Happy New Year...Again; Viva Macau

This week those that follow the Lunar Calendar all over China and the world have been welcoming in the year of the Golden Pig. Chinese New Year is an event that spans an entire week when all work related activity in China virtually comes to a halt. People working in the cities head to train stations and airports to return home to welcome in the New Year with their families. I was in Shanghai when the New Year officially arrived and it sounded like a war zone outside my apartment as people stayed up the entire night setting off fireworks and fire crackers all throughout the city (yes, for all of you envious foreigners, setting off fireworks in the middle of Shanghai is legal). There were so many explosions being set off that it got to a point where I could only hear them, rather than seeing the glittering sky. The next day, an unusually large cloud of smoke hovered over the city.

Against advice not to travel during Chinese New Year, when all forms of transportation are chaotic and packed with Chinese making their way home, I went with a friend to the southern Chinese city of Zhuhai. From Zhuhai we crossed the border into Macau, a place I had only read about and wanted to see for myself.

A few fast facts about Macau:
-settled by the Portuguese in the 1550s
-handed back over to China in 1999, much the way Hong Kong was handed back over to China from the British two years earlier in 1997
-Population of 441,000, 95% of whom are Chinese
-Chinese and Portuguese are the "official" languages, however, I found English to be more widely spoken than Mandarin. Most people in Macau speak Cantonese
-Macau was named after Chinese goddess A-Ma worshipped by seafarers in the region centuries ago. According to legend, a boat was caught in a storm in the South China Sea when a woman who boarded the boat at the last minute stepped up and ordered the elements to desist. Everything became calm and the sailors made it safely to the port of Hoi Keang. The women stepped ashore and walked to Barra Hill where she ascended into the sky. When the Portuguese arrived in the 16th century, they were told the place was called "A-Ma-Gao" (Bay of A-Ma), or Macau as it is presently known.

I went to Macau (the "Next Las Vegas," as the former-Portuguese colony is being touted) to see for myself what all of the hype was about. Hong Kong businessman, 85 year old Stanley Ho, held a monopoly on Macau's gaming industry for some 40 years. Macau had been historically written off as a seedy place where casinos were smoky and dark and shady activity abounded.

In 2004, Mr. Ho's gaming monopoly was broken and American casino moguls Sheldon Adelson (the Sands, Venetian) and Steve Wynn (founder of Mandalay Bay, Mirage, Treasure Island, the Bellagio, the Wynn, and Encore) were granted the necessary licenses to break into the game. An area little recognized outside of Asia, Macau is emerging and actually exceeded Las Vegas in 2006 in gambling revenues. Mr. Adelson opened the Sands in 2004 and Mr. Wynn opened the Wynn in September of 2006. Both have done extremely well. Mr. Adelson recouped his entire $265 million investment in the Sands Macau in 1 year. Plans are in the works for Mr. Andelson to open the Venetian in Cotai (along with 6 other hotel-casinos on Macau islands Cotai and Coloane, a $6 billion investment) and the MGM Grand to open in 2007. Mr. Adelson also just obtained a gaming license for Singapore where he will open a $3.5 billion Marina Bay Sands hotel-casino.

Overwhelmingly, the clientele in Macau is Chinese. In many of the casinos I checked out, I was the only "non-Chinese" person to be found. This was especially true of Mr. Ho's hotels, the Lisboa and the Grand Lisboa among others. The Sands and the Wynn were slightly more international. The focus of hotels and casinos in Macau is gambling. The Chinese are avid but serious gamblers. Slot machines are much scarcer in Macau than in Vegas and many of the games, such as SiBo, Baccarat and other Chinese games, seemed to be the overwhelming favorites of the locals. While some of the dealers were able to communicate in Mandarin, Cantonese and English (or two of the three), there were a few that I encountered that only spoke Cantonese. It took some looking, but I was able to find a blackjack table.

At the table, it was much less of a team game than in Vegas. If you know anything about blackjack, it is a team game, where people at the table can work together against the dealer making moves based on odds. I found this to be true to an extent in Macau, but gamblers there played much more based on feel rather than odds. For example, if the dealer was showing an 8 and two players at the table had busted already, someone with a 12 or 13 was likely to stay and not take a card. This drove me crazy, because decisions were being made based on feelings and superstition rather than cold odds. Nonetheless, it was a very interesting learning experience. In addition, it was impossible to get a drink at the table. I found, people just don't drink when they gamble, as is the case in Vegas, so the casinos cater to that. In Vegas, there are tons of people running around ready to get whatever you want to drink. In Macau, I gambled for 4 hours and one of my friends had to leave the table to get a drink.

Anyone who has spent time in Vegas knows the Asian clientele is extremely important to business there. Previously, those in Japan, Korea, China and other countries were willing to make the trip to the US for the "hotel and casino experience." The emergence of Macau has given these people an alternative closer to home that will undoubtedly hurt business in Vegas. However, given that a lot of the investment being made in Macau is by players who dominate the Vegas Strip, such as Wynn and Andelson, these gaming companies' overall bottom line will not but hurt but actually improved. My guess is,

To me, at this point, Macau is still largely hype. While Macau has come a long way and may bring in more gaming revenues than Vegas, it still lacks something that makes Las Vegas what it is. Vegas has the shows, the performances, more facilities, pools, amusement parks and other activities that make it more of a family destination. Maybe in 5-10 years Macau will have caught up even more and the situation will be different. Macau will continue to draw mostly visitors from Asia and a sprinkle of foreigners who came to Asia solely to experience Macau. Given their investments in Macau, if Mr. Wynn and Mr. Adelson have anything to say about it, the Macau will surpass Vegas in every way sooner rather than later.

Long lines, forgotten passwords, and all-star mother-in-law money managers-China's Investment Environment

If you spend enough time in China, you learn fairly quickly the "herd mentality" abounds. It is evident everywhere, restaurants/ticket counters/kiosks/brokerage lines/ect. The Chinese are big believers that where there is a line (or crowd), there must be something worth waiting for or worth seeing. Maybe this is why there constantly seems to be droves of people pushing to get "an edge." Receiving a shove in the back is never personal, it is just a friendly reminder that you better pay attention, because someone is there to capitalize if you don't. It is a real "hustle" attitude which fits nicely with the idea of free markets and "no free lunches." It matters less if there is really an substance behind what seems to be so sought after, rather the perception of substance is enough to draw crowds. At Starbucks, are coffee beans, hot water and a frothy top really intrinsically worth $4? Maybe not, but that is irrelevant. The marketing folks at Starbucks have done a text-book job of convincing people it is worth the price.

After lingering in the abyss since 2001, China's A-share stock market returned 130% to investors and speculators alike in 2006 making it the best performing market in the world. The A-share market is already up another 10-15% in 2007. Now, do the companies behind these stock tickers actually justify such valuations? It is hard to say for sure, because reliable company financial data is extremely hard to come by in China. If one cannot trade based on reliable fundamentals, that only leaves one option: technical trading.

Stocks in China are largely traded a physical brokerage locations or over the phone. Online trading is still relatively new in China, but will likely gain traction in future years. Due to the "can't miss" investment opportunity that is the A-share market, local Chinese are rushing to open accounts at breakneck speeds to get a piece of the action. By some estimates, as many as 70,000 new accounts are opened daily. With the release of Qualified Foreign Institutional Investor (QFII) regulation last year, foreign investment capital was allowed to flow in to the A-share market for the first time.

While foreign individuals (such as myself) are not allowed to open brokerage accounts in China, a quota of approximately $11 billion allowed to be invested in China's stock market was spread across 50 foreign institutions. Billions more is waiting at the door itching to rush in. Given the fact there is already excess liquidity sloshing all around China and, in the interest of not having the market spike 1000%, the flood gate will be opened slowly to foreigners. Historically, most Chinese lacked many investment options, as the average "Joe" or "Li" isn't allowed to invest abroad. Average people could choose to leave their money sitting in a bank account (where approx. $2 trillion sits today) earning 1.5% or take their chances in the local equity markets. Presently, the equity markets are perceived as more legitimate than before as better quality companies are choosing to stay at home a list locally, taking advantage of the liquidity, and regulations are being more actively enforced. Almost 1/2 of the companies listing in Shanghai last year, were already listed abroad in markets like Hong Kong. As a result of the perceived value, regular people are getting in.

I sometimes hear local people complain they had an off year because their portfolio only returned 70% in 2006. Granted, they missed replicating the overall index, but there are people running hedge funds and investment firms all over the world that would call a 70% a better than average year.

At a dinner I attended the other day, a Chinese friend (who had spent 5 years abroad) told me how nervous she was investing in the local market. She told me last week she made a trip to a local brokerage house to execute a trade. While she was waiting in line, a man, who by her estimate was around 80, starting flipping out. During the 1990s this would have been interpreted as normal, because brokerage houses in China were the equivalent of bingo halls in the US. They were a place where retired people went to pass the time and throw some money around never really expecting a return. To them, it was the price of entertainment.

As it turned out, he was throwing a fit because he had forgotten the password to his brokerage account, so he couldn't make the trade he wanted when he wanted. Her words were, "if he is representative of who is investing in the market today, things are getting way out of hand." The present investment environment in China is symbolic of the mania of the late 1990s that swept across the US. Many people said, once my barber starting getting into the tech game, they knew it was time to liquidate. Maybe we should tailor that statement to read, "once the 80 year old guys forgets his password and flips out in the brokerage house, it is time to get out or at least take a knee for a while."

One of my coworkers' mother-in-law is managing a portion of he and his wife's money. Now, it would be one thing if she was an experienced trader or money manager, but she is neither. She doesn't even know what company financial statements are or anything about investment multiples or sophisticated analysis techniques, which might be just as well given local conditions. Her investment strategy is "never invest for the long term in China's stock market." This might sound crazy, but it is highly logical given the volatile roller-coaster ride that epitomized China's markets during the 1990s. She returned in a measly 35% return last year because, in his words, "she's too conservative." I advised my coworker to fire his mother-in-law as his money manager and run down one of the 80 year-old guys down at the brokerage house to take over, preferably one that can, at least 7 times out of 10, recall his/her password. He thought that wouldn't be a good move given the "probable less than desirable implications on the home front."

Moral of the story: well, there isn't one. It is just a very interesting time in the wild wild east where long lines, forgotten passwords and all-star mother-in-law money managers tell you all you need to know about the state of the local markets.