WSJ: As Boom Times Sour in Las Vegas, Upward Mobility Goes Bust

Submitted By Trader Mark
An excellent article in the Wall Street Journal on a topic we've been following since blog inception in 2007: Las Vegas. [Oct 3, 2007: A Top in C asino Names? Wynn and Las Vegas Sands] Long time readers know I targeted Las Vegas as one of the canaries in the coal mine - as really there is no better city to represent the excess of America. We had the crossroads of housing speculation with conspicuous consumption, all in 1 spot - I mean where better else to observe homo sapiens Americana. In [Apr 14, 2008: Things I've Been Negative on Since Fall 2007]

I cannot continue to stress enough how wrong analysts are on 2008 estimates and any company with focus on the US consumer is simply going to be blown apart in due time - if not this earnings season - then in the future. We are told daily how "cheap" these stocks are; this is based on the fictional body of work called "analysts 2008 estimates". Don't believe the hype. The subprime nation (us) is in trouble. Consumers make 70% of GDP. Its a consumption culture where the consumer is being drowned in negative wealth effect from housing, inflation from the Federal Reserve

/global forces, and underemployment if not outright unemployment. [Apr 2: The Underemployment Rate is Rising] It is bad out there in the bottom 60% and it's creeping up to the formerly immune 20-40 percentile as well. It is the perfect storm and I will utter the most dangerous words a financial commentator can ever utter - it *IS* different this time.

People were asking me for individual names for shorts - I continue to
stress the same themes I've stated since last summer - anything consumer related or based on American conspicuous consumption - it will all go. These stocks bounce every time the bulls pass their... well bull... that the consumer will be back any moment now and just "trust us" because in 6 months they'll be back in the malls spending like mad. Just. Plain. Wrong. These are going to be shorts for a long time. It won't be so easy as when I first called it out in early fall because we were still in the "no recession at all" camp, and the stocks had just began to weaken from much much higher levels.

Next to go on the food chain will be entertainment - think casinos - Wynn (WYNN), Las Vegas Sands (LVS), MGM (MGM) - it is all going to suffer [Nov 1: A Top in Casino Names? Wynn and Las Vegas Sands] - that's an "extra" you don't "need".

If not for a furious series of credit amendments, 2 of our 3 largest public casino players would be in bankruptcy court by now, and home prices have given back a decade of gains. [Apr 29, 2009: Median Home Prices in Las Vegas Fall to Lowest Since 2000] Even Steve Wynn has lost some magic and has had to discount aggressively to fill his new high(er) end hotel. [Dec 23, 2008: Wynn Encore Casino Struggling to Fill Rooms During Launch] Thankfully however, in the stock market all you need to do nowadays is show that you can survive (not thrive, just survive) and your stock skyrockets on green shoots, so in the intermediate to long term the casinos are actually (after 2 years of pain) more likely buys than shorts. But we won't be seeing "the good ole days" for a long time.

With Las Vegas, you would be hard pressed to find a better municipal example of our transformation from a producing country to a consuming culture, and how the mirage of prosperity through multiple Fed induced bubbles created a false sense of "well being". This article, aside from touching on "how we got here" also speaks to those in the middle tranches of society who are increasingly running out of ways to make a living that has them increasing their living standard. It's not quite so easy in this new age "service economy"as it was 30+ years ago. "Trickle ON" economics is just not a great thing for most of the middle of the country, contrary to dogma. (problem to every solution? just cut taxes for the top 0.5% and increase spending i.e. kick the can)

More from the WSJ:

Drew Johnson and his wife, Tina had the life many Americans only dream of: A big house in a swanky suburb, a backyard hot tub, and a $100,000 deposit on a new condo with views of the Las Vegas Strip and 24-hour concierge service. They did it all on the salaries of a construction-equipment salesman and a cocktail waitress who brought in $1,000 a week in tips alone. But the recession has slashed their incomes by nearly half, and financing for the condo might not come through. "It's Vegas," says Mr. Johnson, who fears he could lose most of his deposit. "We gambled."
During the boom years, Las Vegas wasn't just a place where gamblers could hit the jackpot, but where hard-working hotel maids and cocktail waitresses could, too. The city offered something almost no other place in America did: upward mobility for the working class. Now, that is evaporating.
Much in the way jobs on Detroit's assembly lines allowed poor Southern blacks a route out of poverty two generations ago, Las Vegas provided a shot at the middle class for workers fleeing dying industrial centers, or for immigrants arriving from Latin America and Asia.
While average wages stagnated throughout much of the country over the past decade, pay in Nevada skyrocketed. Wages in the state grew at nearly double the national rate between 2000 and 2008, according to an analysis by the Economic Policy Institute, a Washington think tank.
Union workers -- who account for the bulk of employment along the Las Vegas Strip -- saw their pay grow by 12.6% between 2000 and 2008, while union workers nationwide saw an increase of 2.9%, according to the Economic Policy Institute. Nevada's non-union pay increased by 5.4% in the same period, while wages for all workers in the U.S. increased by 1.6%.
The union made upward mobility part of the Vegas allure. In Vegas, the union-negotiated salary for a hotel maid is still $14.25 an hour. In contrast, the median wage for the same worker in Orlando is $8.84 an hour; in Phoenix, it's $9.25, according to the Bureau of Labor Statistics
While the union sent casino workers' salaries and benefits up, tips were often what helped push ordinary workers into the world of posh condos and sports cars. Tips could triple the base pay of casino workers who dealt directly with guests.
Gamblers who hit it big on the tables; young visitors who spent thousands for bottle service at night clubs; and businessmen treating clients to lavish dinners, were all free and easy with gratuities, say current and former casino workers. Valet attendants could take home an average of $500 a week in tips, while room-service waiters at swankier properties could earn $600 a week in tips, often outstripping their weekly base salaries.

Such excess turned Las Vegas into one of America's biggest boomtowns. From 2000 through 2006, Clark County -- home to the Strip and three quarters of the state's population -- was the fastest-growing county in the U.S.
The recession has jolted Las Vegas in a fundamental way. Like other job-creating cities in the Sunbelt, Las Vegas saw its population, income levels and housing prices surge over the past decade. And like those cities -- including Phoenix, Orlando and San Diego -- it's been battered in the bust.
The number of people employed by the casinos crammed along the four-mile Strip shot to 109,000 in 2007 from 40,000 in 1985. Retirees, drawn by low taxes and affordable housing, poured into the area, too
Many of those who found steady work in casinos or on construction sites were able to harness another engine of prosperity: the area's bubbling housing market. Fashionable new suburbs sprang up. The flurry of new housing starts created even more jobs.
But by many measures, Las Vegas's rise and fall has been more dramatic than most.
Last year, Clark County's population declined for the first time in more than two decades. More than 10,000 people left Las Vegas between July 2007 and July 2008, according to Keith Schwer, director for the Center for Business and Economic Research at the University of Nevada Las Vegas.
The unemployment rate in the metropolitan area tripled from 4% in May 2007 to just over 12.3% in June 2009, higher than the national rate of 9.5%.
And after the median price of existing homes rose by 122% in sales between 2000 and 2006 -- more than double the national rise of 49% -- sale prices fell by 30% between last year and this year.
The big bet that fueled Las Vegas's growth for so long is the same one that's now going bad: tourism. Vegas expanded into the lucrative market for business meetings and conventions, building massive exhibition halls and new hotels and casinos. Construction jobs multiplied and the housing market bubbled over. Now that tourism and business travel have collapsed, Vegas has little else to cushion the blow.
Even some long-time Vegas stalwarts now believe the era of astounding growth is over. "I don't see any opportunities for any development in Las Vegas," said Las Vegas Sands chief executive Sheldon Adelson in an interview. (Mr. Adelson, in 1999 opened the Venetian, a Vegas-style replica of Venice complete with indoor canals)
All along the Las Vegas Strip, massive, half-finished edifices may never see a grand opening. Last month, the $3.5 billion Fontainebleau Las Vegas hotel and casino declared bankruptcy, and 3,500 construction workers lost their jobs. Other projects, such as the $5 billion Echelon resort, a hotel tower at Caesar's Palace and a luxury condo tower at the Palazzo, also halted construction.
"There won't be another [casino] property built in Las Vegas for a decade," says Jim Murren, chief executive of MGM Mirage, Nevada's largest employer. Mr. Murren's company plans to move forward with the opening of City Center, the $8.4 billion resort and residential project that the Johnsons bought into. When it's completed later this year, City Center is expected to employ 12,000 workers, a bright spot for Las Vegas employment.
But many casino operators are worried the nearly 5,000 new hotel rooms will flood the market with new supply while demand is down. That could further depress prices at a time when visitors are already spending less on food, gambling and spa services, say casino executives.

The rest of the story is still worth the read - a few examples of "middle class folk" who left other parts of the country to go to Vegas for the chance at the prosperity they see on TV. Unfortunately for many it was a mirage. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] (and let me emphasize some of the salaries and pay was completely out of whack for similar wages in other parts of the country for relatively low skill labor)

As for the future of "Vegas baby!"? It will still be there - but as we've argued on these virtual pages Americans will be forced to change - not because they want to, but because they have to. Despite the new bubbles our government is trying to percolate as we speak. Too many ravaged balance sheets in the prime earning groups of ages 35-55, too many baby boomers who have lost to the "smart guys in NYC" via multiple "prosperity" investment schemes in tech stocks or real estate in just 1 decade. It's a new normal (to borrow from El-Erian), that I'd argue the stock market (dominated by the "smart guys in NYC") does not realize is emerging on Main Streets in middle America. [Dec 15, 2008: The "Recovery"]

Harvey Perkins, a gambling consultant with Spectrum Gaming, believes the industry can no longer depend on regular Americans to behave like high rollers. "I think people have fundamentally changed in their spending patterns."
The casino business model, he says, will have to be "re-engineered." Vegas, Mr. Perkins and others believe, will have to return to the days of being a bargain destination. That's already starting to happen, with hotels throwing in coupons for spa services, and high-end restaurants offering cheaper options.

Until the next government induced bubble to hide the damage under the surface to this once prosperous economy, I encourage all these folks in the middle class to take up daytrading. Much of the nation's real prosperity in the past decade has been in the halls of our investment banks - granted you are not too big to fail, so if you make mistakes Uncle Sam won't come to your rescue but if you can't beat em, join em!

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