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Why Are Casino Stocks Falling on Monday?

After rallying hard since the beginning of October on strong Golden Week data, shares of Wynn Resorts, Limited (NASDAQ:WYNN)Las Vegas Sands Corp. (NYSE:LVS), and MGM Resorts International (NYSE:MGM), and Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) are retracing. Let’s take a closer look at what’s causing investors to sell and see if the smart money agrees with the market.

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In the eyes of most traders, hedge funds are assumed to be underperforming, old investment tools of the past. While there are more than 8000 funds in operation at present, Hedge fund experts at Insider Monkey look at the aristocrats of this group, around 730 funds. Contrary to popular belief Insider Monkey’s research revealed that hedge funds underperformed in recent years because of their short positions as well as the huge fees that they charge. Hedge funds managed to outperform the market on the long side of their portfolio. In fact, the 15 most popular small-cap stocks among hedge funds returned 102% since the end of August 2012 and beat the S&P 500 Index by 53 percentage points (see more details here).

Casino stocks Wynn Resorts, Limited (NASDAQ:WYNN), Las Vegas Sands Corp. (NYSE:LVS), MGM Resorts International (NYSE:MGM), and Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) have rallied hard since October 1 as various research firms have noticed more visitors frequenting gaming tables in Macau during the Golden Week. China’s regulator to Macau also recently said that the central government would support Macau’s economy in ‘all aspects’. Since China’s central government decides gaming demand through visa regulations and financial controls, many investors became bullish and felt that Macau demand had troughed. Macau’s gaming revenue is slowly becoming less bad as well, as September gaming revenues declined by 33% year-over-year, while August revenues declined by 35.5% year-over-year.

China is also showing some signs of reverting back to older ways. The head of the micro economy research department of the State Council’s Development Research Center recently said, “keeping relatively high growth of infrastructure investment is key to stabilizing economic growth”. Some also think there could be a lull in the government’s anti-corruption campaign as many high profile officials have already been removed. If China spends more on infrastructure, its growth rate will be faster and more people will visit Macau. If the anti-corruption campaign slows down, more high rollers could visit. 

Casino stocks are currently falling, however, after Macau’s government summoned casino executives for a meeting on Sunday and demanded that casino operators comply with its regulations. In a statement from Macau’s government website, the government says it has ‘no plan to make any changes lightly’ and regretted certain opinions about its labor and gaming plans. Macau summoned the executives after Steve Wynn decried Macau’s limits on gaming tables in a conference call, and said that, “in my 45 years of experience, I’ve never seen anything like this before”. Wynn’s comments likely didn’t go well with the government, and the government responded with stern words. Keeping in the government’s good graces is vital for Macau casino operators, as some casino operator’s licenses will need to be renewed in 2020 or 2022. In the next page, we analyze hedge fund sentiment toward the four stocks.

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