The steady bad news emanating from Macau has now taken its toll. Investors are fleeing the companies with operations there. Reality has hit home. But what is the real reality?

It’s called capitulation.

That’s when investors, bombarded for months with bad news and sliding stock prices, throw in the towel and set off panic selling, which leads to shatteringly lower prices.

We might be there with Macau casino operators.

Make no mistake. The picture in Macau is gloomy.

And we are not Pollyannas. Readers of this column know that I have long warned about the dangers of Macau given the nature of the Communist government on the Mainland, and the anti-gambling principles of its catechism.

We also warned that trees do not grow to the sky. When markets explode upward like Macau, it naturally leads to a cap, whether that is competing markets opening, or the greed of governments and companies to make decisions that prove counter productive.

You couldn’t just straight-line a projects continued growth based on numbers like low penetration of the vast Chinese nation, I said.

So the reality has come to Macau, and to investors who pooh-poohed such warnings, whether from me, others, or just from common sense.

But investors now might be creating a new unreality, in which there is only destruction.

Just as their straight-line projections seemed so certain then, so does today’s pessimism.

After all, valuations based on multiples of earnings and cash flow are still high as profits have shrunk faster than stock prices. The new Cotai mega resorts will bring new capacity to that shrinking market. The Chinese and Macanese governments are still talking more about tightening rather than loosening various rules. Transportation infrastructure is running years behind schedule. The partial smoking ban is sure to become complete.

All it took was for Wynn Resorts to report collapsing earnings and for CEO Steve Wynn to sound the alarm for the previously complacent to become raging bears.

They drove Macau gaming stocks down to 52-week lows, including WYNN falling to less than half of its former high.

But just as investors ignored warning signs before, they shouldn’t ignore hopeful signs now.

Here are some:

• The Macau government is giving hints that the collapse of its main industry has gotten its attention.

Their almost callous attitude appears to have been replaced by one of concern. We now see reports about the government, which once ran surpluses it couldn’t reasonably spend, now talking about possibly having to cut its budget.

Talk of capping Mainland Chinese visitation appears to have faded. And why not? Current visitation rates are running well below the floated annual 21 million-visitor cap.

• The Mainland government has made its point and appears to have driven out all of the unsavory government gamblers from Macau, so no, or little, further downside there.

• Galaxy II is reportedly going to be allotted 150 table games when it opens in late May.

That is more than the 105 that a strict interpretation of Macau’s table growth formula would allow, and a lot more than the zero some had feared.

If that allocation proves true and is a model for others, it means more gambling capacity.

• Gaming revenues have been leveling out in recent months, even though the year-over-year comparisons still display big negative gaps.

• Valuations, while high when detached from any context, are becoming reasonable based on the new earnings projections that, themselves, might represent bottoms.

So, investors might want to start looking to see if a bottom has been reached.

Though, there is another apt Wall Street phrase of caution: Be careful not to catch a falling knife.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.