Model Portfolio timbo56:SSOF1

"This part of the economy has seen steady expansion for the last 30 years. Now that is a durable trend."

NOT.

No portion of the economy can grow significantly faster than the overall economy, forever. If that were to happen, that part of the economy would gradually take over the entire economy. If the semiconductor industry grew significantly faster than the overall economy forever, eventually every person would work making integrated circuits. There would be no hospitals, doctors, dentists, etc. At some point the growth has to stop being significantly faster than the overall economy and become either insignificantly faster or even slower. Or, that growth could be thrown into reverse.

When growth goes into reverse it is a great money making opportunity, because when growth becomes shrinkage stock prices can really plummet. There is typically a growth premium factored into the recently-growing industry's stock prices, which will be soon removed. Then, the fact that the industry was growing works to the disadvantage of each one of the individual players. It is too late to cancel projects half-way finished. They get finished and simply add to the misery of competing entities.

This is the sad tale of Las Vegas today. The number of visitors is on its way down, and that shrinkage in the number of visitors could accelerate as airlines pass along the increased cost of fuel to their customers and cut back on the number of flights. All at the time that new projects are being completed. The huge, over 3,000 room Palazzo has just been placed into direct competition with the Wynn. Also, the Trump Tower 1, which includes a condo hotel has recently been completed. An MGM condo hotel is opening this summer. It would be bad enough if the number of visitors was holding steady. But as it is on the way down, disaster is striking in a huge way.

Here are the four trends that will devestate the Las Vegas casino resort industry:

1. The high price of fuel, making it more expensive to get to Las Vegas and driving down the number of visitors.
2. The reduction of disposable income for Americans.
3. The continuing completion of partially constructed projects.
4. The devastation of the local Las Vegas economy.

There is a counter trend in the weak dollar promoting tourism from abroad and keeping U.S. tourists in the U.S. But it's not strong enough to counter the other four.

With respect to trend 2, the increasing price of food and gasoline and the decreasing value of houses (depriving many of the possibility of getting a home equity loan) is definitely reducing the disposable income of Americans. If there is less money, there is less money to get to and take to Las Vegas. I believe that disposable income will be under pressure for years to come. The United States must start consuming less and producing more if we are ever to reduce our huge trade deficit, which is unsustainable and will, one way or another, be reduced.

Regarding trend 4, each partially built casino will either be completed, adding to the growing surplus of hotel rooms, or canceled. If it is canceled, that adds to the misery of Las Vegas, where legions of people working in the home building business have lost their jobs. With the cancellation of a project, and it does appear that the Cosmopolitan project might very well end up not being built (see http://www.reuters.com/article/ousiv/idUSN0328923220080409)
another legion of construction workers will lose their jobs. The Las Vegas unemployment rate, at 5.4% is already higher than the national average of 5.1%. What's more, the drastic slump in house values, much worse than the average for the nation, will curtail home equity lending, depriving potential casino patrons of the cash needed to gamble. Some gamblers, even at the big fancy hotel casinos, are locals. It might not be a very high percentage, but they do make some difference.

What makes the opportunity particularly prospectively lucrative is that the stocks of the Las Vegas casino companies have growth premiums still built into the price. Wynn, in particular, has a price to sales ratio of about 4 and a PE ratio of slightly over 40. It would appear that these valuations presume future growth. If that growth is actually shrinkage, the growth premium will go away. Along with the darkening prospects this could make for a particularly swift decline in stock prices.

This is not a temporary dip for the Las Vegas casinos, it is a trend reversal that will last on the order of 20 years. Fuel prices are just going to continue going up and disposable income will continue to fall. We may never have another blow-out consumption-driven growth period like 2003 through 2006 ever again. Well, not for awhile, at least.

But Las Vegas itself (not the casinos) may see a comeback, by way of solar power. The casino melt down is going to dominate for at least five years, however, before other industries can generate enough steam (no pun intended) to pick up the slack.

I do have puts (a bet that a stock will go down in price) on Wynn Casinos (WYNN).