Monthly Archives: October 2013

Atlantic City gambling in 2013

October 10, 2013 By in Casinos, Entertainment, Industry Analysis Tags: , , , 1 Comment

the current situation

In 2006, Atlantic City casinos “won” $6 billion from gamblers there.

National GDP that year was $13.9 trillion.  This year the figure will be around 20% higher.  Using this change as a(n admittedly very crude) gauge for what gambling win for the New Jersey shore resort in 2013, AC should take in $7 billion+.

In actuality, aggregate casino win will be closer to $3 billion.  …and even that 50% haircut from seven years ago may be too high.

How so?

By far the biggest reason is that similar lower-end gambling establishments have been legalized in neighboring states, notably in Pennsylvania.  Why drive when you can get your entertainment in newer venues in Philadelphia, Bethlehem or Mt. Pocono?

The profit situation in AC is in all likelihood worse than that (filings with the Casino Control Commission would show how bad things have gotten, but I haven’t looked).  For reasons best known in Trenton, the New Jersey state government offered $300 million+ in subsidies to persuade foolhardy entrepreneurs to add new capacity into a declining market by opening Revel in 2011.  Already through bankruptcy once, that casino is still up and running in its newest incarnation.  All Revel has done has been to force all casino operators to pay out larger incentives to lure customers in.

At least one more shoe may be about to drop.  Governor Cuomo of New York has been persuaded (thanks to the Lim family of Malaysia?) that his state, too, needs more non-Native American, non-racetrack casino gambling and has been pushing for legislative action in Albany for a while.

how Trenton is responding to the decline

…after the Revel disaster, that is.

–most important, it’s launching online gambling in the state.  Borgata is the first casino to have the service–customers need not be on the casino premises, but must be physically located in New Jersey while they’re online.

–the state has tried to offer sports betting in the casinos, but its thumbs-down to sports books years ago when Federal enabling legislation was being written closed the door to this possibility

–it’s trying to persuade United to service the AC airport, dangling better treatment in its Newark terminals as an incentive, and,

–newspaper reports a while ago suggest the Casino Control Commission has been asked to reconsider its ban of Ho family ownership of casinos (although unless a Ho-related entity were going to buy and refurbish/rebuild an existing casino, I don’t see any positives here).

success = slowing the AC decline?

That’s the best I think Trenton can hope for.

what catches my eye

As an analyst, what gets my attention is the combination of large amount of effort Trenton is exerting, with apparent lack of any forethought.  AC is clearly important to Trenton, but I wonder why there’s so little effective action.

From a stock market point of view, Borgata will soon be giving us some practical insight into the effect of online gambling on casino operations.  Does it bring in new customers (a clear positive)?  does it increase the amount existing customers gamble with Borgata (another positive)?   or does it mostly substitute for visits to the physical casino (presumably a negative)?

China and Japan weight in on the US debt ceiling debate

October 8, 2013 By in China, Current Market Thoughts, economics, Hong Kong, Japanese development, Recent Market Action, Strategy Tags: , , , , , , , , Leave a comment

China and Japan are our two largest foreign creditors.  Beijing holds $1.3 trillion in Treasury securities and Tokyo $1.1 trillion.  Together, they account for 21% of all public holdings of Treasuries, and 45% of foreign lending to the US government.  So what they say counts for a lot.  Of course, whether they choose to roll over their Treasury exposure as it matures counts for a lot more.

Needless to say, neither is thrilled by the current shenanigans in Washington   …but for different reasons.

Japan is worried that a US default would cause a decline in the US$ and a flight to safety in the ¥.  Japan has spent the last year engineering a sharp depreciation in its currency as part of a last-ditch effort to revive its moribund economy.  The last thing it wants to see is one of the three pillars (or “arrows”) of Abenomics, a weak yen, destroyed.  (On the other hand, there’s still no evidence that the third, and most crucial, arrow–reform of antiquated corporate business practices–will ever leave the quiver.)  What I find interesting about this attitude is that there’s no trace of the deference toward US interests shown by a prior generation of Japanese leaders–men who believed their loss of WWII obligated them to act this way.  No surprise here, except maybe to  politicians in Washington.

China is expressing concern that its very large investment in the US could lose value as a result of political stalemate in Washington.  In itself, this isn’t much of a surprise, either.  China has been working for several years to reduce its exposure to US government debt by spending its large surplus of dollars as fast as it can.  No matter what the outcome of the debt ceiling issue in Washington, Beijing will doubtless redouble its efforts to reduce its Treasury exposure.

The way it has framed its concern, however, should be sending chills down the spines of any US entity with direct investments in China.  Beijing points out that China has large investments under the stewardship of the US–predominantly Treasuries.  Conversely, the US has large investments under the stewardship of China–in the form of manufacturing, distribution and retail ventures that US corporations have established there.  The two governments have reciprocal obligations toward each other.  The US must be a responsible steward of China’s investments; China, in turn, must be a responsible steward of foreign direct investment from the US.

The implication is that US failure in its obligation releases China from its duty.

If I’m understanding China correctly, the negative consequences for US companies with China businesses of the current goings on in Washington may be far greater than I think Wall Street realizes.

If so, very bad for the US.  From a practical standpoint, probably better to get China exposure through the Hang Seng than the S&P.

Ray Dirks, Kevin Chang and other stuff

October 7, 2013 By in Getting financial advice, hedge funds, How your broker gets paid, insider trading, sell-side analysts, Trading Tags: , , , , , , 1 Comment

a $30 million fine

According to the Wall Street Journal, Citi technology analyst Kevin Chang was fired last month.  Citi was fined $30 million by state regulators in Massachusetts for his leaking the contents of a research report to influential clients the day before it was published.  Other investigations are ongoing.

What happened?

The Journal, whose account appears to be taken from the Massachusetts consent order, says Mr. Chang found out from an Apple component supplier, Hon Hai Precision, that Apple had cut back orders–meaning, presumably, that sales of iPhones were running considerably below expectations. Chang wrote up his findings in a report that he submitted to Citi’s compliance/legal departments for review.

While his report was being processed, Chang was contacted by at least one hedge fund, SAC, which was looking for corroboration of similar conclusions drawn in an already released research report by Australian broker Macquarie.  Chang promptly emailed the guts of his report to four clients, SAC, T Rowe Price, Citadel and GLG.

The legal issue?   …selective disclosure of the research conclusions.

not the first time:  the Ray Dirks/Equity Funding case

Mr. Dirks was a famous sell-side insurance analyst back in the early 1970s.  In researching Equity Funding, a then-high flying stock, he discovered that the company’s apparently stellar growth was a fiction.  The firm had a bunch of employees whose job was to churn out phony insurance applications for made-up people, which EF then processed and showed “profits” for, just as if they were real.

When he found the fraud out, Dirks immediately called all his important clients and told them.  They sold.  Only then did Dirks inform the SEC.

Rather than being grateful for his news, the SEC found Dirks guilty of trading on inside information and barred him from the securities industry–a verdict that was reversed years later by the Supreme Court.

two observations

1.  Why put important clients first, even at the risk of career-ending regulatory action?  After all, many sell-side analysts take home multi-million dollar paychecks.

Their actions show who the analysts perceive their real employers are.  Ultimately, they collect the big bucks because powerful clients continue to send large amounts of trading commissions to pay for access to their research.  If that commission flow begins to shrink, so too does the size of the analyst’s pay.

Also, an analyst’s ability to move to another firm rests in large measure on whether these same clients will vouch for him–and will increase their commission business with the new employer.

2.  What happens to people like Dirks and Chang?

Dirks was eventually exonerated.  While he was appealing the SEC judgment, his thoughts on insurance companies continued to be circulated in the investment community.  Only they appeared under the byline of a rookie apprentice to Dirks–Jim Chanos.

Dirks eventually established his own research firm.  Interestingly, when I Googled him this morning, I found that the top search results were all basically rehashes of the favorable information put out by Ray Dirks Research itself.  No one remembers the real story.

Chang?  I don’t know.  He lives in Taiwan, where I suspect he will catch on with a local brokerage firm or investment manager.  As far as Americans are concerned, disgraced analysts or portfolio managers tend to end up in the media.  For example, Henry Blodget, who wrote all those laudatory “research” reports for Merrill touting internet stocks he actually believed were clunkers, now works for Yahoo Finance.  You can watch similar characters every day on finance TV.  Crooked, maybe.  But they’re articulate and look presentable.  And that’s all that matters.

 

 

defaulting on the government debt: what it would mean

October 4, 2013 By in Balance of Payments, bond market, currency effects, Current Market Thoughts, Recent Market Action, reserve currency, securities markets Tags: , , , , , , , , , Leave a comment

debt ceiling crunch time

According to the Washington Post, the letter Treasury Secretary Jack Lew recently sent to Congress said that in mid-October, the Treasury will reach the legislatively imposed upper bound on borrowing to pay for goods and services that Congress has ordered up.   That’s a problem, because Washington’s spending so far this year has exceeded its income by about $100 billion a month–and that’s even after the sequester kicked in.

D-Day is October 17th.

The Treasury figures it will have $30 billion on hand on that date.  Bills coming due can reach as high as $60 billion in a single day.  The current layoff of large numbers of Federal employees through the Tea Party-created shutdown might “save” $5 billion a month, but that doesn’t move the needle much.

what if Congress doesn’t act?

If Congress doesn’t raise the debt ceiling, two related problems arise:

–someone has to decide who gets paid and who doesn’t.  The biggest chunks of spending are Social Security, Medicare/Medicaid, the military and interest on the Federal debt (which alone averages about $33 billion a month), and

–inevitably there’ll come a day when the till is empty and the Treasury either misses an interest payment or, more likely though a rollover timing issue, a principal repayment on Treasury securities.  That’s a default.

what default would mean

Secretary Lew is saying that a government debt default could/would create an economic crisis bigger than the bank failures of 2008.

Yes, I think the inevitable default that would come from not raising the debt ceiling would be a major shoot-yourself-in-the-foot moment for the country.  Worse than 2008, though?

…unless we’re talking about possible very long-term consequences, I think this is possible but not probable.  On second thought, minimizing the damage would require Congress to realize what an idiotic thing it had done and “cure” (as the technical term goes) the default immediately.  The more reluctance by Washington to do so, the closer to the Lew scenario we get.

Default would have several important negative consequences:

slower economic growth

–by not paying on time, the US would establish itself as an unreliable borrower.  Lenders, both foreign and domestic, would therefore demand a higher interest rate for the use of their money.  How much higher?  That depends a lot on Congress, but basically no one knows.

–given Washington’s dysfunction, the only effective tool of macroeconomic policy the country has is the Fed.  To at least some degree, the Fed would lose its ability to influence rates if investors begin to regard Treasuries as risky securities.  That’s not good.

weaker currency

–the move among emerging countries to replace the dollar as world currency with, say, the renminbi, would kick into higher gear.  This would risk the US losing the perks of being the world’s banker–lower interest rates, ease of borrowing.

–in extreme circumstances, global buyers and sellers might lose enough confidence in the dollar that they’d refuse to accept it in trade.  This might freeze global commerce in the same way that was so devastating to the world in late 2008-early 2009, when firms wouldn’t take bank letters of credit.  That could be really ugly.

 

There is, of course, the issue that adding $1 trillion+ a year to the Federal debt isn’t a sustainable plan for financing the Federal government.  And business-as-usual Washington has no tolerance for addressing the holy trinity of budget-busters–the military, Social Security and Medicare/Medicaid.  Still, puling the house down around everyone’s ears isn’t a great solution, either.