QUANDARY: Bull and Bear, thanks for coming by. I called for you because again I’m bewildered by the cross-currents in the news every day.
Is inflation transitory or permanent? Is the latest Covid scare going to take the economy down? Is the sell-off of U.S.-focused iGaming and sports betting stocks just excess air being let out of the balloon and a buying opportunity? Or is it the start of a collapse?
And what about geopolitical risks? I just can’t get comfortable with the stock market appearing to ignore Afghanistan and an increasingly assertive and bellicose China.
BULL: Quandary, don’t panic. The underlying economy is strong, and stocks aren’t overpriced given the earnings power of companies as the economy rebounds. Remember, the market climbs a wall of worry.
BEAR: Well, Bull, I finally agree with your advice. Don’t panic. Quandary, stay calm—and make an orderly retreat.
Inflation is a fairly gradual process, so you have time to get out and buy some real estate or gold, or heck, even cryptocurrency. You need a store of value.
One place to start is selling the stocks of companies with high-variable interest rate debt. And despite all the talk about deleveraging, there’s still a lot of debt in the gaming industry. Even companies with near-maturity fixed debt will have to be quick to extend their maturities or reduce debt before the full impact of inflation sets in.
QUANDARY: But is inflation transitory or long-term?
BULL: We have a lot of disruptions, thanks to Covid. They’ll get resolved. Put me in the transitory camp. And even if inflation lasts awhile, it won’t be ruinous, like it was in the 1970s and ’80s.
BEAR: Famous last words, Bull. Look, the folks in Washington are hell-bent on flooding the economy with money while raising taxes, including taxes on success and productivity. Sheesh. What a formula for disaster.
QUANDARY: Okay, you guys haven’t helped me there. How about the gaming industry?
BULL: Record profits. Record margins. Revenues above pre-pandemic levels. Growing free cash flow. iGaming expanding. And we haven’t even gotten completely out of the pandemic yet. Think what it’ll mean for profits when the economy completely reopens and group and convention business is back, now that the guys in the C-suite have gotten religion about operating efficiently.
BEAR: Yeah, and stimulus checks are spent and liberal unemployment checks end and variant Delta or Echo or Foxtrot or Zebra depresses consumers again. Airline passenger traffic has hit the skids in no time at all. Recent retail sales are down. Or look at the plunge in consumer sentiment as measured by the University of Michigan. Not great signs for consumer discretionary companies.
Here’s another data point. Pennsylvania gaming revenues for July were just released. On the surface, the numbers were way up. But legacy brick-and-mortar revenues were flat with 2019. And the Delta variant scare really hadn’t hit in July.
QUANDARY: And geopolitical risk?
BULL: Look, this isn’t the Cold War, and the Chinese, as insufferably belligerent as they’ve become, are no threat to the domestic gaming industry, and the industry is heavily domestic.
BEAR: Well, there’s a problem with your complacency. Markets can tank on crises in confidence, just like the Afghan army can collapse. We have, let me put it kindly, a generously valued market, and investors haven’t had a protracted downturn in a long time. We’re overdue. And the guys in Washington and Beijing can make a confidence-shattering crisis happen.
As an aside, the Chinese might present a threat to the Macau casino industry. Beijing has shown that it will squeeze and squeeze and intimidate until it gets what it wants. Just look at Hong Kong if you need a poster child.
If I were an American company in Macau, I’d start looking to diversify rather than double down.
QUANDARY: Okay, you guys have convinced me of one thing. There are a lot of things outside of investors’ control that can happen, and a lot of them aren’t good.
