In November last year, InterGaming posed the question: "Are casinos a safer bet than the stock market?" Several months on, has the economic picture become any clearer?
MACRO ECONOMICS
It is tempting, but misleading, to look at the world in three economic blocks viz Americas, Asia and Europe. Within each grouping there are huge differences by country. It is better to eliminate the extremes such as Iceland, Columbia and Pakistan. Concentrating on the US, UK, Germany, Japan, China and Australia will give a better feel for what is going on. Are there really "green shoots" or is "hope" just the triumph of optimism over reality? Is the European and Chinese limited stimulus approach likely to be more effective in the long term than the ‘print money until we recover’ policy of the US, UK and Japan? Will we see deflation or inflation? What should casinos be doing?
US
In the United States GDP decreased at an annual rate of 6.1 per cent in the first quarter of 2009 compared with the fourth quarter of 2008 - the third quarterly drop in succession.
First quarter corporate profits are estimated to be 36 per cent down following a 16.5 per cent fall in fourth quarter 2008 corporate profits - the largest decline since the fourth quarter of 1953. Over the last six months the US government has passed four major initiatives to address the recession in addition to quantitative easing (printing money) to buy back treasury bonds etc.
TARP or Troubled Asset Relief Program allows the United States Department of the Treasury to purchase or insure up to $700bn of "troubled" assets.
TALF or Term Asset-Backed Securities Loan Facility allows large investors - including hedge funds and private-equity firms - to obtain cheap credit from the Fed and use the money to buy newly issued securities backed by such loans. The programme finances up to $1tn in new lending to consumers and businesses, in an ambitious attempt to jump-start credit for everything from car loans to equipment leases.
The American Recovery and Reinvestment Act of 2009 is an economic stimulus package, nominally worth $787bn, designed to reduce unemployment and increase domestic spending on education, health care, and infrastructure, including the energy sector.
The Homeowner Affordability and Stability Plan is a $75bn programme to do two things:
1) Help more homeowners refinance at new low interest rates
2) Provide incentives to lenders and mortgage servicers to restructure mortgages to be more affordable
The US budget deficit was close to $1tn halfway through the fiscal year after incurring a budget deficit of $192.27bn in March, the sixth month of the fiscal year. In the first six months of fiscal 2008, the government ran a deficit of $312.75bn. Over the whole of the 2008 fiscal year, the government ran a record high deficit of $454.80bn.
March spending totalled $321.23bn, compared to $227.03bn in March 2008. Interest payments on the national debt were $19.93bn, or six per cent of total spending for the month. Year-to-date federal government spending totals $1.95tn, compared to $1.46tn in the first six months of fiscal 2008. For the US gaming industry nothing gives a better insight than the latest Nevada numbers comparing the 2009 results with those for a year earlier.
Atlantic City casino revenues dropped by a record margin for the second straight month in March. Combined revenue from the 11 casinos in New Jersey’s gaming capital dropped 19.4 per cent to $318.4m in March, compared with a year earlier, according to the New Jersey Casino Control Commission.
The latest decline, the sharpest in the city’s 30-year gambling history, exceeds the previous record 19.2 per cent drop in February. For the first three months of 2009, overall revenue declined 16.2 per cent to $950.2m.
Slot-machine takings slumped by 21.3 per cent to $218.1m, while table revenues decreased by 14.7 per cent to $100.3m.
The slump in revenues has helped drive three Atlantic City casinos - those owned by Trump Entertainment - into bankruptcy, while plans for several major new casinos have been scrapped amid the downturn.
The results come at a time when tight credit markets have stymied construction projects across the country - particularly gambling facilities. The only bright spots are the New York Lottery and electronic games played at home; both showing year-on-year increases.
UK
The £25.6bn stimulus package introduced on November 24, 2008, coupled with quantitative easing and the limited incentives for companies included in the 2009 budget have left UK finances in disarray.
The Treasury Select Committee composed of a majority of government supporters appears to agree with this assessment. In his Budget speech, Chancellor Alistair Darling told the House of Commons the government would be forced to borrow £175bn this year to make ends meet as spending grossly exceeds income.
With GDP falling (-1.9 per cent in the first quarter 2009) at an annualised rate of well over four per cent; a negative Retail Price Index of -0.4 per cent compared with 2008 at the end of March; and unemployment rising to 7.1 per cent, who will disagree that the government is still too optimistic and the more pessimistic IMF forecasts will be closer to reality?
Casino operators are generally experiencing a downturn in revenues as consumer spending continues to fall. In the UK, Genting International, Rank and Gala Coral all reported poorer financial results in 2008, due largely to the combination of the recession and the smoking ban.
For the year ended September 27, 2008, Gala’s group turnover decreased by three per cent to £1,268m and group EBITDA fell by 10 per cent to £363m. Rank meanwhile, reported that for the year ended December 31, 2008, revenue at its Grosvenor Casinos was 1.7 per cent lower than in 2007, while operating profit declined by 1.3 per cent. Both companies warned that 2009 would be a year of economic uncertainty, but suggested restructuring and streamlining initiatives gave cause for optimism.
Germany
German GDP was down 2.1 per cent in the fourth quarter of 2008 compared with the previous three-month period, and is expected to decline at least three per cent more in the first quarter of 2009. The German economy began to contract in the second quarter of 2008 as the strong euro, high oil prices, tighter credit markets, and slowing growth abroad took their toll on Germany’s export-dependent economy.
Blaming a drastic slump in exports (23 per cent decline since January) the German government has predicted a six per cent contraction in its economy this year. With more than 40 per cent of the country’s gross domestic product generated by exports, Chancellor Angela Merkel recently announced two successive stimulus packages worth an estimated €81bn ($104bn), to respond to the financial and economic crisis. But policy makers in Berlin have played down the prospect of another package of measures to shore up the domestic economy.
German unemployment rose for a sixth straight month in April. The number of people out of work increased by seasonally adjusted 58,000 to 3.46 million.
According to the Association of German Casinos, DeSIA, the country’s licensed casinos saw earnings decline by approximately 20 per cent during the first quarter of the year, compared with the same period last year. This fall has been attributed to the ongoing economic crisis, state smoking bans and the globalisation of the gambling market.
Japan
The Japanese government estimates that the economy shrank by 3.1 per cent in the financial year ended March 31, 2009 and will shrink a further 3.3 per cent in the next 12 months with exports falling by 27.6 per cent and industrial production by 23.4 per cent.
Japan is in the process of issuing an extra ¥10,800bn ($110bn) in government bonds to fund the government’s ¥156.85bn ($154bn) stimulus plan and bring its expected new issues up to ¥44,100bn ($48.51bn) - a 33 per cent increase on last year. Following nearly 20 years of limited growth and high debt, Japan is already in a hole with a debt to GDP ratio around 180 per cent.
Japan’s ruling party is continuing to consider legislation to legalise casino gambling in order to raise tax revenue. The Japanese public is becoming more tolerant of gaming and appreciates the potential impact on tourism. The move would imperil Japan’s ¥223.27bn (US$ 250bn) -a-year pachinko business. Pachinko is a pinball game that skirts Japan’s gambling ban because players exchange prizes for cash outside pachinko parlours.
China
The 6.1 per cent rise in first quarter gross domestic product was lower than the 6.8 per cent expansion in the fourth quarter of 2008 and appears to show a slowing growth rate.
However, breaking down the GDP figures relative to the previous quarter - which is how most developed economies report their economic data provides evidence of improvement. China’s 6.1 per cent figure for the first quarter of 2009, because it is a comparison only with the year-earlier period, doesn’t clearly show how the economy is doing relative to the onset of the crisis late last year. Many economists think economic growth probably accelerated in the first quarter from the last quarter of 2008.
China’s stimulus programme, worth 4tn Yuan Renminbi ($585bn) is having an impact on fixed-asset investment in urban areas (China’s benchmark measure of capital spending) which rose 30.3 per cent in March from a year earlier, picking up from 26.5 per cent growth in the first two months of this year. Industrial production, the main driver of China’s manufacturing-heavy economy, grew by 8.3 per cent in March from a year earlier, accelerating from the 3.8 per cent growth in January and February.
Macau’s casino industry may have started to turn, as first-quarter gaming revenues jumped 8.1 per cent from the previous quarter after a dismal second half in 2008, official figures showed.
Revenues were 26.02bn patacas ($3.26bn) in the first three months of this year, up from 24.08bn patacas ($3.02bn) in the fourth quarter of 2008, according to Macau’s Gaming Inspection and Coordination Bureau.
The upturn follows three straight quarter-on-quarter drops in revenue in the former Portuguese colony, as tighter visa restrictions on visitors from mainland China hit operators. But the figure was still down 12.8 per cent compared to the record first quarter of 2008.
City of Dreams, the new Melco Crown Entertainment $2.1bn casino scheduled to open this month, is optimistic that it will accelerate the record (since August 2008) March 2009 revenue figure of $1.2bn, particularly as China appears to have eased the visa restrictions it imposed last year.
Australia
Official figures released for the December quarter show that the economy has shrunk by 0.5 per cent despite government attempts to kick start the economy with two stimulus packages worth more than A$50bn (£23bn). The first quarter results were not available when InterGaming went to press.
HOPE vs GREEN SHOOTS
The analysis gives us a pretty grim picture in all the major economies except China. So why are stock markets bullish? How can Ben Bernanke, chairman of the Federal Reserve, discern "green shoots"? What caused the good results from the banks in the first quarter? Why are mortgages and credit easier to get? How can politicians be so optimistic? Why is consumer confidence recovering?
There are of course a range of answers to these questions. It is difficult to avoid opinion and judgment. Whatever, the main reasons appear to be:
* Pumping money into the economy is helping. And never has so much money been pumped into so many economies in so short a time.
* Governments are guaranteeing financial institutions. Confidence is returning.
* The Federal Reserve, the Bank of Japan and the Bank of England have interest rates close to zero with the European Central Bank getting there. Not to mention quantitative easing and other unconventional policy instruments.
* The rate of decline is slowing in many cases. And there are lots of greedy people trying to call the bottom.
* The Interbank rate (3 month $ Libor) has fallen to a low level (London below one per cent on 5/5/09) helping to restore lending between banks largely as a result of the banks being government supported.
* Corporate bond issues with investment grade are being purchased.
* Inventories have fallen. They must be rebuilt - eventually.
* Prices have fallen for homes, oil and cars. And credit is available again.
* Stock markets are rising. Casino stocks have risen from their nadirs. Debt ridden MGM Mirage by 500 per cent and Las Vegas Sands by 600 per cent. Less high profile casino stocks have outperformed the S&P over the last year.
* Spring has sprung!
Against this optimistic picture there are contrary views. These may be summarised:
* Against a generally buoyant world economy Japan has failed to achieve sustained growth or reduce its indebtedness despite multiple stimulus packages for over 20 years.
* USA and UK economic recovery forecasts are based on being able to continue borrowing huge amounts of money for years, which can only be repaid if significant growth resumes in 2010.
* The credit markets are in no state to support a sustained recovery. Syndicated lending (bank lending to companies) is very low in 2009 compared with 2008. The Securitisation (non banking lending secured against assets such as mortgages) market remains dormant despite the US government’s efforts to restart it with up to $1tn of new funding.
* Regulation will depress the key financial market segments in the US and the UK and prevent them contributing to growth.
* Unemployment is continuing to rise with the transition from manufacturing to services far from complete in the US ( General Motors, Chrysler).
* No profit seeking private institution can remain "too big to fail". If they do the tax base will prove too small to support all of them. After spending $300bn to shore up the US banking system from the TARP, the US Treasury announced on May 7 that still more is needed - Bank of America $34bn, Wells Fargo $13.7bn, GMAC $11.5bn, Citigroup $5.5bn etc. Will they go the way of Northern Rock in the UK?
* Huge excess capacity leads to deflation with lethal consequences for borrowers.
* Indebted households fearing unemployment will increase savings and reduce spend drastically.
* Continuing budgets which are not balanced, soaring debt, risk aversion and printing money all lead to inflation.
* Couple budgets which are not balanced, soaring debt, risk aversion and printing money to low demand and we have stagflation.
IMPACT ON CASINOS
There is little or no sustained good news. Governments may gamble on growth returning and inflation to solve their indebtedness. Banks may gamble on Structured Investment Vehicles and rely on the taxpayer to bail them out. For US casinos the picture is grim, particularly if the government legalises online gaming as it is hoping to do later this year in its search for new tax revenues.
Advice for the future:
Conserve your cash.
* Make sure businesses are getting an adequate return on any credit they may be extending.
* Ensure spending limits are strictly enforced.
* Live within the depleted revenues the business can generate.
* Take a good hard look at all comps.
Wherever possible pay employees on a commission basis.
* Employ staff on short-term contracts.
* Introduce flexible working practice.
* Gear pay to revenues produced where possible.
* Train staff to multi task.
Put those big capital projects on hold.
* Talk to lenders about taking a payment holiday.
* Try to lock in a favourable interest rate.
* Scale back and look at the economics of dropping, for example, the hotel operation.
Casinos are fundamentally a sound business. Disposable incomes will rise again. More leisure time will occur. Tax starved administrations need to support casinos to restore their tax base. In the meantime life will be tough and internet gaming offers more attractive investment opportunities than bricks and mortar.
Final Thought
Fire everybody over 49 years of age who is currently employed. Give them a million each in redundancy pay to spend on upgrading their house/car and paying off their debt.
Net result no unemployment; housing and car crises solved; consumer spending resumes; bankrupt financial institutions fail; honest taxpayers are not penalised; and no debt is passed on to the kids.
