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The Long And Short Of It...
By Ian Cooper
We’ve spoken in-depth about Macau and sub-prime lending ad nauseam… for good reason. These are the two areas where you can make the most money by longing Macau-related stocks, and shorting sub-prime lending stocks.
Macau has not only overshadowed Las Vegas’ 2006 $6.69 billion revenues with $7 billion in sales of its own, it has now overtaken Atlantic City’s 2006 $5.2 billion in sales. The best part – Macau’s revenue is expected to grow from $10 billion to $15 billion by the time 2010 rolls around. That’s a big flashing signal for more casino developers to flock to the area. MGM Mirage, for one, just announced it was moving forward with plans for a second Macau casino.
As for sub-prime lending stocks, we remain bearish on the sector, as does Standard & Poor’s, which just announced that it could downgrade ratings on 18 securities from 11 mortgage-backed bond issues; bonds that are backed in part by sub-prime and second-lien mortgages. Even Fed chief Ben Bernanke has noted that foreclosures in the sub-prime market is a going concern for the Fed. And Piper Jaffray believes that the ongoing shakeout in sub-prime mortgage is likely to quickly accelerate.
Worse yet (for sub-prime lenders), things are likely to get a lot worse. Goldman Sachs, as quoted by Forbes.com notes, “The outlook for sub-prime mortgage credit quality remains extremely challenging. This reflects very poor underwriting in late 2006 with the sub-prime mortgage market now hitting peak levels of early payment defaults and delinquencies in 2007 with peak losses to follow."
Take care,
Ian L. Cooper, Editor, Early Alert Trader