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StumbleDAILY MEMO: GAMING:
Major investor bets big on Vegas
Paulson & Co., which predicted housing bust, says it’s time to buy
Saturday, June 12, 2010 | 2:01 a.m.
Las Vegas casino operators are bracing for a difficult summer, as the desert heat keeps conventions away and hotels try to lure tourists with low rates already beaten down by the recession.
And yet, one of the world’s biggest hedge fund firms has laid a $1 billion bet that three Las Vegas gaming giants, including the two that control most of the Strip, will recover.
Paulson & Co. recently purchased 40 million shares in MGM Mirage and 4 million shares in Boyd Gaming, becoming one of the largest shareholders in both. And in a deal announced last week, Paulson will exchange previously acquired bonds in Harrah’s Entertainment for a 9.9 percent equity stake in the gaming giant.
These are many eggs in a greatly weakened basket.
All three companies have most of their investments in Las Vegas. Two of the three, while narrowly escaping the clutches of bankruptcy, racked up big debts when the economy was booming and have been forced to cut back to make debt payments with enough cash left over to maintain their business.
Hedge fund guru John Paulson is among many investors predicting economic rebound this year and next. Yet some industry watchers wonder whether Paulson placed his contrarian bet too soon given that gaming in Las Vegas has not yet recovered as much as other industries that depend on discretionary spending, such as cruise lines, theme parks and nongambling resorts.
Hedge fund managers have been called the most skilled gamblers in Wall Street’s casino. They use complex investment strategies such as short sales and derivatives to hedge risky bets and maximize returns.
And yet, gambling is a poor metaphor with which to describe Paulson & Co. At a time when most investors lost their shirts, the firm made billions of dollars betting against subprime mortgages, correctly predicting that an epic housing collapse would trigger a broader economic decline.
Paulson, who charges wealthy clients heavy fees for his exceptional returns, might best be described as a professional skeptic.
His initial bets, in 2005 and 2006, were money losers because housing prices remained strong in the face of growing evidence that lenders were peddling mortgages to homeowners who couldn’t afford them, banks were increasing their debt loads to historic levels and bond-rating agencies were signing off on investments in bad loans. Rather than cutting losses early, he stuck with his position and let it ride.
An aerial tour of the Las Vegas Strip.
His early bet paid off in a big way when the real estate bubble finally burst and underlying problems made national headlines a year later. Paulson became one of the most successful and highly compensated investors on Wall Street.
Some analysts think Paulson isn’t too concerned with the specific challenges of Las Vegas gaming industry, such as an oversupply of hotel rooms.
Instead, analysts say he’s betting on a long-term recovery of the broader economy, a recovery in which casinos, like many other places consumers can spend money, will benefit.
Although his representatives wouldn’t comment on the casino investments, an investor conference call led by Paulson and published by MarketWatch last month revealed some of that rationale.
According to MarketWatch, Paulson said he expects the U.S. economy to rebound based on a recovering housing market, which should boost stock prices and gross domestic product.
“We’re looking for a very strong period of corporate earnings growth,” Paulson said. He also urged Americans to buy homes, saying prices are expected to rise this year and next.
(The company’s quarterly Securities and Exchange Commission filing last month revealed investments in multiple hotel and resort companies, such as Starwood and Vail Resorts, along with the casino company.)
Other theories about Paulson’s purchases abound.
Las Vegas casino companies, despite their risk profile, are one of the few sectors that offer the opportunity for the kinds of substantial returns hedge funds seek for their wealthy clients, analysts said.
The investments are no slam dunk.
Although spending in other sectors has increased, some question the strength and longevity of the latest economic boost.
The past three quarters of GDP growth was partly a function of one-time stimulus benefits like tax cuts, so whether the U.S. economy is “strong enough to stand on its own two feet” remains to be seen, said UNLV economist Mary Riddel, interim director of the Center for Business and Economic Research.
Although Boyd Gaming’s neighborhood casinos don’t depend on the health of the U.S. economy like tourism giants Harrah’s and MGM, they are indirectly bound by macroeconomic forces, as many of their customers have tourism-related jobs.
Economists analyze the past while investors bet on future events. Although some have criticized economists for not foreseeing the downturn the way some investors did, economists, unlike money managers, aren’t in the business of forecasting — which might otherwise be called skilled wagering.
Paulson’s bullish bet on casinos, like his investment in bad mortgages, might pay off by virtue of the deals’ early timing.
Otherwise, they are fundamentally different. Rather than crafting complex investment schemes to profit from the kind of homeowner failures that decimated profits in Las Vegas, Paulson’s latest move could have a restorative effect, by boosting investor confidence in companies that are just regaining their footing.
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This is laughable. Las Vegas is dying. Please compare this mindless boosterism to an actual iReporter comment from another site:
"Las Vegas is a goner. The homeless population is out of control. The real estate is far worse than I have seen in the media (no surprise there). The towers of condos are ninety five percent vacant with zero activity. The streets and parks are in decline. Local governments are busy making cuts and fighting unions. When I ride the streets they are deserted, a big change from 2006. The major casino companies have all but moved the casinos out of Nevada. Rooms and restaurants have been closing for years, even while they finished the new projects. The entire town is a skeleton staff providing substandard service and decaying properties. I still work for one of the majors which is in bankruptcy. When the next wave hits there is nowhere to cut. It will be a game of dominoes with the Wynn properties the only ones left standing. I see the ninety nine cent breakfast making a comeback. The bullet train a day late and a few billion dollars short."
Maybe the Sun's three remaining reporters should get out of the Chamber of Commerce or rewriting press releases, and get a beat on the street.
I don't know where this iReporter lives. While I don't see signs of growth, I don't see what they do.
I see people going to work, taking their kids to school, cooking dinner and living their lives.
Maybe the IReporter needs to see a doctor.
Wow. Shocking, really.
That's a HUMONGOUS set of elephant-sized bowling balls Paulson & Co. is sporting there.
All-in, I guess... I hope they win the pot.
"My next pick is Las Vegas Sands [LVS]. Steve Wynn [head of Wynn Resorts (WYNN)] is the best in the business, but I'm picking Las Vegas Sands for the midyear because it is opening a casino in Singapore this month. The stock is 24 and there are 660 million shares. The company will generate $700 million to $1 billion of Ebitda in the next 12 months in Singapore. Las Vegas is showing signs of stabilization. The combination of Las Vegas and their Macau properties will mean another $1 billion of Ebitda. The company owns 70% of Sands China [1928.Hong Kong], which operates its Macau property. That represents about $13 a share of value. Las Vegas Sands has very strong cash flow and debt is falling at an accelerating rate."
Mario Gabelli
Maybe they think what they are investing in will be the last casinos standing? The survivors.
Deodand, you quote an entire "iReport" and somehow try to imbue it with more credibility than that of a report written by a reporter with personal and professional accountability. "iReports" like this are often little more than anonymous rant from an individual of unknown background and training.
Journalist Benston's report, however, is balanced and objective. It is a fact that a major investor has put his money where his mouth is, and people are free to take away from that fact whatever they wish. "Boosterism" may be interpreted as inherent in Paulson's actions, but not in Benston's reporting of them.
Do not confuse anonymous, untrained, axe-grinding iReports with "reporting." Las Vegas might be dead to that "iReporter," but reports of its death have been greatly, and repetitively, exaggerated over the past 100 years ... And almost always by someone with an axe to grind.
Obviously they're betting on the FUTURE based on expectations that PRESENT busines will be picking up. If business were booming now, it wouldn't be a gamble now would it? It's good news that big wall street wales are diving in to the deep end now. They're always looking 2-5 years ahead.. so expect that to be the timeline for a valley recovery.
Did that particular iReporter ever pass the driver's license test yet?
If the corporations own and operate casinos outside of Las Vegas that certainly minimizes the downside for the company. Even if Las Vegas remains flat, profits are being made in the booming Asian economy. In Las Vegas, it will be the off-strip and weaker casinos that will go first. With the weaker casinos gone and a modest increase of visitors, casinos can be profitable although not to the extent of the boom years.
Paulson may once again come out on top alhough it will not be the gains he obtained when he bet against the housing boom.
they are in it for the long run 24 years 21 up a few down . i am in for the long run . i have a 30yr fixed rate mortgage here . stay the course calmer seas ahead
I love the mindset of short term thinking investors; investing is about long-term and seeing into the future and how the markets will yield the highest return.
Paulson investments will yield them a great return with the present market conditions and price paid. Vegas prices in this sector will increase and when they do the markets will react and the common investor will drive the prices to levels where Paulson will a few billion in profits.
Residential houses is not a long-term investment, you buy and hold on for no longer than 10 years then sell before repairs are needed and remodeling to bring up to current trends. Commercial investments are considered long-term and will yield the highest returns in a down economy at these prices.
I know you're all good at what you do, sit back and watch. In today's market and over the next few years the commercial markets are collapsing and our financial institutions are going plummet, we're going to be witness to one of the worst depressions this generation has ever seen. We're going to soon realize how 3 to 5 trillion can be lost in a short period and it's going to be ugly. For investors like Paulson, Buffett, Gates, Allen, Trump, they're going to make trillions upon trillions and you're going to pay for it.
This story is difficult to follow. According to the write-up of Paulson, the firm is a low end firm that buys or invests in emerging companys that have seen the inside of courts. Now the Paulson Investment Company has billons of dollars to invest in MGM, Harrahs and other almost there gaming entities. Either the financial editor was up too late editing the story or there is a company or two or three or more that do not have the money to invest that the barons of Wall Street have indicated as such.
And being in the seat of a secretary for two years at a lowly casino,my best guess is that there are persons who are hitting on the lowly casinos at a constant rate either because they are mentally lacking in brains or they are mentally in need of professional help.
Race_Car_Diva Just what is your juvenile point? Diva?
iReporter?
How does this piece of writing give credibility to the matter being discussed?
Just remember space needs to be filled every day, every hour, every minute, - just because it is in print does not make it so.
At this stage of Las Vegas 's decline years, Paulson has shrewdly and boldly thrown the dice on Las Vegas Pass Line (wouldn't be surprised if he isn't covered on the Don't Pass Line as well) This is a good thing for these idiot corporations because they are just floundering and treading water at the moment. The stock shares are cheap and plentiful. This is the time to jump into the gaming stocks and hold'em for future gains.
@deodand:
Laughable all the way to the bank. I bought 10000 shares of Sands Corp stock (LVS) March 2009 @ $1.92/share and it closed yesterday at $25.72/share.
Do the math, genius. Your iReporter hasn't a clue.
Good Now mgm has enough money to pay perini.
Recovery? More and more debt, no plan, or the fortitude to pay it down, employment remains weak, Europe is the prelude to whats coming.
Good move sunnyside! I doubt that the Paulson move is designed to take advantage of a 12x upswing. I think enviroprotector is closer to the reality behind the move.
Hedge funds typically make their money on small changes in value of financial instruments. My guess is that in addition to betting on these major casino operators to win, Paulson also has made bets on them to lose. His hedge fund will make money buying and selling related instruments that are slightly off their actual value. The investments are simply ballast to insure the day to day (actually microsecond to microsecond) transactions against risk of ruin.
Hate to say it but if everyone thought the way the "smart" and "intuitive" people did there wouldn't be such a thing as those people. Think mainstream, live an average life...
Economists claim to be scientists, and the economic field a social science.
The business of science is to predict the future. As much as possible and as correctly as possible. That is the point of all those equations. That is the criteria of a successful theory. If your theory can't make any predictions, then it is not a scientific theory and it has no utility.
Can Liz Benston tell us where she got the idea that economists are not in the prediction business? Who told her that? Or did she just make it up?
"Can Liz Benston tell us where she got the idea that economists are not in the prediction business? Who told her that? Or did she just make it up?"
UUiiiy(btw, very sharp screen name :) --- I have a friend who teaches economics at MIT. In case you're not aware, the economics department at MIT is one of the very best in the world.
I once asked him what I should invest in. His reply was "don't ask me, economists are notoriously bad investors".
If I were a betting person, I would tend to lean towards Paulson might have other interests, have they placed funds aside in California's for clients who have no California credit exposure have placed speculative bets with California credit default swaps? There is something to be learned here, one has to wonder, invest large in Vegas, Vegas is out to bring California businesses to the region, brilliant if this is their ultimate goal, they'll win on both fronts.
Understanding how California has screwed themselves into massive dept with their liberal agenda, one has to wonder, they can't borrow their way out their mess, and with so much debt, hum!
Dumb people are not millionairs. Now is the time to buy when stocks and etc are low. The only way Vegas will be eliminated is if it gets Nuked.
Eevery time I hear those words " Hedge Funds" the hair on my arms stand straight up.
Paulson? Isn't he the guy that pumped the mortgage industry to dizzying heights and then bet against it? Paulson also urged Americans to buy homes, saying prices are expected to rise this year and next.
Sounds like another pump and dump scam.
In order for these companies to recover, they are going to need to raise their rates significantly which will kill their bottom lines. There just isn't a lot of demand for $200 rooms in the face of $450 plane tickets. Cruises are a good value, by comparison.
I'm with Babyboomer and Kenodave,dont trust these types with your hard-earned money unless youre a big risk taker.
Think about this, its human nature.
People are always going to want to have fun.
Its just a matter of how, where and when.
I think Boyd Gaming has recently been downgraded by rating agencies due to continued low economical development in the local market. How can Paulson then buy into Boyd Gaming? Isn't it much rather that this article is trying to "sell/advertise" casino stocks as a good investment?
As for the Las Vegas Sands phenomeon, I wished I had kept my LVS stocks. I bought only 2000, but paid less than 2 dollars per share, and sold it for 5 dollars, happy with my 5000 dollar profit. Today, i would have won a bit more than that. So the guy saying he bought 10,000 shs at 1.92 and today it's worth about 25 dollars, let me ask you: Are you still holding these shares?
There are many people aware of the Las Vegas Sands phenomenon, but I have serious doubt that there are many investors that bought when it was under 2 dollars and still have it. At some point people want to cash out, and buying into LVS now at this level may be just as risky as not selling at 5 dollars when the markets were ultra nervous. I just can't believe that Boyd Gaming will go anywhere higher than 13 dollars or so unless the economy definetely recovers....which is not going to happen anytime soon.....
From Switzerland