Monthly Archives: June 2017

a new casino for Connecticut, good or bad?

June 8, 2017 By in Casinos, economics, local casinos, microeconomics, Uncategorized Tags: , , , Leave a comment

Shortly after I retired as a portfolio manager, I went to work part-time at the Rutgers business school in Newark.  No, it wasn’t to teach investing or portfolio management–accreditation rules effectively rule this out for anyone without a PhD in (the alternate reality of) academic finance.  Instead, it was in a practical management consulting class run by adjuncts with real-world experience and advising mostly small businesses.  (We were all fired several years later and the program–the only profitable area in a school dripping red ink–dissolved.   …but that’s another story).

Anyway, one of the projects I mentored involved a casual dining restaurant.  A student had a connection with a very successful pizza restaurant whose approach might serve as a model for our client.  The pizza owner said he had superior results.  How so?  …he had cloth tablecloths and fresh flowers on each table; the food was good;  he spoke with every customer himself to make sure everyone knew they were welcome.  In fact, he drew customers from as far as 15 miles away.

How far was the closest competing pizza restaurant?   …30 miles.

Put a different way, in this state customers hungry for pizza went to the closest restaurant, despite what this owner thought was his special charm!

It’s the same with a lot of other things, including local casinos.

In the case of Connecticut, the two existing operators are coming under threat by the decision of Massachusetts to legalize gambling in that state.  In particular, it’s allowing MGM to open a casino just on the northern border of Connecticut in Springfield, MA.

Hartford has just responded by authorizing a new casino in East Windsor just on the Connecticut side of the border from Springfield, to be jointly run by the two incumbent operators.

This is an interesting case.  Let’s take a (simple) look:

My pizza rule says customers go to the closest casino.   If that’s correct, the new Massachusetts casino will reduce the existing Connecticut casinos’ revenue by a substantial amount.  Hartford estimates that amount at a quarter of the current business, about $1.6 billion.   If they want to keep the remaining 75%, however, it seems unlikely to me that the casino operators will be able to reduce their costs by much.  So their profits could easily be cut in half.

And when the proposed East Windsor casino opens?

Figure that East Windsor will take back from Springfield half of the revenue initially lost.   That’s $200 million a year.  From the state’s point of view, any revenue gain means higher tax collections–in this case, about another $35 million a year.  So it’s understandable why East Windsor has gotten a legislative seal of approval.  It’s not clear, however, that the casino operators are going to be better off–because they’re taking on the expense of a third location in order to protect 12% of their current revenue.

 

We’ve also seen this movie before in the northeast US, with the effect on Atlantic City of gambling legalization in Pennsylvania, and on Pennsylvania of legalization in Ohio and Maryland.  One additional complication in this instance is that both of the incumbent operators are Native American tribes, for whom maintaining/expanding employment may be more important than profits.  A second is that the new CT casino will be run by two in-state rivals.  That should be interesting to see.

 

 

 

 

 

 

actively managed ETFs begin to attract investors

June 7, 2017 By in actively managed ETFs, ETFs Vs. Mutual Funds, Uncategorized Tags: , , , , , Leave a comment

About 2 1/2 years ago, I first wrote about actively managed ETFs.

As I mentioned in greater detail then, for buy-and-hold investors ETFs can be substantially cheaper than mutual funds.  That’s because mutual funds maintain their own high-cost distribution and recordkeeping networks, while ETFs use the much larger, and cheaper, infrastructure maintained by Wall Street brokerage firms.  To pluck a number out of the air, the added value of the ETF route could be 50 basis points (0.5%) in annual return.

Active ETFs have never really taken off, though.  That’s partly because start-up active ETFs can be illiquid, and therefore difficult to trade.  And, again because of their small initial size, expense ratios can appear to be very high.  In addition, large mutual fund groups have been reticent to launch active ETF clones of their mutual funds.  Most firms don’t want to be pioneers.  But also, if an associated ETF begins to trigger redemptions of a mutual fund, the fund’s expense ratio will begin to rise–presumably creating more momentum to redeem.  That’s because the costs of distribution will be spread over fewer shares.

This may all be beginning to change.

As Factset reports, actively managed ETFs had large inflows for the first time ever in May.

Two things caught my eye:

–the Principal Financial Group launched an actively-managed, dividend-focused global ETF last month that took in $424 million, and

–ARK Investment Management, a small firm focused on “disruptive innovation”  received $37.3 million in new money in its flagship ARK Innovation ETF (ARKK) + the ARK Industrial Innovation ETF (ARKQ)  (Note:  I’ve owned ARKW, the firm’s internet fund, for a long time).  ARKK and ARKQ together had assets of $53.4 million at the end of April.

My first thought about the strong ARK showing was the attraction could be that the firm has been an early investor in the Bitcoin Investment Trust (GBTC).  But ARKQ doesn’t hold it.

It’s noteworthy, too, that Principal should want to cannibalize its mutual funds–although it’s always better to cannibalize yourself than to have other firms do it.

 

We may be at a positive inflection point in the development of active ETFs.  Good for innovation, if so.  Bad for stodgy mutual fund complexes, at the same time.

 

discount brokers and technical analysis

June 5, 2017 By in day trading, insider trading, Trading, trading: how valuable?, Uncategorized Tags: , , , Leave a comment

The stock market can be considered as the place where the financial characteristics of publicly traded companies meet the hopes and fears of potential equity investors.  Fundamental analysis addresses the former issue, technical analysis the latter.

In the US of the Roaring Twenties, technical analysis served both functions.  Depression era reforms that forced companies to release accurate and readily understandable financial statements had not yet been enacted.  So the trading activity of “insiders,” detected by carefully watching price and volume movements, was the best gauge one could get of how firms were actually doing.

Since that’s no longer the case, why do online brokers (Merrill Edge is the only exception I know of) provide such lame information on company fundamentals?

Several reasons, I think:

–brokers earn their revenue from trading, not from investment results.  (For what it’s worth, there’s a strong belief in the professional investment community that there’s an inverse correlation between the amount of trading a portfolio manager does and investment performance.)  So it makes some business sense that they should provide tools that make trades easy to do, with an old-style video game-like interface that makes it seem important and fun.

–a fundamental research effort is a headache.  It’s difficult to create and sustain.   It’s expensive, as well.  Arguably, offering proprietary research also exposes the broker to liability if the recommendations don’t pan out.  The user needs some accounting/economic background to understand what’s being said.  The broker who provides fundamental research has an obligation to consider whether a recommendation is suitable for a given client–opening another can of worms.  And, of course, an emphasis on fundamentals runs the risk of refocusing clients away from frequent trading, to the detriment of profits.

–discount brokers do offer a kind of fundamentals-based product through actively-managed mutual funds and ETFs, as well as through their sponsorship of networks of financial planners for whom they provide back office services.  Offering fundamental research might put brokers into competition with those planners.  And the fundamentally-based fund offerings carry a much higher price tag than DIY trading.

 

Employment Situation, May 2017

June 2, 2017 By in employment, Employment Situation report, Uncategorized Tags: , , , , Leave a comment

As usual, at 8:30 edt this morning, the Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation.

The May results were ok, but not great.

The economy added 138,000 new jobs during the month, a reasonable number although one below recent reporting trends.  In addition, results for March and April were revised down by a total of 66,000.  Ouch!

Wage growth remains at an inflation-beating pace of +2.5% but continues to show none of the acceleration one might be hoping for,  given that the unemployment rate has fallen another notch to 4.3%.

my take

Let’s separate what’s going on from why it’s happening.

On the second question, I have inklings/prejudices but nothing that I’d care to act on.  My guess/fear is that jobs are being created, but in lower tax-rate foreign jurisdictions (meaning just about anywhere other than the US), and that machines are substituting for domestic labor, thereby keeping wages low.  If that were so, it would imply US employers believe President Trump won’t be able to advance his tax and infrastructure agenda.

But, really, who knows.

On the first, the signs are that after eight years, the US is finally at full employment again.  This would imply what other indicators seem to be showing–that’s there’s no reason to bet that there’ll be any “pent-up,” cyclically unfulfilled demand showing itself in surprisingly strong future consumer spending.

If so, the stock market should move away from cyclical ideas to secular growth and structural change beneficiaries.  In addition, overall annual upward movement in the broad indices should be limited to, at best, 1.5x the growth in nominal GDP.

The way I see things, this is the way Wall Street has been acting since early in 2017.  So this ES report is not new news.  Rather it’s confirmation of the direction the market has already recently taken.