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Pat Carter/AP

The Chips Are Down for the Gambling Sector

November 09, 2008 08:01 AM
by Anne Szustek
Employment worries and the credit crunch have cut into disposable income, making the gambling industry a tougher gambit during this economic climate.

The Gambling Sector During a Sluggish Economy

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From Las Vegas to Atlantic City—and at casinos in between—consumers are betting against spending their dwindling leisure funds on gambling and gaming, as evidenced by the financials of gaming sector giants.

Atlantic City-based gaming company Trump Entertainment Resorts reported net third-quarter losses of $139.1 million, or $4.39 a share. For comparison, Trump Entertainment Resorts raked in $6.6 million in profits last year, a gain of $0.21 per share.

“The negative effects of the slowdown in the U.S. economy, especially consumer spending, had a significant adverse impact on our results during the quarter,” Trump Entertainment CEO Mark Juliano was quoted as saying in Forbes magazine.

The Market Vectors-Gaming exchange-traded fund, or ETF—a type of investment vehicle based on a basket of stocks in a given sector—has lost 59.1 percent of its value between the start of the year and Friday.

At French Lick Casino, located in Indiana, a destination for Chicagoland residents looking to gamble nearby, September earnings on slots and table games are down $2.7 million year-on-year from $78.9 million at that time in 2007.

Michael Hicks, an economist at the Center for Business and Economic Research at Indiana’s Ball State University told the Associated Press it is unlikely that any of Indiana’s 13 gambling sites are going to have to shutter outright during this economic downturn. But newfound risk aversion among American consumers who’ve seen their retirement savings frittered away in investments that have gone down in value has potential spillover into gambling.

“A big loss in wealth may be something that the gaming industry is finding tougher to deal with,” Hicks told the AP.

Las Vegas, arguably America’s gambling capital, is also feeling the country’s re-awakened penchant for penny pinching. Gaming industry titan Las Vegas Sands announced this week that it is at risk of infringing on debt covenants. Unless Sands ramps up sufficient capital, its $80.1 million budget shortfall could put the company’s major projects, including a $4 billion resort and casino complex going up in Singapore—as well as the survival of the company itself—in peril.

Background: How “sin-sector” stocks are faring during this economic downturn

Historically, “sin sector” stocks, which include alcohol, gambling and tobacco, have been a safe bet in bearish financial markets; however by and large this year they have slumped. Shares of tobacco conglomerate Altria dropped 11 percent from the start of the year to July 25.

Shares of Diageo, the world’s largest alcoholic beverage company, including foreign beers Harp and Guinness, showed a 16 percent decrease over the first seven months of 2008.

Sales for domestic beer have been on the upswing though. U.S. beer sales for the first seven months of 2008 are up 1.4 percent since the start of the year, with more than 16 million barrels of domestic beer sold in the country during July alone, according to statistics from lobbying group Beer Institute.

Higher sales were reported across price segments. According to statistics compiled by Nielsen Research this summer, sales at grocery and convenience stores of “superpremium” beers, which include Michelob and Rolling Rock, have shown increases in the double digits. Budget beer sales were up some 4.8 percent, and “below premium” beers were up 3.3 percent in sales volume year-on-year.

Market observers attribute the trend to several factors, including more people entertaining at home. Lofty oil prices and a weaker dollar have translated into less attractive prices for foreign beer. A similar trend has been seen in wines.

A 2007 study entitled “The Price of Sin: The Effects of Social Norms on Markets” suggests that organizations that, out of public relations concerns, do not include “sin sector” stocks in their portfolios stand to lose financially. Given the requirements for public disclosure of stock holdings, banks, pension funds and universities are less apt to invest in tobacco stocks, argues the study, led by the University of British Columbia’s Sauder School of Business. Because “sin stocks” have fewer institutional investors, individuals, hedge funds and some mutual funds may buy into the lower-demand securities to take advantage of the subsequently higher risk and reward.
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