Keep the champagne on ice for now

My extended commentary on February’s Nevada gaming numbers is out in the Las Vegas Business Press. Here’s the start:

The February gaming revenue numbers for Nevada caused some cheer around the state and on Wall Street. Total casino win rose 13.9 percent, the first double-digit increase in nearly three years. But if this is cause for celebration, it should be a muted one; there are still signs that the state's gaming decline is far from over, and this resurgence is resting on an increasingly narrow reed.

For one, much of the increase was due to the calendar. The Chinese New Year, always a big gambling holiday, fell in February, while in 2009 it fell in January. With much of the increase in win coming from baccarat, a favorite game of visiting Asian high rollers, it is likely that the true organic increase in gambling was far more modest.

via Las Vegas Business Press :: David G. Schwartz : Gaming win is nice, but hold the celebration.

I wrote this as an counterbalance to what I perceive as the overly Panglossian view that you often get from reading other people’s interpretations of the numbers. Even in the face of decline, some were asserting that this was still the best possible result in the best of all possible worlds. And this isn’t much of a resurgence, since if you look at the actual levels of play for most games besides baccarat, they’re not that impressive.

I’ve been thinking a lot about something Tyler Cowen said at the APEE conference I attended last week. He talked about 4 different kinds of potential recovery from the recession: U, V, W, and L-shaped. Both U and V are rapid returns to the status quo ante bust, while W is a “double-dip recession.”

Well if you thought double-dipping was the worst scenario, you’re wrong: Cowen raised the possibility of an L-shaped recovery, which means that we’re not really going to recover at all–we’ll just limp along for the next 20 or 30 years with no economic growth. Ouch.

I don’t know what the prognosis for the national economy is, but it seems to me that there’s a very real danger that we’re looking at an L-shaped recovery for Las Vegas. I don’t want to spoil your mood too much so I won’t even mention Cowen’s pessimism about the local real estate market, but the tourist economy is facing some real obstacles to growth that won’t be willed away.

I’d like nothing more than to be proven wrong, and for the big increase in baccarat to lead to a revival of growth on the Strip. But until a broader base of people have more discretionary income, it’s hard to see how overall visitation to Las Vegas can increase.

9 Responses to 'Keep the champagne on ice for now'

  1. Schopenhauer says:

    So, would a recession in Russia have potential recoveries shaped like Cyrillic letters? и, ц, г, and ш make for interesting macroeconomic scenarios.

  2. WestVegas says:

    I, for one, always “look a gift horse in the mouth” to count the inevitable amount of bad molars inside the dubious presents that get presented to me.

    I’m a Pessimistic-Optimist and do a lot of Negative Positive Thinking. I cheerfully look for the dark side of every sunbeam and search for the mud-puddle at the “other” end of the rainbow (and usually find it rather quickly).

    And in my whole, entire life I have never initiated a ‘high-five’, and only take part in ‘high-fiving’ when I’m cornered into it. High-Fivers scare me actually. I’m not kidding. The sheer act of high-fiving (in my mind) bothers the Gods and just instigates finding my car with a flat tire within the hour.

    I can’t imagine Japanese people ever high-fiving. They’re similar to me in never getting overly-happy from any form of good news. The Japanese are fairly successful in a lot of things but never really jump-for-joy over any of their achievements. They have a certain humbleness that I find is very intriguing, for various reasons. They seem to understand Nature’s great ‘balancing act’ better than most people do.

    I’m cautious by nature and have killed lots of flimsy Golden Gooses along the way doing exploratory surgery on them.

    My Philosophy of Caution might not be the best approach to life in this land of Gung-Ho High-Fivers – but it suits me personally.

    As for this issue of the Economic Recovery of the Gaming Industry, I think the letter “S” might best represent the shape (and scenario) of its comeback (an uphill recovery with a few twists and turns, leading back to the top).

    IMO

  3. I would assume Mr.Cowen’s prediction of the local real estate market is this: horrible. The Sunshine states (Nevada, Arizona, California and Florida) are all way, way overbuilt and hopefully they will be better by 2015. Yes, that is 2015 which is 5 years away.

    Station Casinos, which owns several local casinos in Las Vegas, is a prime culprit of overbuilding of casinos in Las Vegas and that is why they are in bankruptcy. Why they built the $1 billion dollar Red Rock Hotel and Casino out in Summerlin (which is around 10 miles west of the Strip) is just stupid considering they own over 100 acres of land at the corner of Tropicana and Dean Martin Drive (which is 1 mile west of the Strip). That is where they should have built Red Rock (obviously they would have to change the name). I was at the Red Rock Hotel and Casino back in 2007 and I was really impressed.

    One of the best things that has happened in Las Vegas recently is Carl Icahn buying the Fontainebleau out of bankruptcy for $156 million dollars earlier this year. He is an extremely smart investor and most of the time his multimillion (or multibillion) dollar investments work out. I think everything will get better in Las Vegas it just might take a couple of more years.

  4. WestVegas says:

    Gee. I never knew Station Casinos owned land on Dean Martin Drive. Very interesting.

  5. West Vegas-
    I think Station Casinos bought the Wild Wild West Hotel and Casino back in 2005. They already owned some of the land around the Wild Wild West and the total acreage is over 100 acres. In May of 2008 they announced a project called Viva at Dean Martin Drive and Tropicana; the cost was $10 billion dollars. Obviously a $10 billion dollar project is not going to work in Las Vegas anymore.

  6. WestVegas says:

    I use three Internet browsers, but AOL is the one I use to receive e-mail and to see whatever daily news is taking place. BTW: going 9 months without CNN TV is a dreadful thing…especially since I’d received it since it first became available back in 1980. After 29 years of being a 24 hour news-junkie, I now basically only see the news-snippets that AOL’s homepage provides.

    (Last year’s national conversion to digital TV means a person can’t eve receive ‘basic’TV signals thru the air anymore unless they have a digital TV or digital antenna).

    Anyway. That’s why I now have to rely on seeing AOL’s ‘news of the day’.

    Today, their main economic news article talked about how Las Vegas is now back on its feet and that the economy has turned around. The article shows a photo of the new City Center and the Strip and definitely makes it seem like “happy days are here again” and that the Great Recession is finally over.

    It’s a simplistic news story mainly based on the last quarterly report of the LV casinos.

    I thought it was slightly funny how one single quarterly earnings report could lead to such an optimistic news conclusion.

    Then I got to thinking that such ‘half-truth’ news reports are actually beneficial (in a propagandistic way) to alter people’s perceptions about things. Most people only use ‘news headline snippets’ to form their evaluations of the current state of the world anyway.

    So. If AOL is giving the ‘impression’ that Las Vegas has finally come out of its slump, maybe that’s a “good thing” and maybe a few more such headlines will kill people’s perception of a bad recession.

    I’ve always been one to be alert to various forms of ‘national propaganda’. It was such propaganda that caused the VietNam war to last so long and caused the citizens of the USA to back the plan to invade Iraq to go find all those hidden weapons of mass destruction.

    They say “perception is everything”. So, if our country and the news agencies have suddenly started a campaign of ‘optimistic economic propaganda’ I, for one, am all for it.

    Simplistic Propaganda is a funny thing. It can be used to entice people to invade nations…or to plan a vacation to Las Vegas. I’m not in favor of telling or believing in lies. But if the ‘new thing’ is to start spreading “white lies” about the economic comeback of Las Vegas maybe we can lie our way “all the way to the bank”.

  7. FoolsGold says:

    >”L shaped recovery featuring 20 or 30 years of …”
    You can stop right there! It doesn’t matter what is predicted for 20 or 30 years. It seems the casinos got into trouble with overly rosy predictions … and I don’t know of anyone whose been able to look that far into the future accurately.

    The smaller more remote casinos funded their growth from profits, not loans. This was wise of them. Ofcourse, had they instead gone to the banks, they probably would not have been very favored customers anyway. The banks didn’t want to lend a modest amount to a casino in Mesquite, the banks wanted to fund humungous projects to established, major casinos since then there is an asset that is worth foreclosing on if they have to do it.

    Is Vegas subject to th general economy: ofcourse it is. Is it less subject than other destinations? Probably. But visitors to Vegas will always arrive if they are given a good enough deal. And those visitors will always bring some money with them, if they have a good enough opportunity to spend it.

    If Vegas had some tough times, its due to their believe that they could predict anything for 20 or 30 years.

  8. FoolsGold says:

    >Keep the champagne on ice …
    No. Serve it to your customers! And to your employees (as the go OFF duty). Sure the “blip” in Bacc revenues is good news at first blush and a little less interesting once there is the focus on the calendar and the risk of any market segment consisting of a small number of imported whales.

    Meanwhile it seems to be business as usual at the casinos:
    …Quote deceptive and above-all annoying room rates by concealing Resort Fee levies.
    …Emphasize ‘sizzle’ rather than the ‘steak’ such as by focusing on ambiance rather than the food, a valet parker peeking at a luggage tag so as to greet someone by name rather than simply getting the bag to the room quickly, a flurry of coupons none of which are worth a darn thing, special offers that in reality are hardly worth mentioning.

    Vegas made a ton of money from Asian junketers. The casinos gave that money to their bankers … and the casinos are continuing to annoy their customers (except for the Asian junketers, I imagine.).

    So what’s new?

  9. Dave says:

    I’m not sure I understand the argument 2 posts up. Is it that the casino industry should assume that, no matter what, the economy will continue to grow like it did from 2004-2007, and not make contingencies for the possibility that it won’t? That’s probably what will happen, since the industry hasn’t learned much from previous recessions, but that doesn’t mean its a good idea.