” value to DIS.

3.  The theme parks were suffering from the Great Recession.  I thought results would gradually improve as the economy recovered, first through an increase in foreign tourists, then through a return of US vacationers.

4.  Wall Street didn’t like the Marvel deal, which made DIS even cheaper.  So I bought some more.

I ended up selling most of my DIS stock about a year ago, soon after it popped above $40 a share.  Two reasons:  the stock was up a lot, and I worried that possible strikes by the NFL and/or NBA players would dent the profits of ESPN, which is DIS’s dominant business.

I’ve still kept my eye on DIS, which has been a market outperformer even after my sale.  The media reports of strong theme park business in 2Q12 (ended March 31st) when the company reported results last week caught my eye.  So I thought I’d take a closer look.

Here’s what I found.

DIS’s 2Q12 results

Excluding unusual items, earning per share were up 18% year on year, at $.58 vs. $.49 in 2Q11.

parks and resorts

Disney cruise line bookings were up 30% yoy.

Domestic theme park attendance was up 7% yoy, with spending per person up 5% in addition.

Occupancy in park hotels was up 2% yoy at 82%.  Room rates were up by about 5% as well.

Disneyland set a new 2Q attendance record.

The strength in the domestic theme park business comes from two sources:

–foreign tourists, especially from Latin America and Asia, and

–reviving interest from in-state residents in California and Florida.

Out of state domestic visitation to the parks was about flat, yoy.

Operating income from the worldwide Parks and Resorts business was up 53% yoy at $222 million.  The comparison is skewed by the closing of Tokyo Disneyland last year after the mid-March nuclear reactor accident in Japan, combined with a $15 million business interruption insurance payment made in the current quarter.  Ex these factors, the theme park business was probably up a bit over 20%.

To me, the most encouraging news is that residents of two of the areas hardest hit by the domestic housing crisis–southern California and Florida–are starting to come back to the Disney parks.

studio entertainment

Currently, this business is a tale of two movies.  John Carter, which may have made a $100 million loss, is certainly the main reason Studio Entertainment operating results dipped into the red by $84 million in 2Q12.  The other is The Avengers, which reportedly cost $220 million to make but which has had box office of over $1 billion in the first three weeks.  So 3Q12’s results in this segment will doubtless be eye-popping.

consumer products

Avengers-related merchandise sales are going much better than DIS had planned for.  A change of actors appears to have even breathed back life into the Hulk.

media networks

This segment is two-thirds of DIS’s operating income and is driven mostly by ESPN.  Changes in affiliate contracts and the differences in  timing/number of sporting events make year-on-year comparisons particularly hard for an outsider to interpret.  The reported you gain in operating income is 13%.  DIS says an apples-to-apples comparison would be more like half of that.

my thoughts

I find the implications for the US economy in DIS’s results to be encouraging–and consistent with what other companies who appeal to a broad range of Americans are saying.

DIS shares aren’t expensive.  They’re trading at 15x the Wall Street earnings consensus of $3.00 a share for fiscal 2012.  Trend growth is probably around 15% a year.  My guess is that they’ll be mild outperformers over the year ahead, with their best relative showing coming in uncertain days like these.