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Gaming, Housing and the Pairs Trade


The gaming business and housing business are going in opposite directions in this country, which does present an interesting paired trade possibility.

Every once in a while it's a good idea for me to take a couple of days away from reading about what consumers and investors are supposed to be doing, and watch what they are doing. From one of these trips, the week after Minyans in the Mountains 3, I wrote about the "Other Side" of the consumer story, in opposition to calls for his imminent demise, without disagreeing that there are structural imbalances with harsh consequences. Consider this a second installment, from another dusty town. My partner and I just attended one of my favorite consumer "conferences" of the year with not a Wall Street analyst around. Is the consumer's bankroll a mirage or underestimated? There is one spot like no other to visit this question, witness a social crisis stand beside opulence, tease the bears, play with the bulls, and wrap it all together with a paired trade next to a sushi roll – in Vegas, of course.

The ARM's at the dice table seemed to shrug off any fear of adjustment in mortgage rates while looking for a hard ten instead. While players played, eaters ate - a consumer streak that still befuddles many short positions on Wall Street. They needed no charts on inflation or debts, just plenty of napkins and bets. Unless you knew the right guys with pinky rings (thanks again Gary), you were in loooong lines at every restaurant. Look at earnings reports this week as confirmation.

I could illustrate many bullish "tells" and all sorts of anecdotal evidence that many of my fellow professors would completely disagree with, and they have better evidence than I. As much fun as that would be, instead, I'll simply stand by my notion that American consumers are remarkably resilient or stupid (both, in my view) and there is not an economist that will change their minds or belt sizes. You can say what you want about their certain collapse, but I'll wager they reshuffle the deck before they quit playing. What I mean by that is that leisure is non-discretionary to many, while Wall Street assumes just the opposite. Silly stuff like health care are more debatable to Americans it seems. Fact: Emergency room visits from males skyrocket after football games end, compared to during the game. Recent headlines reveal that 90% of Americans can't afford rising healthcare insurance (which is a separate article with, I believe, surprising conclusions). But this is an entirely misleading survey, because for some reason what they need to do (health) is spent AFTER what they want to do (play) so that last expense is sickening to them and "un-affordable," especially since they've been conditioned to believe they are entitled to health care. Instead of getting into the consumer and gaming plays (my firm is long Shuffle Master (SHFL), but just for a trade), I'll share a less controversial idea but much more overlooked and boring, that is a growing problem every single day out there – water and pipes to deliver it. Throw in engineering and "stuff" that you know we like very much worldwide (their airport needs a complete overhaul for example) and you've got the chalk trade. For the long shots? Not likely, but where the risk offers disproportionate upside, I offer these three live dogs to win their respective titles: Auburn 10:1, NY Giants 16:1, Houston Rockets 25:1.

The looming social and financial civil war was presaged in yet another way, and if there are cracks in the foundation of this relationship of haves and have nots where business is booming, just imagine how bad this is and will become in businesses that are suffering. The employment trend according to everyone my firm asked, is towards part-timers to avoid paying benefits which is a must in some industries but a lousy idea in high margin service industries were the disgruntled are on the front lines. Little boxes full of those margins sit right next to the dealers reminding them that the divide between haves and have nots is wide and accelerating. The latest buzz in the desert was a revolt by dealers at Wynn (WYNN) who were forced to start sharing their tips with management. Socialized blackjack? Bugsy Siegel is rolling in his well-lined coffin. Well, the dealers stood up and protested, and if you don't believe in the gambling gods you wouldn't understand why Steve Wynn's prized painting that he paid $138 million for, was mishandled by him just days later and accidentally had a silver dollar sized hole poked through it. There are no accidents in Vegas.

Some honey for the bears was offered by Centex (CTX) who just announced scrapping a $1 billion residential project that has been advertised for years. The gaming business and housing business are going in opposite directions in this country, which does present an interesting paired trade possibility. If you are a true housing bear, then as Amarillo Slim liked to say "Bet on it or shut up." An indirect and potentially more potent short would be the casino operators that rely on the local Vegas players as their housing market plunges. If the locals are seeing their homes marked down they may be far less likely to take out markers. My firm is long Las Vegas Sands (LVS) primarily for Macau, but also for non-locals Vegas properties. I sat and thought about how lonely I was eating sushi that was admittedly rather expensive, while looking at the lines forming for the cheaper buffet. If you were inclined to pair a long on Macau with a short on "Mack," (the short-stacked locals), you could look at Station Casino (STN) among others who cater to a vast majority of customers who live in Vegas. It makes good sense to me, and very likely a nice pair, but my conflict of interest will preclude me from the short side. You see, I am one of the few who like to stay and play there with the locals, never stepping foot on the Strip. I enjoy watching and learning from what they are doing before I go home and read about what they should be doing.
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Position in LVS, SHFL
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