November 5, 2014

Why it may be time to cash in on this casino stock

Casino stocks are on a cold streak. And according to the latest data out of Macau, it may not get better anytime soon.
October gaming revenues in Macau sank 23 percent compared with 2013. That is the largest year-over-year drop in its recorded history. Being blamed for the decline are a slowdown in mainland China’s economy, a recent smoking ban and a crackdown on corruption that is keeping VIP players home.
Investors greeted the news by cashing in their chips on Wynn Enterprises, MGM and Las Vegas Sands. All three fell between 3 and 4 percent on Tuesday.
For names such as Las Vegas Sands, which gets more than 70 percent of its revenues from Macau, the news is particularly troubling.
But one market watcher isn’t too worried. According to Gina Sanchez, founder of Chantico Global, Las Vegas Sands investors shouldn’t be too worried, particularly about the recent drought of VIP gamblers. That’s because the company is looking to diversify its customer base in Macau.
“They’re going after the mass market, which is more of the middle-class gamers,” said Sanchez. “That actually could be its saving grace.”
But the charts are not as positive, according to Steven Pytlar, chief equity strategist at Prime Executions. He sees the stock as now testing a critical support level at $59.85 per share.
“On the chart, we see that this was a high on two tests previously in recent years,” said Pytlar, referring to Las Vegas Sands’ March 2012 and May 2013 highs. “When you have a stock that broke past two major highs and is now coming back to retest those highs, that tells you there is a lot of deterioration in the stock. It tells you there is a lot of sellers and not a lot of buyers.”
The technical implications are that Las Vegas Sands’ stock could potentially move lower, Pytlar explained. “We could see more selling pressure,” he added. “If it falls below those two prior highs, we could see it potentially fall significantly more. We would be staying away from this stock right now based on the charts.”

Oil below 60?

Oil prices could have a hard time finding a floor after Saudi Arabia trimmed prices in the face of growing North American oil production.
The market took the price cut this week as another sign the kingdom is willing to use pricing as a lever to preserve its market share, rather than cut production in what is now an oversupplied market. Even if it was not the intention, some traders took the Saudi move as a sign the kingdom would like falling prices to slow U.S. shale production.
U.S. West Texas Intermediate fell sharply on Tuesday, dipping close to the psychologically key $75-a-barrel level, before closing at a three-year low of $77.19, off $1.59 per barrel. Brent fell along with it to $82.82 a barrel, the lowest settle since October 2010, after Saudi Arabia set a new price in the U.S. 45 cents lower than November's level.
Workers at an oil facility near Riyadh, Saudi Arabia.
Hasan Jamali | AP
Workers at an oil facility near Riyadh, Saudi Arabia.
Tradition Energy analyst Gene McGillian said the next technical level he's watching for WTI is $74 a barrel, and it's not clear how much further it will fall.
"The managed money longs still outnumber shorts 3½-to-1. If this isn't a heavy exodus of the money manager longs, we could still have a significant drop, especially if all these factors that are driving us lower continue to weigh on the markets," he said. "The dollar strength and also fears of slowing economic conditions in Europe and China are still continuing to play a role."
There was initially a muted reaction to the Saudi announcement Tuesday as the market focused on dollar strength and other factors.
"I don't think the probability is we're looking at a meltdown or collapse. If there was a global price war, it could go between $30 and $50 a barrel but more realistically, we're within 10 percent of the bottom," said Tom Kloza, senior oil analyst at
"What the Saudis are doing is business as usual. They change the price formula each month. The problem is there's an implication that it's business as usual in terms of production. The problem is if they continue to produce what they've been producing in the last two months, the market is headed for trouble, and downward pressure will be more significant than upward pressure," said Kloza.
Some analysts said the Saudis were motivated by market fundamentals. "In our view, it's not a direct attempt by Saudi Arabia to grab market share," said Dominic Haywood, crude and products analyst at Energy Aspects. "We think it's more a move by them to stimulate some demand from Gulf Coast refineries that are coming back from maintenance in November and December. By cutting to the U.S., you allow more exports to the U.S."
Haywood also did not think the Saudis were attempting to curb shale production. "In any case, you need crude below $70 a barrel for much longer than a month to limit U.S. production," he said.
Saudi Arabia's price setting was a market mover for a second month. For November, Saudi cut prices to Asian customers, and for December, it raised them for Asian and European customers while cutting U.S. prices. What the market sees as bearish is the lack of discussion of production cuts, analysts said.
"It's really the first time we are in this kind of era," said Max Denery, commodities strategist at Bank of America Merrill Lynch. "I think the OPEC meeting will be very interesting Nov. 27, and there is no real consensus about if they're going to cut or how much they're going to cut. They have a total ceiling of 30 million barrels. My thinking is if they cut between 300,000 and 500,000 barrels a day, it would not have an impact and might be bearish for the market because it's not enough to reduce the oversupply. If they cut 700,000 to 1 million, that would make a difference."
Denery said he sees the West Texas price stabilizing around $75 per barrel though it's possible the price could fall through that level first. He said prolonged prices of $70 would ultimately trigger a slowdown of production by some U.S. producers, and there could be less investment in new wells.
But he expects $75 to ultimately be the floor. "As soon as you see headlines about producers saying we need to cut some production or even close some wells, I think the market would react," he said.
The nature of the U.S. shale industry makes it flexible, serving as an economically driven swing producer that can brake or speed up production based on prices. Wells are most productive when they are first drilled, and production can be cut in half after the first year, so Denery said it is easier to slow production but not drilling new wells.
"We think that we need to have even lower prices to get some reaction from the shale industry. It's true that the supply response is much higher in shale than in other areas. In order to have significant reduction in growth, we would need to have WTI in the $70 area," Denery said.
Because U.S. breakeven costs for drilling vary dramatically by region and within regions, Denery said it would be the smaller producers with the highest costs that will be the first to slow down. "Those will be the first companies that will be hurt. Those companies do not hedge, and they try to produce as much as they can because they are on the edge," he said.
In the Permian Basin, in Texas and Oklahoma, companies' breakeven averages $55 to $60, while at Eagle Ford, they average $45 to $50, he said. In the Bakken in North Dakota, there is an area with $40 breakevens, but another area averages about $55 per barrel.
Watch: Read MoreSaudi Arabia's oil fight
The levels can fluctuate within each area, and some of the higher-cost production could be as much as $70 or $75 a barrel.
Oppenheimer energy analyst Fadel Gheit said the type of oil companies most vulnerable to lower prices are those with the highest debt loads.
"Not one company so far admitted or denied that they are canceling projects, but the question is not how many producers will say they are canceling projects but the question is how many projects and which are the companies. Every company will slow down. The question is, is it 5 percent or 50 percent. It will depend on the financial flexibility and the nature of the investment," he said.
Denery has already projected growth in shale drilling will slow next year. "For this year, shale growth was about 1 million barrels. Next year, we believe a little less. From the combination of an efficiency gain and slightly lower prices, we think growth in shale will be about 700,000. If prices drop to $70 a barrel, then you might see a growth in shale of just 300,000 to 400,000 barrels a day," Denery said. "We're still going to get growth but there's going to be a reduction in growth."
Denery said demand has not yet responded to the lower prices, and he expects to see demand improve in 2015. "The demand reaction takes much longer than the U.S. shale supply elasticity. If we have a lower price in 2014 then you're going to see another maybe 300,000 barrels a day of growth," he said.
Weekly U.S. government data, due Wednesday, should show that the world is well supplied with crude and U.S. production continues to approach 9 million barrels a day, a million barrel a day more than last year. Oil inventory data is released Wednesday at 10:30 a.m. ET.
"We're looking for another big build in inventories, another 2 million plus barrels," said John Kilduff of Again Capital. "It's been massive in the last couple of weeks. It's really what flipped the term structure into contango." Contango is when futures for coming months show higher prices than the nearby prices, a bearish sign.
"I think these prices are going to remain under significant pressure into the OPEC meeting, and I think it's going to go very badly. It's going to set us up for another leg lower, possibly into the 50s in the first quarter," Kilduff said.

October 18, 2014

Why deflation is so scary

If the price of a car or an iPhone drops, that’s usually good news for consumers. So it might be puzzling that investors and economists suddenly seem freaked out about the possibility of deflation, or a sustained drop in the level of all prices, on average.
Deflation was a concern back in 2010 and it’s a fresh worry now as oil prices plunge, the stock market wavers and consumers put spending plans on hold.

The paradox of deflation is that falling prices on a few items can generally be good for consumers, leaving more money in their pockets for other things. But falling prices on too many things can have ruinous effects on the economy that are hard to reverse. Japan suffered nearly two decades of deflation starting in the early 1990s, and deflation helped prolong the Great Depression in the 1930s.
When all prices fall, consumers have a strong incentive to put off purchases -- after all, everything will probably be cheaper tomorrow. Some purchases are hard to delay—food, medical care, gasoline to get to work. But a lot of the things we buy can wait, which is why sales of cars, clothing, and appliances drop sharply when times get tough.
In an economy like ours — in which consumer spending accounts for about 70% of total GDP — a powerful incentive to postpone purchases can be disastrous. When spending drops, so does corporate revenue, raising pressure to cut costs, which leads to layoffs and other personnel cutbacks. Companies are likely to freeze salaries or even cut pay for those workers remaining. Dwindling income makes consumers even more leery about spending money, worsening the whole cycle.

More expensive debt
The other mechanism for deflationary ruin is debt. One big reason lending helps the economy grow is inflation—most loans become easier to pay back over time, because the principal doesn’t grow but income used to pay it down does. We typically think of inflation as a rise in prices, but it's usually accompanied by an increase in workers' wages as well, and as long as wage increases exceed price hikes, ordinary people get ahead. Home buyers, for instance, often “grow into” a mortgage that might seem onerous at first, because their income climbs as they progress through their careers. The mortgage payments on a fixed-rate loan, by contrast, remain constant. So in a typical economic environment, you gradually earn more income to make the same payment every month.
Deflation creates the opposite phenomenon: Debt gets more expensive over time, because consumer spending power declines. When prices and corporate revenue fall for a sustained period of time, wages inevitably go down, too. That makes fixed-rate debt more expensive, because you have less money instead of more to make the same regular payments. The mismatch affects companies and even governments the same way it does consumers, causing cash-flow shortages, liquidity problems and bankruptcy. Each of these ugly outcomes reinforces the others, making a deflationary spiral very hard to pull out of.
On top of that, deflation makes people wary of taking out debt in the first place. Too much debt is a problem in itself, but prudent lending is an essential element of capitalism. Without it, investment shrivels and wealth is more likely to disappear than accrue.
We don’t have deflation yet, but we may be in a period of "disinflation," in which prices rise but at a progressively lower rate. The U.S. inflation rate dropped from 2% in July to 1.7% in August and will probably come in lower during the rest of the year, if only because plunging oil prices will lower the cost of gasoline and other products affected by petroleum or energy costs. This chart tracks the monthly inflation rate during the last five years:
View photo
Source: Moody's Analytics.
Source: Moody's Analytics.

Will central banks respond?

The risk of deflation is greater in Europe—where inflation is just 0.3% (a five-year low) and the economy is weaker than in the United States. Disinflation (though not deflation) may also be taking hold in Japan and China.

Lower inflation abroad will reduce prices for U.S. imports, as will a strengthening dollar, which has occurred as investors have chosen to put more money into U.S. assets and less into foreign ones. All of those factors contribute to disinflation and could generate outright deflation if they become severe enough. As the chart above shows, however, disinflation doesn't always lead to deflation; the rate of inflation dropped in late 2011 and early 2012, but then leveled out around 1.5%.
The Federal Reserve has been determined to head off deflation, which is one of the rationales behind the super-easy monetary policy that began in 2009. Part of that policy—quantitative easing—ends this month, which may be one of the factors shaking up markets. It seems unlikely the Fed will restart QE, although one key Fed official, James Bullard, recently argued the Fed should keep QE going. His case would get stronger if deflation seemed imminent. Under QE, the Fed pumps money into the economy by buying bonds, which in theory ought to make borrowing cheaper, lubricate consumer spending and potentially cause inflation. But many predictions of runaway inflation have been way off the mark, with deflation concerns today undermining how weak the global economy really is.
A more likely source of quantitative easing may be the European Central Bank, which has long hinted at aggressive stimulus measures but acted more modestly, to appease inflation worrywarts in Germany and elsewhere. Near-zero inflation—or full-blown deflation, if it happens—may finally prompt the ECB to mimic the bolder moves of the Fed. Meanwhile, if you see a good deal on a phone or an SUV, consider whether you can get a better deal by waiting. If you think you can, we may all be in trouble.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman

October 9, 2014

Six Stocks Owned by Billionaire Carl Icahn

Carl Icahn has the best long-run investing track record in history.  Yes, better than Warren Buffett, and over a slightly longer period of time.
From 2000 to July of this year, Icahn returned a cumulative 1,622%.  That compares to 235% for Buffett’s Berkshire Hathaway, and just 73% for the S&P 500. Icahn has returned 27% annualized over a 52-year period.  That turns $10,000 into $2.5 billion.  That’s a remarkable statement.
How does he do it?
This past August, he wrote a public letter on his style of investing.
In his letter, Icahn points to a dysfunctional corporate America as the lifeblood of his strategy. He says, “true corporate democracy does not exist in America and as a result many unfit CEOs are not held accountable.”  He credits his success to “adhering to the activism model which we have spent many years developing. What we essentially do is attempt to hold managements accountable through our rights as shareholders and seek to ensure the right people run the companies we invest in.”
In short, there will always be the opportunity to step in and shake up management, remove bad CEO’s, replace them with good CEO’s, and unlock value in poorly performing companies.  Until every company in America is optimally run and is maximizing shareholder value, Icahn will be in business, and so will the art of shareholder activism.
Perhaps the biggest nugget in Icahn’s letter was his analysis on the power of the board seat.  Over the past five years, if any investor would have bought an Icahn-owned stock the day that he (or his team) joined the board of the company, and sold it the day they left the board, according to Icahn's study that investor would have made a 27% annualized return.  That means Icahn’s “board seat screen” would have turned $30,000 into just over $100,000.  Moreover, these stocks were winners nearly 8 out of every 10 times, when this condition of a board seat was met.
Through this analysis, Icahn is essentially telling us to follow him – to do what he does.  With this in mind, here’s a look at five stocks where Carl Icahn has a 5% stake or more, and currently has a board seat.
Hologic (HOLX) – According to Icahn’s Filings he owns almost $7 billion dollars worth, or 12% of Hologic. His team has two board seats on Hologic.
Nuance (NUAN) – Icahn has two members of his team on Nuance’s board and he owns more than 19% of Nuance stock.
Transocean Ltd. (RIG) – Icahn has had a member of his team on Transocean’s board since 2013 and he owns almost 6% of this stock.
Navistar (NAV) – Icahn’s team has been on the board of Navistar since 2012 and Icahn owns 17.6% of Navistar’s stock.
Hertz (HTZ) – Icahn owns almost 9% of Hertz, and last month he just received three board seats from the company.
Herbalife Ltd. (HLF) – Icahn owns a whopping 18.5% of Herbalife and he has had three seats on Herbalife’s board since April of 2013.
To learn more about the stocks owned by the world’s best billionaire investors, please visit us at   

Buffett says "no-brainer" to get a mortgage to short rates

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said he was puzzled by the sluggish rebound in U.S. home construction amid near record-low interest rates and a broader recovery in the economy.
“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel, California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”
Housing starts slumped in August from the highest level in almost seven years to a 956,000 annualized rate, Commerce Department data show. Slow wage growth and tighter lending standards have kept some would-be borrowers from buying a home

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