Casinos Are Falling Off the Cliff No Matter What

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

What happens on January 1st? Aside from hangover city, $200 billion in spending cuts, and $500 billion in tax increases, about 4% of GDP if Congress and President Obama don’t reach a deal to avert the “fiscal cliff.”

Who will take the “fall” if we go over the cliff? Everyone. Make more than a million dollars, you will, according to the Washington Post, see an average tax hike of $254,000, while taxpayers making between $40,000 and $50,000 will see a $1,700 tax hike, equal to about 4.4 percent of their income.

If that sounds ominous, it is. What does it mean to investors? A lot. It means corporate profits are going down. You don’t have money to spend as the government absorbs it, meaning you will consume less.

You: “No honey, let’s stay in for dinner tonight.”

Waitress: “I have no tip money guys, sorry, you’ll have to wait a few more months before we can upgrade to the new iPhone.”

Apple Shareholders: “Not looking forward to the next earnings report.”

This of course is the simplistic version of events, and in truth it goes much deeper. This is why many economists take such a strong case against austerity.

Do we need austerity?

In a word, Yes. Why? Because without it there should be no faith in our currency. Yes, the US could simply put the printing presses into overdrive mode, and come back and pay off their debt. Of course, this would be disastrous for the world’s financial well-being, as faith in paper currencies would be completely lost (look what happenned in Zimbabwe and their 5 billion dollar bill worth less than the paper it was printed on), and the value of the US dollar, and all our savings, would plummet. Ask a gold bug what they would have wanted for Christmas and they’d recite to you this scenario.

If a household keeps borrowing, borrowing, borrowing, no matter how great a name they have, there comes a point when the banks will say, “No more! Get your act together and start paying us back before we foreclose.”

I grant you, the United States is not some ordinary single household. Heck, the government could always sell some off assets, like excess states, and since the Dakotas are now producing oil, I’m thinking Arkansas and Nebraska (but who would buy). The point is, excesses from the past are catching up to us.

Wars paid for with a credit card, massive bailouts, pork sent back to congressional home districts, borrowing for a house you couldn’t possibly repay and nationalizing the mortgages so the banks don’t go under -- suddenly we’re 16 trillion dollars in debt.

This is all the doing of the politicians and the American people. We overspent, and now we whine, whine, whine when we have to pay it back. Toughen up you soft-bellied sheep.

What does it mean for investors?

Look, what is keeping us afloat are the advances in technology, from Intel to Google, from IBM to Apple, the companies that make the hardware and software that eases communication around the world and makes us all more productive. They truly create real wealth and enhance our standard of living. There is no greater time to be alive in the history of the world than today. This is what gives me hope long term.

In the near term however, assuming no deal is reach and tax hikes and spending cuts go into effect (some version will happen either way, just the question of extent) the market will not react well.

Stay away from the casino

One thing is for sure, the first item to be cut from most peoples’ expenditures is frivolous, wasteful gambling.

You definitely want to sell your shares in MGM (NYSE: MGM) and Ceasars (NASDAQ: CZR), both of which have a lot of exposure to the US gaming market.

It was MGM CEO Jim Murren who stated that the health of the Las Vegas gambling market was in part tied to the real estate market. People will have far less money to purchase real estate with all the additional taxes. Values will drop; Vegas will dry up.

While they have are more diversified with their Asian operations, a slow-down in the US means a global slow down as well, and as both Las Vegas Sands (NYSE: LVS) and Wynn (NASDAQ: WYNN) have some exposure in Vegas, sell them too.

Don’t get caught with your pants down on this one, it has the potential to take place very quickly. Yes, I am aware that, if a last second deal is reached, these stocks might jump a few percent, but the downside is much larger than the upside.

The market overall will suffer, but casino stocks promise to be the worst performing in the post cliff environment.

Good news

The good news, if no deal is reached, the value of the dollar will likely go up, so if you have cash, it would be a good time to travel. This is the unwinding of years and years of over-consumption. Recession is a near certainty. Sorry to be the bearer of bad news. 


margiecfl has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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