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Changes at the Top

Leadership decisions in the United States and China will have an impact on the gaming industry.

Changes at the Top

With the presidential election over, we can be sure of two things:

The 2016 campaign has begun, and Barack Obama is a lame duck, though still a powerful one until the last year or so of his second term.

Those somewhat facetious observations aside, the American elections and the decennial change in the government of China are both matters that have stirred speculation among investors.

After all the billions of dollars spent and millions of words uttered, the election left the United States in a status quo—a split government capable of gridlock.

That prospect caused stocks to fall on the day after the election, and it holds room for caution going forward given the concern about whether we’ll fall off the fiscal cliff, or avert that sudden calamity by raising taxes in such a way as to create a grinding kind of recession for investors.

Casualties could include favorable tax rates for capital gains and dividends, at least among those making more than $250,000 a year.

Dividends have become important to investors of all sizes over the past couple of years, but especially to those in gaming stocks.

That is because the gaming industry has matured to the point that companies like Wynn Resorts and Las Vegas Sands are generating more than enough cash, and can return it to shareholders. And both Steve Wynn and LVS CEO Sheldon Adelson have said they will continue paying, and raising, dividends.

Dividends also have become attractive to investors looking for income thanks to historically low interest rates. But dividends could be cut or eliminated if higher tax rates erase their value to investors.

Yet another area of uncertainty is online gaming.

As those who’ve been following us on this issue know, we have long held that each passing day makes it more difficult to enact a federal

i-gaming law.

Advocates of federal i-gaming legislation appeared to dodge a bullet on election night as Mitt Romney, who opposes i-gaming along with his big money man Adelson, was removed from the picture.

That leaves Senator Harry Reid and his lame-duck Republican partner on the bill, Senator John Kyl, to try to legalize online poker only before the new Congress convenes in January.

But it might not be easy. We now have states with turf to protect, meaning we now have congressmen who might oppose the federal bill they would have supported a year ago.

New Jersey, for example, has its own internet gaming ambitions. Delaware has legalized i-gaming. The treasurer of Massachusetts is against it. Ditto the lottery director of Kentucky. It’s likely that Massachusetts and Kentucky congressmen will respect their opinions, making it more difficult to round up votes for a federal bill.

Reid already has had to soften his bill to permit traditional lotteries. But states may want the right to go beyond traditional lottery games, protecting future revenue potential, especially if expanded gambling can be done under the auspices of a lottery, thus avoiding the risks and turmoil of passing legislation or referendums.

And if i-gaming doesn’t pass this year, it could get more difficult next year as more states creep toward their own legislation.

Finally, there is China.

Again, as those who follow this column know, we have long raised the flag of caution on Macau, noting that the Chinese government remains controlled by the Communist Party, which, at least on paper, opposes gambling.

At present, there are two schools of thought as to how the new government will approach business.

One is that it will take this opportunity to further open China’s economy, allowing businesses to flourish in what might be called something like “let a million fortunes blossom.”

The other school is that the government will use its fresh start to crack down on corruption, which in many cases means public officials gambling away public money, or businessmen trying to get their money out of China by playing it through Macau’s gaming tables.

The two schools don’t need to be mutually exclusive, a point that Adelson seemed to address on the latest LVS earnings conference call.

The Macau government, he said, wants to grow its hospitality industry and is likely to favor resorts whose casinos occupy less than 10 percent of their floor space, as opposed to 25 percent.

That, he suggested, plays right into LVS’ wheelhouse of the integrated resort. Which it very well may. After all, unless the Chinese

economy collapses, its population of modern consumers will continue to grow into the hundreds of millions, which means lots of affluent customers, even if VIP growth stops or even reverses.

So, there are some big policy decisions in the U.S. and in China that have the potential to be game-changers for investors.

And, while we are not policy prognosticators, we’ll hazard a guess that politicians everywhere—well, maybe not Illinois—are generally cautious about making changes that could undo successful economies and industries.

So, heading into 2013, we’re wary, but not worried.

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