Some of the reasons why I've added to my Melco Crown Entertainment (MPEL) short position
Current price: $29.17
Price target: $16
Price target: $16
In addition to my original thesis there have been a number of negative developments both direct and indirect that I feel will continue to exert pressure against MPEL for the foreseeable future.
- A solid negative feedback loop has been established after a few market closes below the 30 dollar mark - most analysts have revised their price targets to reflect the change in sentiment. This behaviour will likely continue and increase in frequency as the shares continue their descent. Having a 55 dollar price target on a stock trading in the 20s seems a bit unreasonable given the current economic and geopolitical milieu. Traders will also adjust their stops accordingly.
- Technically, the stock seems quite weak between 20 and 30 dollars.
- The 500 billion dollar buyback SCREAMS WEAKNESS! Perhaps they are trying to soften the landing for the next bout of subpar earnings given its current valuation!?!
- There have also been a number of negative indicators coming from mainland economic activity: China Services PMI (Record low), Chinese power consumption (falling YoY), Wealth Management Products and corporate paper defaults seen accelerating through the end of 2014. Oh, and a falling housing market - one where developers have to agreed to buy back your property for a premium if prices fall - that sounds suspect.
- The latest crackdown on corruption by President Xi Jinping may discourage some VIPs from wanting to be seen flashing their cash in Macau. Do you think that special broadcast, regarding loopholes in the banking system, on CCTV was rogue journalism - or message from the state to the citizens...? A warning of things to come.
Although, if the Chinese government wishes to kick the can down the road at the expense of future generations it certainly has the capability. I suspect that certain market participants are betting on some extraordinary stimulus package. I may be wrong, but I believe the Chinese will continue playing chess and leave the checkers to the Americans.