Model Portfolio timbo56:SSOF1

After the posting of my last entry, Edmund Ho, chief executive of the Chinese special administrative region for Macau, stated that no licenses would be granted for new casinos or expansions of existing casinos in the near term future. This caused the price of stock in the Las Vegas Casino companies that have licenses in Macau: Wynn (WYNN), Las Vegas Sands (LVS) and MGM Mirage (MGM) to take about a 10 percent jump. And right after I said they are headed down. Not to mind, they are headed down, quite soon.

First, the decision to stop issuing licenses will not have an effect on business for at least 2 years, as expansions including planning, license application and construction generally would take two years. Second, it does not mean that there will not be more competition for the established casinos of Macau, because there will be competition, first from Singapore were two new huge casino resorts are under construction, the first to be opened in early 2009, but also now from Taiwan, where the president elect, Ma Ying-jeou, favors permitting the local governments of the Penghu island group to issue casino licenses.

In fact, it was the competition from outside Macau that appears to have prompted Mr. Ho to make the statements about not approving any more licenses. Also, Ma is from the more Beijing-friendly part of the Taiwan political divide, so perhaps by the time casinos are built in Penghu it will be possible for mainland Chinese people to travel to gamble in them.

In any event, a gaming license in Macau is not the license to print money that it might have once appeared to be. Don't get me wrong, Macau is a fabulous place to be for the casino companies. It is just not quite as golden as first appeared after the opening of the Sands casino hotel there, where Las Vegas Sands is reputed to have netted back its investment in a mere nine months. But that was the first western, Las Vegas style casino there. And all those marketing techniques that had been built up in the fiercely competitive Las Vegas market for years proved very successful in Macau, where there had been a casino monopoly for many years. Now that there is more competition both from Wynn and MGM and from the operations of the Stanly Ho empire, revamping to compete, it won't be quite as easy to rake in the big bucks.

The Singapore casinos, the first of which is being developed by Las Vegas Sands, are a particular threat to the high roller market, which represents the Lion's share of the take in Macau. High rollers can afford to go wherever they want. Also, they like new and opulent, which the Singapore casino resorts will certainly be. So, far from being an edict against competition, the Macau decision against new licenses was a recognition that plenty of competition is coming, and no more is needed right on Macau, right in the immediate future.

Everything I stated about the Las Vegas Market still holds. I just read today that house prices in Las Vegas fell 24 percent in March from a year earlier. That represents a huge decrease in wealth for Las Vegas residents. Even though Boyd Gaming Co. (BYD) has come down from 50 to 18 over the last year, it still looks to be worth shorting this stock, as the locals market, which it has a good share of, looks to be sure to be trounced.

But Wynn is still at very high levels, with a PE of about 25, and the rise of fuel costs is likely to just savage their bottom line. Even if the number of visitors only falls by a small amount, the remaining visitors will be wooed so much more strongly, and expensively, principally with lower room rates, that the fall in revenue is likely to be just devastating. And the Wynn Encore, a huge new casino hotel right next to the Wynn, is still under construction and likely to open in late 2008 or early 2009. The squeeze is on. And the stock still has a substantial growth premium.

I do own puts (a bet that a stock will fall in value) on Wynn Casinos (WYNN).