A Chinese victim... Going after the millionaires, not billionaires... BNSF announces third year of record spending... 'A world-class problem to have'... Meet Teeka Tiwari tonight...
People hate China today...
That's the subject we covered in Tuesday's Digest. People are concerned about a number of things in China: Its debt situation, excess real estate, and "shadow banking," to name a few. But the biggest issue with China is that growth is slowing.
That slowdown has crushed commodity producers and Chinese companies. Mind you, China is still growing its gross domestic product (GDP) by 7.3% a year (compared with 1.9% growth in the U.S.)... But our neighbors to the east were growing GDP at a double-digit clip for most of the last decade.
One sector that has taken a beating in particular is gaming...
Macau casino shares are down 30%-50% from their peak earlier this year. It's impossible for these casinos to grow 30% per year forever. Current gaming revenues in Macau are $45 billion – around seven times the size of the Las Vegas Strip. And today, it's no longer possible for Macau to maintain the growth rate of the previous decade...
Global Contrarian editor Kim Iskyan consulted on the following piece about Macau...
Macau casinos used to be valued at 21 times EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation, and amortization). That priced in unrealistic growth levels.
Today, the same stocks are trading at a more reasonable EV/EBITDA of around 12 times.
So a slowdown in growth was inevitable – which is easy to say in hindsight... and getting the timing right is virtually impossible. There were two immediate causes of the slowdown...
First, Macau ran out of capacity. Hotels were packed. You could hardly move on gambling floors. Operators hiked prices and table minimums. (You're lucky if you can sit at a table for less than $100 a hand in Macau.) And there were no new properties due to open in the foreseeable future, with a steady flow of new properties set to open in mid-2015. If you're at maximum capacity with no additional capacity coming online and you've already hiked prices as much as possible... by definition, you can't grow.
The second main reason for the slowdown has been the collapse in revenues stemming from VIP gamblers, who account for close to two-thirds of Macau's total revenues. These are the high rollers who win or lose tens of thousands of dollars in a single sitting... and demand top-flight perks and services.
The Chinese government is cracking down on corruption. That means it's a bad idea for people who earned their wealth illicitly to flaunt it (as they often do in Macau). And that has spooked the high rollers – some of whom are corrupt government officials.
The margins casinos earn catering to the mass-market gamers (the $100-a-hand folks) are about one-fourth of the margins they earn on VIPs. And the rising wealth of China – combined with improving transportation infrastructure – means millions of mass-market Chinese gamblers are waiting to fill the void of the high rollers.
The slowdown in VIP revenues will hurt in the short term... But it will be a good thing for the industry as a whole.
People worry that the slowdown in China will hurt Macau. But the country's wealth – including the number of people who feel financially secure enough to sit down at $100-a-hand tables – is difficult to comprehend. Macau isn't going to grow 30% per year... But it will remain a powerhouse, and the shares of some Macau casinos represent a fantastic opportunity today.
During his travels to Macau, Kim found a casino positioning itself to cater to the "premium mass-market gamblers" – the multimillionaires (as opposed to the billionaires) in China. These are people who are willing to spend more than $1,000 a hand – so-called "aspirational wealth," according to the company's head of investor relations.
As Kim wrote in his most recent issue, "The company is targeting China's very rich, not very, very rich."
Of course, the very rich want to feel like they're part of the "billionaire's club," so the casino Kim recommended to his Global Contrarian subscribers is taking the ultra-luxury route... fancy cars, over-the-top décor, and jewelry shops featuring multimillion-dollar diamond necklaces.
Right now, this casino stock is trading at a 90% discount to its Macau peers on a price-to-book value basis. And a major investment bank recently agreed with Kim, rating the stock a "buy."
But Kim doesn't think shares will stay this depressed for long. For more on Global Contrarian – and to learn how to access Kim's favorite way to profit in Macau – click here.
In last Thursday's Digest, we explained why railroads are one of the best inflation-beating businesses... and why legendary investor Warren Buffett spent $44 billion to acquire railroad operator Burlington Northern Santa Fe (BNSF).
Over time, inflation will debase BNSF's debts... Meanwhile, the value of its assets – tens of billions of dollars of railcars and rail across the U.S. – will soar. We don't see another company competing with BNSF's track any time soon.
As we also noted last Thursday, BNSF can't keep up with demand... Shale-oil shipments have clogged up the railroad's lines, and other customers are facing delays. As a result of the shortage, BNSF is laying new track and buying new cars.
But it has been difficult managing the growth. BNSF Executive Chairman Matthew Rose told the Wall Street Journal that his company should outpace GDP by 2%. "It's a world-class problem to have, but it's a world-class problem to manage," he said.
Right now, the answer to that problem is spending money...
The company is on pace to spend $5.5 billion this year to maintain and improve existing rail and expand its track across the nation. Next year, it expects to spend $6 billion... the third consecutive record year of spending.
From 2000 through the end of 2015, BNSF will have spent more than $50 billion on equipment and infrastructure. We can't stress enough how difficult it is to compete with (or replace) a company that has spent so much money on infrastructure over such a long period of time. And in BNSF's case, it's spending the money because the economy is growing. As BNSF President and CEO Carl Ice explained in a statement...
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Again, just since Buffett purchased BNSF in 2009, annual revenue is up 57%, and net earnings have more than doubled to $3.8 billion.
Porter's subscribers made 53% on the deal in six months. Buffett will earn billions of dollars into perpetuity...
We'll close today's Digest with a request...
Our friend and former hedge-fund manager Teeka Tiwari from the Palm Beach Letter is hosting a live online training session tonight at 8 p.m. Eastern time.
He's going to discuss a trading system he spent years of his life (and tens of thousands of dollars) developing.
Teeka and a PhD in applied mathematics built a quantitative program that scans billions of data points every week to find winning trades. Teeka has never shared any details about his system before – not even with his bosses Tom Dyson and Mark Ford.
Why the secrecy? Well, Teeka has been trading his own money with this system for huge gains. He backtested the program and found the system is 93% accurate, with an average gain of 66% when trading stocks. The average gain when trading options (which his system also tracks) was an astounding 164%. Meanwhile, the average loss was only 5.5%. The average gain was 12 times larger than the average loss.
I spoke with Teeka this morning. He promised to share a few of the secrets behind his trading algorithm in tonight's webinar. He's also going to share two trading recommendations.
The training session is completely free to attend. You just have to sign up for it tonight before 8 p.m. Eastern time. To make sure you don't miss the action – and the secrets behind Teeka's profitable trading system – click here.
New 52-week highs (as of 11/19/14): Brookfield Property Partners (BPY), Chubb (CB), Express Scripts (ESRX), Kinder Morgan Management (KMR), AllianzGI Equity & Convertible Income Fund (NIE), Constellation Brands (STZ), Sysco (SYY), TC Pipelines (TCP), Target (TGT), and Wal-Mart (WMT).
Subscribers continue to write in – both for and against Porter's brand-new business venture. Bidding is still open for the first 10 razors... but only until tomorrow at 12 p.m. Eastern time. Is Porter on to something... or has he lost his marbles? Send your thoughts to feedback@stansberryresearch.com.
"I accidentally hit send before I was finished with my previous message about the OneBlade message... Porter's expertise in investing and business has saved me decades of learning the hard way. I can't thank him enough. If Porter wants to talk about another business venture... Awesome! It helps me generate more entrepreneurial ideas from learning about his thought process. For all I care, he could write about fairy dust, leprechauns, and pink rhinos, and I would still read every Digest." – Paid-up subscriber Joe Haefner
"I think the design is a winner but I'm not going to (... not to mention I can't... ) pony up a 10-Spot to claim some bragging rights. However, when the concept is productized I will be there to 'invest' in its 'Tier 2' market. Good Luck!" – Paid-up subscriber Richard Perron
"Talk about hubris!! $5k for a razor?? I don't see the words 'donate' or 'charity' anywhere in the blurb. If you were going to give the $50k+ to charity I might not be so appalled. p.s. If you don't need to shave for 3 days I think you should get your testosterone levels checked." – Paid-up subscriber Chris Leathart
Regards,
Sean Goldsmith
Baltimore, Maryland
November 20, 2014
