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Hold MGM Resorts in portfolio for 2016 story

posted on July 3, 2015 at 10:25 pm
yuan

Update: July 3, 2015. Despite a 5.6% gain from June 29 to the July 3 close, MGM Resorts International (MGM) remains a 2016 story. The stock has been a member of my Jubak’s Picks portfolio since May 4, 2012 with a gain of 49.24% through July 3.

The good news this week was a better than expected report on monthly gaming revenue for Macau and new visa rules that could make it easier for mainland China residents to visit Macau. But note that the better than expected gross gaming revenue for June still showed a year over year drop of 36.2%. The good news was that analysts had expected a drop of 39% to 40%. On the visa front the Chinese government removed limits on visas that it had imposed a year ago.

I don’t think the two measures are enough to produce a recovery in Macau gaming revenue in the next quarter or two. The beginning of stability perhaps after months of relentless declines but I think it will take a significant relaxation of the current corruption campaign in China to put Macau revenues back on a growth track. Casino and hotels companies have responded to a reluctance by high rollers to draw attention to themselves by their consumption of luxury goods or travel by increasing their marketing to mid-market gamblers and shoppers and by looking to increase the non-gaming attractions in Macau. I think the big expansion in hotels and attractions in Macau’s Cotai area will help to turn around the revenue picture. MGM Resorts is scheduled to open its new Cotai casino and hotel in the fall of 2016.

Back in Las Vegas, where MGM Resorts owns 30% of the rooms on the Strip, the company is trying to increase room rates and looking to future attractions such as a potential NHL franchise to increase visitor numbers. MGM Resorts also continues to explore strategies for increasing the below-sector multiples it gets from the financial markets on its real estate holdings, either through the sale of individual assets or a conversion to a REIT (real estate investment trust) structure.

The big potential prize looming on the horizon for MGM Resorts and its competitors is the possible approval of gaming in Japan. There is a good chance for a vote in the Japanese parliament in 2015 but even if that measure passes, the process is so cumbersome that new casinos wouldn’t go live until 2020.

As of July 3, I’m keeping this stock in my JubakPicks portfolio for its 2016 story but cutting my target price to $25 by December 2015 from the current $31 a share. That $25 target price represents a 35% potential gain from the $18.55 July 3 close.

Update DXJR

posted on July 3, 2015 at 1:17 am
yen

Update: July 2, 2015. The recent volatility in the Wisdom Tree Japan Hedged Real Estate ETF (DXJR) isn’t surprising—the erratic performance of the Japanese economy and the bear market that has struck stock markets in Shanghai and Shenzhen are enough to make even the steeliest trader nervous.

But the smoothed trend in the ETF, added to my Jubak’s Picks portfolio on December 19, 2014, continues to point upward. (I’ve got a 4.73% gain in the ETF since I added it to the portfolio—plus a 2.58% yield.)

And we can thank the same bear market in China that supplies short-term volatility to this ETF for the longer-term upward trend.

Every 5% swing in Shanghai right now is sending more investment dollars into Japanese (and especially Tokyo) real estate.

Driven by falling markets in Shenzhen and Shanghai, by the yen’s drop to near 20 year lows, and by the prospect of a Tokyo real-estate boom as a result of the 2020 Tokyo Olympics, Chinese investors are flocking into Japanese real estate. Real estate agencies in Beijing run twice-monthly tours to Tokyo and Osaka that combine shopping for consumer goods with shopping for real estate. Real estate agencies in Shanghai are about to jump on the tour bandwagon, Bloomberg reports. (Investments in Japanese real estate also offer a chance to invest cash outside of China, a key goal for wealthy Chinese during the current government crack down on corruption and perceived corruption.)

Prices for Tokyo apartments have reached their highest levels since the early 1990s and have climbed 11% in the last two years, according to the Real Estate Economic Institute. But they still look like they have a way to go. Sales to buyers from China and Taiwan jumped 70% year over year in the first quarter of 2015. But apartments in Tokyo remain priced lower than apartments on Hong Kong Island or New York. The average price for a three-bedroom apartment in Tokyo and environs was $434,680 in April versus $1.1 million for a 600-suare foot apartment in Hong Kong and $554,200 in New York.

As of July 2, I’m raising my target price to $32 by October 2015.

Sell Holly Energy Partners

posted on July 1, 2015 at 11:50 pm
Oil rigs - land

I’m going to sell my position in Holly Energy Partners (HEP) out of my Dividend Income portfolio tomorrow July 2.

The master limited partnership has been a steady distributor of cash since I added it to the portfolio on May 31, 2013 with distributions equal to an 11.4% yield on the original purchase price of $35.96 as of the last distribution to holders of record on May 15. And the MLP still yields 6.1%. (The next distribution is likely to come to holders of record at the end of July. The next quarterly earnings report is now scheduled for August 4.)

But with any master limited partnership you want to see a solid stream of new investments that will growth distributable cash flow in the future and that future investment inventory looks thin for Holly Energy Partners right now. That’s a significant weakness in this master limited partnership as we get closer to an initial increase in interest rates from the Federal Reserve sometime as early as September or as late as December 2015.

A major portion of the growth in assets at Holly Energy Partners has come from the drop down of assets from refiner HollyFrontier (HFC), which spun off the MLP in 2004. But that cupboard of drop down assets from HollyFrontier is looking a little bare right now and asset growth at Holly Energy Partners looks like it will have to draw more on acquisitions in the sector at a time when volatility in the U.S. oil and gas sector is increasing raising the risk of these deals. This bare cupboard also comes just as incentive distribution rights kick in that increase the share of distributions flowing to HollyFrontier to 32% in 2018 from 23% in 2013. (HollyFrontier is the general partner in the MLP structure and owns 44% of Holly Energy Partners.)

I don’t think you have to sell Holly Energy Partners here—there is that 6.1% yield—but while the MLP has been on an upward trend since April, the volatility in that trend has been increasing. I’d expect those swings to increase in magnitude as the markets get closer to the first Fed interest rate increase. I wouldn’t mind having a little more cash available in this portfolio as volatility in the income sector increases. There’s always the chance of catching a bargain at a time like this.

As I noted, distributions on this pick equal an 11.4% yield. The price of Holly Frontier was down 4.06% from my purchase date as of the close on July 1. My total return on this position is 7.3%.

Last minute offer fails and Greece misses payment to the IMF; sees bailout program end

posted on June 30, 2015 at 6:45 pm
acropolis_470x225

Well, that didn’t work.

The last minute request by the Greek government for a delay in the 1.6 billion euro payment due to the International Monetary Fund today, for billions in debt relief, and for a new two-year bailout program went no where today. And Greece missed the deadline for repaying 1.6 billion euros to the International Monetary Fund. With the end of the day Greece’s existing bailout program expired.

Today’s last minute offer didn’t get any takers.

It was certainly an odd negotiating position.

It’s roughly equivalent to walking into a bank, pointing a loaded gun at your own head, and demanding “Give me all your cash or I’ll shoot.” The hope, a slim one, is that the bank will decide to hand over the money rather than watch you kill yourself.

In its last minute offer the Greek government asked for 30 billion euros in new funding under a new two-year bailout program, restructuring of the country’s debt, and an extension of the current bailout so that Greece wouldn’t miss payments due to the International Monetary Fund and the European Central Bank. The Greek proposal cites Articles 12 and 16 of the treaty that set up the European Stability Mechanism to deal with a financial crisis just like this one. But Article 16 also requires that any new bailout program must include a new memorandum of understanding. It’s exactly that kind of document that Greece and the EuroZone haven’t been able to negotiate in the recently ended talks.

What is the government of Greek Prime Minister Alexis Tsipras thinking

I can see two possibilities

First, it’s possible that Tsipras still believes that Germany, France, and the other EuroZone members are so afraid of Greece leaving the euro that they’ll give in. That would seem to be a misread of Germany’s Angela Merkel and the International Monetary Fund’s Christine Lagarde—and pretty much every other European leader or European Union official, and I don’t think Tsipras is that dense. (Merkel said today, for example, that there will be no negotiations before the referendum vote.

Second, it could be yet another cynical political ploy designed to manipulate the vote in the July 5 referendum. (Just to be clear the Greek government isn’t the only one playing cynical politics in order to appeal to Greek voters.) If, as is likely, Greece’s creditors turn down this last-minute offer, that would give the Tsipras government more evidence that its creditors are to blame for the breakdown of negotiations. And that might, the thinking could go, buttress the No vote on Sunday

So at the end of the day Greece missed its IMF payment. Tomorrow we move to a new stage in the end game to this crisis when the European Central Bank will decide what to do about supporting Greek banks.

European markets closed down but not with anything resembling yesterday’s plunge. The German DAX Index closed lower by 1.25% and the French CAC was down 1.13%. Spain’s IBEX 35 ended lower by 0.78% and Italy’s Milan market was off 0.48% at the close.

Shanghai enters a bear and that’s not good for global markets looking for an end to Greek-debt crisis plunge

posted on June 30, 2015 at 12:00 am
stocks down 2

Anyone looking to see whether financial markets are done tumbling as a result of the chaos in Greece and the possibility that the country will fall out of the euro after the July 5 referendum isn’t getting any solace from early trading today in China.

As of 10:40 Tuesday morning in Shanghai, the Shanghai Composite Index was down another 4.68%, falling to 3863 from Monday’s close at 4053. That was itself down from Friday’s close at 4193.

The Shanghai market, which had been flirting with a bear market, has now joined the Shenzhen and ChiNext markets in full bear mode. The index is now down 25.2% from its June 12 high.

What we’re seeing in China’s mainland markets is a wave of selling by traders who have bought stocks on margin.

Some of that selling is being driven by domestic forces—efforts by regulators to reduce shadow margin lending and fears by Chinese traders that the government isn’t going to support the market to the degree assumed just a few weeks ago.

But some of the selling is a reaction to global trends that say the financial markets are a riskier place than they seemed just a few weeks ago. Trends here include a sudden end to complacency over an eventual deal in the Greek debt crisis and a worry that, with a potential exit from the euro by Greece, we’ve entered uncharted territory. From this perspective, the continued plunge in mainland markets is of a piece with cash flows into the yen by traders looking for a safe haven and the drop in stock markets in Spain and Italy that accelerated at the end of Monday trading in Europe.

It’s always possible that European markets will bounce when they open on Tuesday, but I find it hard to see how any bounce could hold given the degree of uncertainty introduced into the financial markets there over the last few days. At the moment (11:15 p.m. Monday night in New York) it looks like Greece will miss the 1.6 billion euro payment to the International Monetary Fund due on June 30. (Which, technically, wouldn’t count as a default since a default needs to involve a private creditor instead of an agency such as the IMF.) Speculation will then turn to the European Central Bank decision on Wednesday about whether or not to continue the current emergency liquidity assistance program for Greek banks. On Monday the central bank refused a request from the Greek government for an addition 6 billion euros in assistance to Greek banks, but the ECB did keep the current credit line in effect. The read right now is that the central bank will keep that credit line intact on Wednesday because the alternative would be sending the Greek banking system into insolvency.

But unfortunately for the nerves of traders and investors that’s only a consensus market view and not a guarantee.



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