EUR/CHF Could Continue To Rise Over The Long Term, But Near-Term Risks Warrant Hesitation


The EUR/CHF currency pair, which expresses the value of the euro in terms of the Swiss franc, has been trading higher in recent weeks. While euro sentiment is thought to have improved, the so-called positive sentiment has not pervaded all EUR FX crosses, as I demonstrated in the latter part of a recent article (covering EUR/NZD). The euro has improved mostly with respect to the U.S. dollar, as USD has weakened considerably across the board.

However, EUR/CHF may prove to be an exception. While EUR is struggling to gain ground against other major currencies, recent Swiss franc weakness has enabled EUR/CHF to steady itself and begin to approach its 2020 highs above the 1.09 handle. The pair began 2020 by trading just under this level, while EUR was able to exceed this level only briefly in June (as shown in the daily candlestick chart below).

(Chart created by the author using TradingView. The same applies to all subsequent candlestick charts presented hereafter.)

In early July, before the most recent rise, I did believe that the outlook looked constructive for EUR/CHF. My view was based on the fact that since the interest rate spread was effectively zero (and it is unchanged since then), relative political risk was at the forefront of this pair’s valuation. Given continued SNB intervention to help soften any CHF strength, and positive risk sentiment, there was a chance that EUR/CHF would rise. This was especially true considering the potential for increased harmony across the European Union with jointly-issued debt (per the proposed EU Recovery Fund).

I did admittedly suggest that further downside was probable, but only on the basis of the trend, which seems to have promptly reversed. Yet EUR/CHF still has not taken out its 2020 highs, so a degree of indecision still seems to be present. One interesting article from Bloomberg recently made the following important point:

Investors may have thought that the gigantic stimulus package agreed by EU leaders in July is a done deal. It’s not. The plan for 750 billion euros in joint debt issuance still needs unanimous approval from the bloc’s parliaments, with Hungary threatening to hold back ratification until it’s reassured the disbursements it’ll receive won’t be subject to strict rule-of-law standards. The stimulus package also needs approval by a fragmented EU Parliament, which has threatened to block it.

While the joint debt issuance is constructive for both reduced European Union break-up risk (i.e., due to greater implicit integration) and also higher European yields (Germany has for a long time been averse to spending, and so some have seen Germany’s approval of this prospective recovery fund idea as potentially positive for EUR yields), it is not a done deal. Perhaps markets have got ahead of themselves, and perhaps further progress is needed before we see a sustained EUR advance against USD and CHF.

Both USD and CHF are safe havens. USD is viewed as a safe haven for several reasons. The U.S. has historically outperformed other countries economically, and the U.S. maintains the petrodollar system (most oil trade is conducted in U.S. dollars), and furthermore the U.S. equity market has been the most popular among international investors for a long time (outperforming other major international equity indexes). For many reasons, USD still remains in high demand especially among central banks, whose FX reserves are approximately 60% USD claims (and only 20% EUR).

Meanwhile, CHF is also a safe haven, owing to the relative political stability of the small country (most relevantly with respect to European Union) and its historically positive current account surpluses (which provide the country’s currency with a natural degree of support). In spite of the country’s deeply short-term rate of -0.75%, CHF remains in high demand for these reasons, and the country maintains a high standard of living where residents enjoy a higher average nominal GDP per capita than almost all other countries in the world.

Because of these differing but still not categorically dissimilar characteristics, both USD and CHF tend to correlate positively versus other currencies, which also enables USD/CHF to often trade without too much volatility.

With EUR/USD advancing, this might therefore lend further support to EUR/CHF appreciation, and most recently it has. However, the recent support has been limited. With the United Kingdom’s trade deal deadline still in sight at year-end, and with the potential for either another wave of COVID-19 infections across Europe and/or a break-down in progress regarding the EU Recovery Fund project, EUR risks still remain.

If we think about relative political risks, CHF always seems to have an advantage, considering the stability of Switzerland in light of the rest of the world. Perhaps this is why CHF remains in high demand, and this really goes to show the power of political risk in the FX space; as I have written before, confidence is the most important factor. Using OECD data, I construct the Purchasing Power Parity model below that shows that EUR/CHF actually remains at a deep discount in light of EUR’s relative purchasing power.

EUR/CHF Purchasing Power Parity Model in 2020(Data sourced from Investing.com and OECD)

In the chart above, the red line represents the rolling PPP fair value estimate (most recently as of 2019), while the black line represents EUR/CHF price action on a weekly closing basis. The upper band (which is not visible) and the lower band represent levels that are 40% above and below (respectively) the PPP model’s fair value estimate. Notice that during the period from 2000 to present, EUR/CHF has remained at a steep discount, not even coming into contact with the PPP value once (the upper band is not even visible on the chart, as it is simply too far away to be relevant to us). The variance to PPP has been consistently negative, only to differing degrees over time.

EUR/CHF almost made its way to 1.70 in 2007/08, yet the Great Recession sent the pair substantially lower just as the PPP fair value estimate fell over this period. When the SNB broke its EUR/CHF peg in January 2015, EUR/CHF dropped to a level that essentially represented a 40% discount to the PPP value. The chart below illustrates the variance (i.e., discount) historically to the running PPP value through to the end of 2019. The chart below uses the same data as the chart above.

EUR/CHF PPP DiscountEUR/CHF is trading at a historically deep discount, even relative to its previously pessimistic history. It is worth noting that due to the higher GDP per capita in Switzerland, the GDP-adjusted discount is potentially far lower. For instance, The Economist’s Big Mac Index indicates that CHF is overvalued by 44% on a non-adjusted basis (July 2020), but overvalued by only 2% on an GDP-adjusted basis. Still, exports remain important to the Swiss economy, and the SNB makes repeated attempts to intervene to stem any CHF/EUR strength.

Over the medium term, because of several risks that remain on the horizon, general uncertainty is likely to moderate any positive EUR/CHF sentiment and investor confidence. However, there is clearly plenty of potential for EUR/CHF to trade higher. The PPP value between EUR (in this case the euro area) and CHF (representing Switzerland) has been fundamentally steady over the past few years (averaging at around 1.64 since the start of 2015). The current price of EUR/CHF is just over the 1.08 handle.

Since the difference (regarding PPP) is likely far lower on a GDP-adjusted basis, it is unlikely that EUR/CHF would be able to stage a sharp recovery to the upside (unless the Swiss economy deteriorated significantly relative to the euro area). However, an upside bias should be considered at this juncture, considering the stability of the PPP value and the potential for longer-term euro area integration. This pair simply needs to see itself through 2020, one of the most uncertain years in global markets for many years, before light will begin to emerge at the end of the tunnel.

If 2020 is not enough to shake EUR/CHF significantly lower, I believe this pair will begin to establish a floor of sorts, and CHF may finally be able to concede some strength to EUR. Rates between these nations are likely to remain close, probably unchanged, and in negative territory for the time being. Meanwhile, Swiss inflation has been in deflation (negative) territory year over year throughout much of 2020, which certainly provides another headwind for EUR/CHF (deflation, as opposed to inflation, usually leads to a stronger currency; lower inflation technically improves inflation-adjusted “real yields”).

Switzerland Annual Inflation Rates in 2020(Source: Trading Economics)

Once again, no significant surge upward in EUR/CHF can be expected. But a gradual improvement should probably be our bias over the longer term into 2021. Confidence tends to reign supreme, and I think the broader backdrop is constructive for EUR/CHF, but near-term risks warrant some hesitation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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del Centro Norte Can Recover Further, But The Near-Term Looks More Turbulent (NASDAQ:OMAB)


With its strong domestic-oriented franchise, a healthy balance sheet, and a new concession negotiation coming up, I liked Grupo Aeroportuario del Central Norte (OMAB) (“OMAB”) back in April on what I thought was a market overreaction to the pending impact of COVID-19. While COVID-19 has indeed hit the business hard, the market has come to terms with the issue and the shares have risen almost 50% since then.

I’m still bullish on OMAB, but not quite as aggressively as before. While I do believe that OMAB’s leverage to domestic travel within Mexico is still a relative advantage over its peers, Grupo Aeroportuario del Sureste (ASR) and Grupo Aeroportuario del Pacifico (PAC), I believe Mexico’s weak economy is likely to pressure business travel in the near term, and I likewise believe OMAB is going to see some challenges from the restructurings at Aeromexico and Interjet. The pandemic should also help the company in its concession negotiations, and I still see double-digit annualized return potential here.

Everyone Knew It Would Be Bad … And It Is

With international travel bans and internal lockdowns, it was widely expected that Mexican air travel would get hammered this year, as so it has been. OMAB reported a 90% decline in passenger traffic in the second quarter, and traffic was still down 73% in July, versus a 68% decline across the entire sector. Traffic to Monterrey, a major business center in Mexico, was still down 75% in July, after falling 91% in the second quarter, and Monterrey alone is about 45% of OMAB’s traffic (Culiacan, the second-most important airport at 12%, was down 61%).

OMAB was able to partly offset the steep decline in aero-driven revenue in the second quarter with its non-aero businesses, about 40% of which are relatively “fixed” relative to traffic-dependent, including some industrial real estate assets that the company acquired to diverse the revenue base (a move that was not universally applauded at the time). Non-aero revenue declined “only” 58% in the second quarter.

OMAB also did a good job of managing expenses given the circumstances. Airport service costs fell by 16%, and while the company’s operating profit did go into the red, adjusted EBITDA stayed barely positive and did beat expectations of a loss – the beat was P$ 93M on a P$ 635M revenue base and P$ 347M ex-construction revenue base.

Challenges On The Way Back To Normal

Most airlines, aircraft lessors, and airport operators are expecting a multiyear path to normalization, with estimates ranging from around three to five years. In the case of Mexican air travel, it may take a little longer for tourist traffic to return, a bigger threat to Sureste and Pacifico than to OMAB.

That’s not to say that it will be easy for OMAB, though. First, Mexico’s economy remains quite weak, with GDP down 19% in the second quarter. As long as Mexico’s economy remains weak, business travel is likely to remain weak, hurting near-term results for OMAB.

OMAB also has to deal with some challenges in its customer base. Aeromexico declared bankruptcy in June, and Interjet is undergoing its own voluntary restructuring. How these restructurings play out for OMAB is yet to be seen, but with about a third of OMAB’s traffic coming from these carriers (versus 20% for Sureste and 10% for Pacifico), it’s going to matter. I believe we’re going to see both airlines cut capacity, but some of the damage to OMAB may be mitigated by the airlines reallocating away from some money-losing international routes to domestic routes.

The Master Development Plan Negotiations Are Going To Be Interesting

OMAB is in the process of working with the Mexican government on its new Master Development Plan (or MDP) – basically a multiyear concession agreement that allows OMAB to operate its airports and charge fees to airlines/passengers for access, in exchange for which OMAB must commit to specific levels of capex (expanding airports/terminals, renovations, and so on).

OMAB had been planning to commit to P$ 14B to P$ 15B in new capex over the life of the plan, but now it looks like the number will be closer to P$ 12B. That should still allow the company to achieve a low double-digit increase in fees, though, as the Mexican government will likely allow OMAB to effectively recoup the business it is losing now over the life of the new agreement.

I’d also note that Sureste and Pacifico have the option to renegotiate their MDPs. There is a clause in these agreements that allows for extraordinary negotiations if GDP falls 5% or more in a twelve-month period, and that has happened. These renegotiations are unlikely to impact OMAB’s process, though it could lead to some delays given that the authorities may be working on three plans at once and attempting to find some cohesion between them.

The Outlook

Given what I see as a somewhat rockier path back for domestic business travel in Mexico, I’ve adjusted my near-term expectations a little lower, but it doesn’t really change my long-term outlook much, as I expect a more generous outcome from the new MDP process. The net to OMAB is that I still expect mid-single-digit revenue growth (although down a bit from “mid-to-high single-digit growth”) and high single-digit FCF growth has cash generation will remain healthy even during the reinvestment phase of the new MDP.

The Bottom Line

Discounting those cash flows back, I still believe that OMAB is priced for a double-digit annualized return to shareholders. That’s a solid return in my view; while there is certainly macro-economic risk here, as well as the risk of a rebound in the pandemic and currency risk, OMAB is a relatively lower-risk way to invest in Mexico’s recovery and growth, and I believe management’s demonstrated skill with managing costs further reduces the risk. All told, I think this is a stock worth considering at these levels even after a big run.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Ford: Built Tough Against Near-Term Headwinds (NYSE:F)


Like most car companies, Ford (NYSE:F) has been having a tough time during the coronavirus pandemic. The lockdown and subsequent stay-at-home orders have dampened consumer confidence and halted automobile sales. However, the company is an American icon with a fantastic product and a loyal following. Despite the current short-term difficulty, I believe the company still has a solid, long-term future.

The company is facing some serious short-term headwinds because of the capital and fixed-cost-intensive nature of the business. Ford reported Q1 2020 net loss of $2.0 billion. Even more concerning is this net loss corresponded with a first-quarter free cash flow of negative $2.2 billion. In order to raise cash, the company tapped around $15 billion from its credit lines, issued an additional $8 billion in debt, and suspended its dividend. The company ended Q1 with $35 billion in cash.

The preliminary results for Q2 do not look promising either as total vehicle sales were down 33.3%. This is really bad news for the company as, like all automobile manufacturers, Ford’s margins are incredibly tight. Despite having $155.9 billion in sales, the company only has a 13.6% gross margin. Given the high fixed costs, a small decrease in sales would lead to a large decrease in the bottom line.

A possible silver lining though is that retail sales were only down 14.3% and retail sales for trucks were practically flat. The bulk of the loss can be attributed to the lack of industrial fleet sales. This is not surprising given that companies were conserving cash due to the pandemic and a lot of these purchases may have been pushed back or canceled. Basically this means that the Q2 2020 results will most likely look much worse than Q1 2020.

Investor presentation

Investor presentation

Ford’s future prospects look a lot better

Despite the present challenges, Ford is prepared to fire on all cylinders through 2020-2022. First and foremost, a new Ford Bronco is set to launch sometime in 2021 (with the unveiling in a few days’ time). The Bronco is a classic brand last seen in 1996. Ford is intending to tap on the nostalgia for the brand by highlighting its classic design such as its iconic horizontal grill. Similar to the Jeep Wrangler, an SUV Ford dedicated to taking on, the Bronco is an off-road-focused SUV. It will be mid-sized 4×4 and be a body-on-frame designed for rough roads. The Bronco will be offered in two- and four-door configurations along with a smaller variant called Bronco Sport.

2021 Ford Bronco: What We Know So Far

2021 Ford Bronco: What We Know So Far

Ford has been very clever in building hype for the reveal of the Bronco by partnering with Disney to get the message across all of its platforms. In fact, the Ford Bronco is among the most anticipated cars in 2020 according to Google search trends. Hype for the Bronco has been building up since this study was done and is close to the highest it’s been in anticipation of the launch. The company seems to have learned its lesson from the failed launch of the Explorer, so I do not expect any issues from this launch.

These Are The Most Googled Upcoming Cars Per State In America | Carscoops

Google Trends

Brian Moody, executive editor at Autotrader.com, said, “Jeep has been capitalizing on their heritage for decades, and not in name only. Jeep has proven that a genuinely capable adventure/utility vehicle with a nod to the past is what many people want. And that’s what the Bronco promises, if they can deliver an authentic product and, more importantly, communicate that authenticity laced with nostalgia, it will be a winner.”

Ford declares war with all-new Bronco as Jeep Wrangler demand spikes

Apart from the upcoming Bronco, Ford has hedged its future in the electric vehicle market. Threatened by upstarts like Tesla (NASDAQ:TSLA) and its Cybertruck, Ford has dedicated itself to building its own electric vehicle using its ever-popular F-150 as the base. The F-150 is the best-selling vehicle in America, and it’s quite clever that Ford used this as a way to introduce its entire EV line-up. This means that for the average truck driver, the design and feel of the electric vehicle version F-150 is far more comfortable than the somewhat weird-looking Cybertruck. Ford is targeting to have this car out by 2022.

Pick-up trucks are the company’s differentiator and its bread and butter. Ford and Lincoln both ranked in the top 5 in J.D. Power 2019 US Initial Quality. Ford pick-up trucks have a brand history built over the years when it comes to power and reliability. Given Tesla’s Model Y production quality issues, I do not view the company as a threat to Ford’s long-term dominance of the market.

The other potential threat to Ford from the EV side is the upcoming Rivian truck which is set to launch sometime in late 2020. However, Ford has hedged being displaced by a possible disruptor by investing $500 million into the car manufacturing start-up. Ford’s Lincoln brand continues to closely work with Rivian using its electric vehicle platform. This partnership allows Ford to have a sort of “hedge” should Rivian become the dominant EV technology.

Watch Ford F-150 all-electric pickup prototype tow over 1 million lbs of train carts – Electrek

Valuation

I feel that Ford is undervalued as the company’s price to book value is close to the lowest it’s been in five years. The current price to book ratio is 0.83x. Automobile manufacturing is a mature industry that is incredibly capital intensive. This deters new entrants from entering the industry and ensuring the incumbents’ dominance in the long term. While the stock has recovered from the lows quite a bit, it has not yet fully recovered from its price of $9.16 at the beginning of the year.

ChartData by YCharts
ChartData by YCharts

Among the big three car manufacturers, Ford also consistently has the highest gross margins. In a capital-intensive industry, having the highest gross profit margin gives you a substantial edge over your competition. However, there is room for improvement as Asian competitors like Toyota (NYSE:TM) and Honda (NYSE:HMC) have gross margins above 15%. Ford’s margin has been declining over the past five years. I feel confident that the company can improve its margins as it is undergoing an $11 billion restructuring plan in order to bring costs down and be more efficient. With the various possible tailwinds the company could have in the future, I believe the company is oversold and a reversion to a price to book value of 1 is probable. The company has a book value per share of $7.46 (which is my near-term target price as well). This implies a 25% upside from the current price levels.

ChartData by YCharts

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in F over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don’t know you or your specific circumstances, therefore, your tolerance and suitability to take risk may differ. This article should be considered general information, and not relied on as a formal investment recommendation.





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MGM Resorts May Have A Near-Term Geographical Advantage (NYSE:MGM)


(Image from Daily Mail showing reopening enthusiasm and a lack of social distancing.)

During the past year, the US stock market have confounded many experts. Wild swings in both directions so far in 2020 have been no exception. MGM Resorts International’s (MGM) stock plunge of over 80% during a one-month period between mid-February and mid-March was perhaps the most surprising among its peer group. When the COVID-19 pandemic swept throughout Asia, Macau-linked casino stocks rightfully corrected. However, among the three largest casino companies listed in the US, MGM took the largest hit despite having the least exposure to Macau. Although MGM’s spectacular stock price recovery was largely justified after an irrational panic sell-off, the risk/reward profile still remains slightly bearish as long as COVID-19 cases continue to raise worldwide.

First-Quarter 2020 Outperformance

In fiscal 2019, MGM generated just 22% of its adjusted property EBITDA in Macau, which was far less than that of its main peers. Since COVID-19 originated in China, Macau was initially hardest hit and was among the first regions to shutter casino operations last February. Although US operations were ultimately halted in mid-March, MGM’s lower exposure in Asia should have insulated its first-quarter results compared to Wynn Resorts (WYNN) and Las Vegas Sands (LVS).

FY 2019 Total Adjusted Property EBITDA Macau Adjusted Property EBITDA Macau Exposure
MGM $3,347.72 $734.73 21.95%
LVS $5,389.00 $3,189.00 59.18%
WYNN $1,815.41 $1,378.37 75.93%

(Data compiled from fourth-quarter 2019 earnings from MGM, LVS, and WYNN. Dollar figures in millions.)

Yet, despite MGM’s first-quarter regional advantages, its stock declined by the most during a one-month period prior to the bottom set on March 18. In fact, MGM shares almost retraced back to 2009 post Financial Crisis levels. In contrast, LVS and WYNN only retested the industry’s previous cyclical lows set back in late 2015.

02/18/20 03/18/20 Percent Decline
MGM $32.02 $7.14 77.70%
LVS $68.16 $37.68 44.72%
WYNN $133.46 $43.02 67.77%

(Stock prices based on closing levels.)

While MGM’s first-quarter results were understandably bad, it was not as bad as its peers as the table below shows. Excluding a $1.49 billion gain related to real estate transactions, adjusted quarterly EPS loss was -$0.45. While bad, MGM’s adjusted quarterly loss was far less than WYNN’s adjusted EPS loss of -$3.54. In terms of adjusted EPS, LVS outperformed the group with just a -$0.03 loss. LVS benefited from its Singapore resort remaining open during the first quarter, while Macau and US operations were impacted by shutdowns to varying degrees.

Looking Beyond Q1 2020

In contrast to WYNN’s 76% and LVS’s 78% Asian exposure, MGM only had 22% adjusted property EBITDA exposure in Asia based on fiscal 2019 figures. This metric becomes increasingly more important when looking at second-quarter results and potentially for the remainder of 2020.

Singapore exposure which benefited LVS during the first quarter will completely reverse in the second quarter. According to LVS’ 2019 annual report, its Singapore resort has been shut down and may remain shut down for the entire second quarter. Singapore’s COVID-19 “second wave” has not abated, as total cases doubled last month despite rising summer temperatures in the country’s tropical environment. Until this situation is fully contained and travel restrictions lifted, LVS’ Singapore adjusted property EBITDA, which accounted for over 64.5% of its Q1 2020 consolidated total, will sink into deep red.

Operations in Macau have deteriorated further in the second quarter despite what appears to be a successful COVID-19 containment in China. Although casinos were allowed to reopen since late February, Macau monthly gaming revenues have not recovered, as the table below shows. The extension of travel restrictions between Hong Kong and Macau until July 7 will likely result in a 90-95% second-quarter annual revenue decline for all casino operators in Macau.

March 2020 April 2020 May 2020
Macau GGR Annual Change -79.70% -96.80% -93.20%

(Data compiled from monthly gross gaming revenue figures for March, April, and May 2020. Percentage figures represent annual change from 2019.)

In contrast to strict precautions implemented in Asia, US casinos have already reopened to some degree since early June 2020. MGM has already reopened some of its Las Vegas properties, with plans to reopen another strip casino this week. Although these properties only represent a portion of the company’s total and although capacity will be capped anywhere from 30-50%, revenue should finally start to flow from its US operations. Thus, due to geographic exposure, MGM’s top line figures for the second quarter and potentially for the second half of this year should outpace those of its main rivals.

Las Vegas Initial Observations

Since Las Vegas is only a four-hour drive away, I decided to get a first-hand account on its reopening. Although I only stayed for one day, it was on the first Saturday after reopening, which I believe could represent a potential best-case scenario. Since time was limited, I did not spend more than half an hour in any casino, but did walk through most of the ones opened on the main strip and in the downtown area. Upon arrival, the first thing I noticed was the typical summer heat. If experts are correct about heat and sunlight killing the COVID-19 virus, just walking outside from one casino to the next may effectively disinfect an individual’s exterior, so that’s a potential positive. Just joking, of course.

In terms of traffic, there were a fair number of people, albeit understandably more inside than outside the casinos. In some locations on the strip, traffic might be about half peak levels I’ve experienced in past years. Since staff appeared to be out in force during opening weekend, in some places there were more staff than visitors. The good news is casino staff were all wearing masks, and when I made eye contact, I could tell they were smiling behind their masks. I was almost brought to the brink of tears thinking about how many ordinary hard-working people were impacted by COVID-19. Hopefully, most can get back to work now that Las Vegas is slowly opening up.

The bad news was most visitors were not wearing masks. I estimate over 80-90% of the people I saw were not wearing masks, and in some casinos, particularly in downtown Las Vegas, social distancing was completely ignored. The main casinos, such as MGM’s flagship Bellagio, did a good job with its prevention preparations. In addition to the staff wearing masks, plexiglass was everywhere, including between where gamers sit at tables. Although seats were still spaced closer than the six-feet standard, the plexiglass should limit transmission as long as players remain behind it. Disinfectant dispensers were everywhere, and free masks were dispensed near the entrances of major casinos. The fact that the vast majority of visitors were not wearing masks appeared to be by choice.

The choice not to wear masks could be a long-term problem as long as COVID-19 cases still exist and continue spreading in the US. I am not an expert, but it is not hard to imagine a visitor touching his face at some point, then touching door handles, seats, tables, casino chips, dice, cards, cash, etc. There were people who simply chose to disregard any social distancing guidelines. This was especially the case in the smaller downtown Fremont casinos, which were horrific at times. I understand people come to Las Vegas to have a good time, but the total disregard for the COVID-19 threat is alarming.

People who choose to ignore the dangers of the current pandemic could be inherently more exposed and be potential “super-spreaders.” If COVID-19 is as contagious as experts say, casinos could be a breeding hotbed, regardless of all the precautions its operators take. This was the main reason why I did not stay long in any casino and avoided touching anything, including entering areas that used manual doors. After hearing about a study showing restaurant customers becoming infected due to recirculated air, I wondered if this scenario could repeat not only in Las Vegas but in other areas where people chose not to take the pandemic seriously.

Final Thoughts

mgm chart

(Daily chart for MGM with 50- and 200-day moving averages shown in green and red, respectively.)

As the chart above shows, MGM stock may be short-term overbought after quadrupling from its intraday lows nearly three months ago. Although many stocks have powered through their 200-day moving averages lately, the $25 level could still be some resistance for MGM without additional positive news flow.

MGM’s geographic exposure in the US could benefit its short-term quarterly results, at least on a relative basis compared to peers with low US exposure. For better or worse, many Americans appear to be content acting on their own terms, and as long as government policy keeps the doors open, the company could offset some of its operating expenses with an income stream from its US properties. It should be clear to investors that MGM will lose money in the second quarter and potentially for every quarter this year. It’s just that its losses may not be as bad as Asian-dependent casino operators such as WYNN or LVS.

In the first quarter, where MGM “only” witnessed a 29% annual revenue decline, adjusted operating losses were already -$241 million. Assuming US operations achieves the maximum 50% of capacity limit for the remainder of June, the company could still see an 85% drop in second-quarter revenues compared to last year’s levels. If US trends continue in the second half, annual revenue declines should improve sequentially to anywhere from a 60% annual drop to a 50% drop if Macau recovers to half of its normal operating levels. If there is a COVID-19 resurgence due to the US reopening or a global second wave, losses could continue for several more quarters. Needless to say, there are still a lot of risks for high-operating cost casino operators during a global pandemic.

On a positive note, MGM has a stronger balance sheet compared to peers. According to its first-quarter earnings presentation, the company has no long-term debt maturing before 2022. Without additional asset divestment, the company still has enough liquidity through the end of 2021, based on the estimated $300 million monthly cash burn rate. MGM’s lower net debt position relative to cash burn could also allow the company to raise additional capital more easily than peers.

Investors do need to keep in mind that MGM’s better relative positioning is dependent on the US remaining open while Macau and Singapore remaining cautious. In a Barron’s article from March, LVS and WYNN were listed as better-positioned, but that thesis was based on a stronger Asian market relative to the US, which at present may not be the case after Las Vegas’ relatively successful reopening. Asian, particularly Chinese, consumers have remained extremely cautious even on a local level despite very few new reported COVID-19 cases in China. Reports on the mentality of Chinese citizens during and after the initial COVID-19 shock are a stark contrast to how a fair number of Americans view the pandemic. Most Chinese did not even leave their homes for over two weeks, with some resorting to eating instant ramen for every meal, which is a huge disparity compared to the images of young Americans partying in large gatherings at every opportunity. This conservative attitude may likely result in a much slower recovery for Asian-based casino operators than many Wall Street analysts had predicted.

Increased tension between the US and China could also increase investor risk for operators heavily exposed in Asia and dependent on Chinese tourism. MGM’s low Macau exposure, which limited its upside in recent years, could now limit its downside if Chinese sentiment turned increasingly anti-American. Even after COVID-19 is completely resolved, the decoupling of the US and Chinese economies could be a longer-term systemic threat for US companies with high exposure to China.

It may take many years for revenues to recover to levels recorded last year. Overbuilding in both Las Vegas and Macau resulted in stagnant revenue for all operators even prior to the outbreak of COVID-19. Potential rising anti-US sentiment among the higher-spending Chinese cohort, combined with travel restrictions, could disproportionately impact revenues moving forward. Outside of excess liquidity continuing to drive stock prices high, MGM, along with its peers, could experience upside caps based on fundamentals. In an unresolved COVID-19 pandemic, the risk/reward profile remains skewed bearish, so investors should refrain from chasing the sector beyond their historical average multiples.

Disclosure: I am/we are short WYNN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Goldman Sachs warns a ‘near-term correction’ risk for stocks grows as coronavirus complacency abounds


Stocks look ready to take a breather and you can blame that on some fresh coronavirus worries.

Japan reported two deaths from a cruise ship and South Korea told 2.5 million people to stay home following its first casualty. While investors may be tired of hearing how virus-complacent they are, as stocks keep busting records, our call of the day from Goldman Sachs is saying exactly that.

“In the nearer term…we believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high,” chief global equity strategist Peter Oppenheimer told clients.

The virus history books — SARS in 2003 — reveal that setbacks for markets are often temporary. But China’s economy is “six times bigger now than it was then,” with Chinese tourism a 0.4% chunk of global GDP and missed work days in China equal to an two-month unplanned break for the entire U.S., he notes.

Oppenheimer points to Apple’s

AAPL, +1.45%

 latest warning that Wall Street largely shrugged off, noting that the company has been driving better-than-expected fourth-quarter earnings results.

“During the fourth quarter, the five largest stocks in the S&P 500 (Facebook

FB, -0.14%,

Amazon

AMZN, +0.67%,

Apple

AAPL, +1.45%,

Microsoft

MSFT, +0.30%,

Google

GOOGL, +0.36%

 ) posted an average earnings surprise of +20%, compared with just 4% for the average S&P 500 company. Any weakness to these and other companies would likely push earnings estimates lower,” cautions Oppenheimer.

Don’t look to stretched valuations in bond markets versus stocks to immunize against an equity pullback, he said. Not a sustained bear market, but don’t hit the snooze button is the message.


Last word goes to JPMorgan’s top quantitative strategist Marko Kolanovic, who notes investors have been piling into technology, low-volatility stocks and bonds, driven by coronavirus fears and as passive-funds pile into stock winners. As a fan of value stocks, Kolanovic expects a rotation back to that asset class once the virus subsides.

“We caution investors that this bubble will likely collapse, i.e. this time is not ‘different,’ with valuations reverting closer to 2010-2020 average,” he warns in a note.

The market

The Dow

YM00, -0.21%,

S&P

ES00, -0.21%

 and Nasdaq

NQ00, -0.24%

 are down, along with European stocks

SXXP, -0.35%.

China stocks

000300, +2.30%

 jumped after the central bank cut its loan rate — an expected move but not enough, say some.

The U.S. dollar

DXY, +0.13%

 is up, with the Australian dollar

AUDUSD, -0.6889%

 falling after a jobless spike.

Read: Could a surging buck hurt stocks?

The chart

Palladium prices

PAH20, +1.94%

 have been going parabolic, and the commodity is a fine Tesla

TSLA, +6.88%

 contender as a “green hedge” for investors, says The Market Ear blog.

The Market Ear/Thompson Reuters

“Palladium is a key component in pollution-control devices for cars and trucks. About 85% of palladium ends up in the exhaust system in cars, where it helps turn toxic pollutants into less-harmful carbon dioxide and water vapor,” says the blogger.

The buzz

A shipping giant and more airlines have warned over coronavirus fallout. China’s new cases rose by just 394, as officials changed their counting methodology again.

L Brands

LB, +0.00%

 is reportedly selling control of its lingerie arm Victoria’s Secret to take it private.

Shares of Zillow

Z, +4.19%

 are surging after the online real estate group posted higher revenue, though losses rose as well.

Democratic presidential candidate Mike Bloomberg came under attack by rivals at Wednesday’s debate.

Weekly jobless claims and the Philadelphia Federal manufacturing index are ahead, followed by leading economic indicators.

Random reads

Nine dead in Germany after gunman attacks hookah bars.

What the Taliban want — deputy leader’s New York Times opinion piece.

Silicon Valley inventor behind “cut-copy-paste” has died.

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