Archive for October, 2008

How effective is the Bailout Plan

Friday, October 10th, 2008

As President Bush signed the bailout plan into law, the majority of the Americans are now watching closely the effects of the bill on the financial market. Most of those on main street are afraid to spend as they are unsure whether the bailout plan will work or not. The bailout plan calls for the acquisitions of toxic assets held in the books of ailing financial institutions. The goal is to help unlock the credit squeeze which is gripping the global economy. Under the Emergency Economic Stabilization Act of 2008, the Treasury Department is allocated $250 billion to buy up the mortgages and CDOs. If this amount is inadequate, at the President’s discretion, another hundred billion can be made available. A final $350 billion is also provided for subjected to the US Congress scrutiny.

The entire dominos effect began with the demise of the Lehman Brothers followed by the bailout of American Insurance Group (AIG) by the US Government. From there onwards, for the 3 weeks prior to the passing of the bailout plan, the world’s financial markets had been on a roller coaster ride. The effects were felt globally as stock markets all over world nosedived. Many had hoped for that the bailout plan will provide for a calming effect on the market. However since a week had passed, in a climate of mistrust, Banks are still holding on tight to their cash worried which is the next bank that will collapse. This has prompted shares prices to continue falling, slowly wiping out the values of retirement funds resulting in even less consumer spending. In fact the US president has asked Americans to brace themselves as he warned that the bailout plan will take time to be effective.

Already analysts are warning that more banks are likely to fail by next year. The question on many peoples mind now is how many of these banks will fail and also the manner with which these banks will be disposed off. The reason for this anxiety is due to the dwindling deposits of the Federal Deposit Insurance Corp (FDIC). Under the bailout plan, the liability of the FDIC is increased from $100,000 to $250,000 per account. It follows as to whether there are enough funds to meet the obligations of the FDIC. Granted that the bailout plan will save some financial institutions from insolvencies, a substantial numbers of banks will still face failures as the deteriorating assets which they hold are not covered by the bailout plan. For example, constructions loans are not covered in the list of assets which the Federal Government will take off from the books of ailing banks.

With the turmoil in the financial markets, despite being covered by the FDIC, many depositors are wondering whether their savings are secured. With the failure of Washington Mutual several weeks prior to the enactment of the Emergency Economic Stabilization Act of 2008, this has not aided in boosting confidence in the minds of depositors. The current trend is a flight of money to quality institutions. The problem is that no one really knows which banks are on a strong footing when banks like Washington Mutual, are not even immune to failure.

Although Australia is on the opposite end of the globe, the fallout from the US has not left Australian banks unscathed. Earlier during the year, the National Australian Bank (NAB) was forced to write down 90 percent of its holdings on American CDOs to the tune of A$1 billion. The write down had forced the NAB to cancel its £550 million bond sales by 70 percent as investors shy away from investing in the NAB bonds. In addition analysts are predicting that the NAB will need to further write down an additional A$500 million to A$1billion to cover its losses in the US mortgage investments. Even the Wingecarribee Shire council is not spared from the fallout of the US credit crisis. Like many of the charities and churches in Australia, the council had purchased millions of dollars worth of these toxic assets as investments. A lawyer acting for the council commented that it is unlikely that the bailout plan will benefit the Wingecarribee Shire council.

The New World Order brought about by the globalisation of the world’s economy has resulted in many positive benefits like ever increasing trading among the various nations of the world. Corporations are also able to raise funds easily on worldwide capital markets with lower cost. The unfortunate consequences of a globalised economy are that risks are also amplified even to areas seemingly unrelated to the global economy. Today, because of the world dependencies on the US economy, even its domestic problems have the cascading effects on a local council like Wingecarribee Shire council. Today, investing is no longer a simple and clear cut matter as Money Market Instruments are packed and repackaged so many times that no one know what their real risk levels are despite of their triple “A” rating.

In addition, globalisation has also revolutionised the way Share prices are being determined on the stock market. A company shares used to be determined by the amount of dividends that it paid out to shareholders. Today shares prices bears no relation to its intrinsic value but rather to its earning potential based on forecast. With a little bit of creative accounting like what the previous management of the demised Enron did, a company is able to show earning potential much higher than it actually is able to earn. Secondly, with increased competitions among the market traders, trading margins are becoming increasingly lower. To compensate for the decline in margins, market traders are now resorting to alternative ways to generate revenues. One way which the market traders have gone about doing this is by taking advantage of inherent market inefficiencies. Using a system pioneered by Morgan Stanley’s Desk Trading Operations during the 1980s, market traders are able to use statistical arbitrage to profit for temporary mispricings of assets to gain profits from as low as two decimal points. With computers programmed with algorithmic blueprints, market traders are able to isolate these “mispricings” within a fraction of a second and capitalise on them before the market readjust itself. By the sheer volume of shares traded, hedge funds are able to move the prices of shares which they deal in thus creating the market sentiments.

Due to large volume of shares traded by hedge funds to capitalise these mispricings of assets, they are able to profit by the billions daily. Their profit taking abilities are not curtailed by the direction of the market movements. Regardless of whether the market is moving up or down, hedge funds are able to profit from their trading. Statistical arbitrage is able to remove the element of risk from the equation. Because these computerised systems requires substantial amounts of money to develop and to maintain, these systems are beyond the reach of the ordinary investors.

Nevertheless, Rajeev Shah, former London city stockbroker, pointed out those situations of arbitrages is not just limited to the financial market. In the world of Sports betting, the same mathematical principles of statistical arbitrage can be applied to betting. With an algorithmic computer program called the ArbAlarm, placing bets cease to become gambling but rather as hedging because statistical arbitrage reduces the element of risk to zero. (To know more, read “Sports Arbitrage–How to place riskless bets & create Tax free investments”). Furthermore, the profits from Sports Arbitrage are not subjected to tax. (See Australian Tax ruling TR2004/DR17).

Although this is an unorthodox method of investing one’s funds, in comparisons, the traditional model of investments based on shares, bonds and money market instruments are no longer fail safe to fund one’s retirement plans. Of late, returns on superannuation funds are declining with many resorting to the aged pension instead. In additions, brick and mortar are also no longer reliable as place to park one’s money. The collapse of ACR, Fincorp all seek to show that the real estate market is also subjected to manipulations by unscrupulous developers. With the current situation, perhaps it really time that we think outside the box to seek an alternative way to fund our retirement without it being at risk to factors beyond our control.

Tags: Australian Financial Review
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Implementing the Bailout Plan

Thursday, October 9th, 2008

One of the difficulties which lay ahead for US Treasury Secretary, Henry Paulson, is the problem of valuing the toxic assets of the ailing banking institutions. Many are concern that the Government could ended up paying in excess of what these assets are actually worth. With the uproar surrounding the Emergency Economic Stabilization Act of 2008, a move which the financial institutions are seen gaining at the taxpayer’s expense will no doubt have grave political implications. Although the bailout plan had been enacted into law, several provisions were tied to the Bill before the US Congress agreed to pass it into law. Some of the main provisions include:

(1) Disbursement of the $700 billion funds in tranches with $250 billion being made available immediately to the Treasury Department.

(2) A provision requiring the President of the United State to propose a bill requiring the financial institutions to reimburse the taxpayers for any losses after the 5 years of the plan running its course. In addition, the Treasury is allowed to take up equity in the participating financial institutions.

(3) Provision for the curbing of excessive executive salaries of participating financial institutions.

(4) The provision of two oversight committee to oversee the execution of the program.

From an initial 3 pages proposal, the final Bill had ballooned to 450 pages to covers for all these provisions thus providing Treasury Secretary Paulson with enough incentives to ensure a proper execution of the program. With thousand of mortgages tied to each piece of financial instrument and with delinquency rates spiking in the housing market, to unveil the actual underlying value of these assets can be daunting indeed. To compound the problem of finding a market price for these assets, the market for these instruments is not transparent.

Furthermore, the structures of these types of instruments are intricately complex. With variables like how many homeowners will become delinquent and the recuperation rates of the foreclosures tied to the value of these instruments, these assets will continue to decline in value as long as the housing market are in a downward spiral. As if these mortgage backed securities aren’t complex enough, Investment banks have taken these instruments one step further by rebundling them into even more complex instruments called collateralised debt obligations (CDO). The fact is none of these assets are in any way the same to each other.

An additional difficulty which the Treasury Department will face is to strike a balance between maximising the taxpayer’s money as opposed to minimising the financial institutions losses. The depreciation of these assets has already left these banks financially weak and cash strapped. If the Treasury is to purchase these assets at discounted prices below book value, the bailout program may ultimately prove ineffectual in unlocking the credit squeeze. One way that the Treasury is considering to overcome these hurdles is to conduct reverse auctions to determine the market price for these assets. This way, the Treasury will let the financial institutions themselves decide the selling price.

Whatever method that the Treasury department will use to determine the market price doesn’t dull the fact that most Americans are angry at Wall Street. Many are still asking why the taxpayers, who are suffering at the hands of greedy and reckless financial institutions, are the ones who have to bail these banks out. Opposite the Globe in Australia, people are also asking the same questions as the bailout plan is not designed to help investors like Wingecarribee Shire and other local Australian local councils. The losses from these so called triple “A” investment will result in less monies for the local councils to spend on community development. The major American banks have their lobbyists to represent their interests but unfortunately tiny debt holders like the Wingecarribee Shire council will probably never see a cent of the Australian public money returned despite the bailout program.

This is one of the dire consequences of a globalised economy. Beside from the benefits of increasing trading opportunities, access to the world’s capital market, globalisation has also brought about intensification of risks even to areas which were traditionally regarded as safe. External factors, a few thousands miles away now has the abilities to influences and affect even what was considered the prime investment instruments, like the money market instruments, for many corporations, charities and even the conservative local councils to earn a reasonable yield on their surplus monies. However when greed takes precedence over prudence, the result is a proliferation of poisonous assets like the CDO’s and MBS’s which bears no relationship to the triple “A” ratings they carry in respect of their risks level. In the end, the victims are the investors who have no idea what they have brought.

Globalisation has also brought about changes in the ways of how share prices are being determined on the stock market as well. As increased competitions come about due to the integrations of markets, margins are being slashed. To make up for the loss of income, market traders are now resorting to market inefficiencies to generate additional revenues from declining trading margins. With technological advancements, computers are now programmed with algorithmic trading patterns to execute stock trades in a fraction of a second. In additions, trading systems like the TradElect on the London Stock Exchange can simultaneously process 3000 trade orders in a second. With these innovations and the use of quantitative analysis like statistical arbitrages, price differential as little as two decimal points allow market traders to reap billion of dollars in profits everyday. With the large volume of trades which passes through hedge funds, it is no wonder that hedge funds have the ability to move the prices of shares and create market sentiments.

Today stock prices are no longer valued based on their intrinsic values alone. The dividend yield of a share is no longer as important as the price differential which the market traders can isolate with their trading systems. It is for this main reason why hedge funds are the best performing managed funds in the financial markets. The downside however is that unless you have the financial capacity to develop and maintain such a system, this form of investing is off-limits to the ordinary investors who are bound to just follow market sentiments and like in the current credit crisis suffer the losses. Hedge funds, regardless of the direction of the market is heading, makes monies as their profits are based on mispricings of two complementary assets and not just one assets. Statistical arbitrages allow the market traders to almost reduce their risk levels to almost zero.

The upside is that as former London city stockbroker, Rajeev Shah pointed out, the arbitrage market is not the sole domain of the financial markets. Statistical arbitrage principles can also be applied to the world of sports betting. Using a software developed by him called the ArbAlarm, sports betting can no longer be regarded as gambling as one no longer places bets but “hedges bets” just like in financial markets with the risk level at zero level. (To learn more, read “Sports Arbitrage–How to place riskless bets & create Tax free investments”). In addition, capital gains from the world of sports betting are not subjected to capital gain tax according to the Australian Tax office. (See Australian Tax ruling TR2004/DR17).

The traditional models of investing based on the three main assets class like Bonds, Stocks and Money Market Instruments are already outdated as demonstrated by the fact that today, superannuation returns are declining due to the credit crisis which the global economies are facing today. Ultimately, the ordinary investors are the one who are suffering due to the greed and recklessness of Wall Street. Even with the $700 billion bailout plan, not all investors will benefit from the rescue package. In time like these, we seriously ought to rethink how we can secure our retirement’s funds which are not subjected to the whims and fancies of a foreign nation problem.

Tags: Australian Times
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Warren Buffett’s “Time Bomb”

Tuesday, October 7th, 2008

In Washington DC, while the debate about the $700 bailout plan rages on, Federal Reserve Chairman Ben Bernanke warned that, unemployment in the US are rising and consumer spending have been sluggish despite easing oil prices. To compound the situation, August data shows that housing prices have been dropping at record level fueling worries that foreclosure rates will spike further.

The Head of Congressional Budget Office, Peter Orszag, also warned that unless Congress acts quickly, the US economy would face possible chaos with equaling severity to that of the Great Depression.

Congress has been unwilling to give its endorsement to the bailout plan in its original form due to the huge price tag attached to the plan. Another reason was the lack of oversight controls over the execution of the plan. The House Democratic Speaker Nancy Pelosi also said that Congress will not just hand over a “$700 billion blank cheque” without any safeguard. The anger felt by Congress is understandable as while the crisis is getting worse; CEOs of failing banks have been receiving “Golden parachute” payments to the tune of millions of dollars. To many, this amounted to rewarding them for failures. In fact, so great is the contention that the FBI is now investigating the two mortgage giants Fannie Mae, Freddie Mac, as well as Lehman and AIG for possibility of fraud.

Meanwhile the US dollar slide further when investors shifted their focus to bonds as unease about the bailout plan increases. Even Warren Buffett $5 billion investment into the Goldman Sach Group Inc failed to calm investors nerves. France, Spain, and Germany are also not spared the effects of the fallout from the US as surveys show investors’ confidence at an all time low. Talks of an European recession are now matters of concern with the Europeans markets. Meanwhile according to the South China Morning Post in Hong Kong, the Chinese government has already instructed all its banks to curtail their inter-bank leading to US banks with immediate effect to prevent any further losses. This is China first attempt in trying to defend its financial position from the fallout after its mainland banks have reported losses due to exposure to the financial crisis in the US.

The Chinese and the Europeans were not the only ones who are showing concerns about the situation in Washington DC. Australian Prime Minister, Kevin Rudd, at the United Nation meeting said that the world’s economy required the bailout plan to be put into effect quickly. He reiterated that the plan is a “good and strong” measure required to stabilise and to avoid a recession in the market. Speaking to reporters after his meeting with the World Bank President, Robert Zoelick, He called on members of the US Congress to work together to enact the plan as the world’s financial markets are under considerable stress.

The Australian Stock market in response to the situation in Washington, took a dive earlier this week as doubts whether the bailout plan will work affected investors confidence. The exceptions to the plunge in shares prices were those in the Oil and Gold sectors which gained ground amidst falling investors’ confidence. In addition, the International Monetary Fund forecasted that the Australian economy growth will slowed to 2.7% in 2008 down from 4.3% in 2007 whose growth had been fueled by raising commodity prices.

Analysts have warned that the situation is bound to get worse as the financial market starts to adjust itself to an equilibrium position. The process of deleveraging, that is the unwinding of bad debts, will cause additional downward spiral on an already distressed market. As bad as Australians wants to avoid the fallout from the crisis, the nightmare is not going to go away. As banks like the NAB write down their losses, multinational companies like Ford, Qantas, and Mitsubishi are retrenching workers to cut down overheads.

Many of us are questioning how did we ended up in a crisis of this magnitude. Some say it was the housing bubble burst, some say predatory leading practices was the cause while others said the credit default swaps market resulted in all this mess. The truth is that while we all hated to admit it, Greed played a major role in all the drivers for the credit crunch crisis. Everyone wants to get rich and as quickly as possible. Unfortunately there is no such thing as getting rich quickly. The truly wealthy like Warren Buffett and George Soros got to where they are now because they followed a definitive plan when it comes to investing their capital. Five years ago, Warren Buffett exited the credit default swaps market when everyone else was diving in neck deep. Today, everyone is talking about Warren Buffett “Time Bomb” going off already.

The reality is that if we want to be successful, we have to follow their footsteps in terms of mindset. George Soros, when it comes to investing, always hedges his bets in the currencies market. This way, no matter what direction the market turns, he is still able to reap a profit. In short, he practices what we call “riskless investment“. This form of investing capitalise on what we term as “Statistical Arbitrage”. (To gain more insight, read “Sports Arbitrage-How to place riskless bets & create Tax free investments“). Pioneered by Morgan Stanley Investment Bank during the 1980s, today statistical arbitrage have advanced to incorporate computers into everyday trading using softwares like the ArbAlarm to execute high frequency trading. With this technological development, trading situation takes mere seconds to execute. In addition to dealing with unorthodox investment vehicles, the successful investors also do not let go of control in respect of matters like capital gain tax. This path of thinking allows them to profit further without running afoul of the law. In fact, according to the Australian Tax Ruling (TR2004/D17), capital gains from this form of investment are not subjected to tax.

As the Governments of the developed countries meets and discuss at the United Nation about the financial crisis that the global economy is facing now, many of us here at Main Street level, will have to start to rethink about our future and with whom we can leave it all too. While financial planners recommend us to invest in shares, we can see the stock market extremely volatile and having the ability to wipe out our “dreams” within days. The property market also leaves very little room for us to maneuver in the current economic climate. Whatever and however we decide, it will be us who will reap the fruits of our labour or bear the pain of our losses.

Tags: Australian Times
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Spreading Contagion

Monday, October 6th, 2008

Despite constant interventions in the financial market by the US Federal Reserve Board, the credit crisis is getting worse by the day and already investors are questioning how effective will the bailout plan be. Beginning with the bailouts of Bear Stearns in March to Fannie Mae and Freddie Mac and the latest for AIG, none of the corrective measures seem to have any effect in arresting the chaos which had ensue in the financial markets. The latest move led by US Treasury Secretary, Henry Paulson, led to the enactment of the Emergency Economic Stabilization Act of 2008. The $700 billion rescue plan calls for the US Treasury to buy up the “toxic assets” of ailing banks which were initially the root cause of the credit crisis. When the Federal Reserve Board refuses to extend any financial assistance to the Lehman Brothers, the demise of the century old investment bank had led to a cascading effect which had so far resulted in the current situation. What the Lehman Brothers failure had shown is that size is no longer a safety net for failure in the financial world.

In response to the global credit crisis, Australian banks had move swiftly to provide details of their limited exposure to the US mortgage investments hoping to alleviate fears of a financial meltdown locally as what had happened in the European Union currently. Lawmakers in Australia were also quick to add that the current problems in the US were due to lack of regulations unlike Australia which has existing regulations in place. However the latest development in Germany which resulted in the German Government bailing out Hypo Real Estate AG, Germany second largest property lender, for €50 billion seeks to show that this line of thinking might not hold true. The German’s Bundesbank is known for its conservative and prudent management of its financial institutions and yet this has not insulated Germany from the fallout of the credit crisis. Furthermore, globalization has not resulted in diversification of risks rather it has intensified risks and permeating even to areas which are supposing to be immune.

Shares prices in the Australian Stock Exchange (ASX) have been falling by as much as a third since the end of last year led on by the banking sector. The commodities sector is not immune to the declining prices as well. Blue chips mining shares like BHP Billiton Ltd has seen their value eroded despite the imposition of short selling of shares by the ASX. It goes to follow that if the current condition persists, Australian would be facing harsher times ahead. The Australian economy, in terms of its ability to remain insulated from the fallout, is on borrowed time.

The global contagion is already testing the supposedly bond that exist in the European Union (EU) as Finance ministers from member countries broke ranks in their bids to protect their own banks. The magnitude and speed of fallout had caught many of the European nations unaware that instead of a concerted effort to stem the effects of the crisis have ultimately resulted in disarray unilateral actions of EU member countries. The Irish Government on 30^th September, in its bid to starve off a meltdown of its financial system, had sought to guarantee the debts and deposits of its six largest banks. The move was decried by its neighbors and Brussels fearing a flight of deposits from the domestic banks the neighboring countries to Ireland. What the recent events had shown is that despite the ideal goal of unity that the EU has tried to embodied, no nations can be immune from the current financial crisis. Australia will not be the first exception to the rule.

The globalisation of the world’s economies has brought tremendous gains in terms of trade and finance. The development of instant communications, international trade and development of the capital markets has contributed to what is termed as the New World Order where the economies of the world are intertwined together. Businesses now are able to raise funds on the global capital market with ease. However it has brought disastrous repercussions as well. Globalisation has also sought to magnified risks in areas which are seemingly totally unrelated to the global economy. What traditionally used to be considered safe and worthwhile investments has now changed subjected to external factors thousands of miles away. The current credit crisis the global economy is facing is an example of a US domestic crisis spilling over to Europe now. Money market instruments before were considered a prime investment as they carried a well balanced mix between yield and stability. Due to the emergences of the toxic assets, investors are now shying away from investing in any of these types of instruments as no one knows the actual risks that are tied to these investments anymore.

Rapid advancements in technologies have totally changed the ways shares prices are determined. The intrinsic value of shares used to be determined by amount of dividend that share would yield thus reflecting shareholders values. Today the profitability of shares investments are derives from inherent market inefficiencies. The world’s major stock markets today are largely automated. In the London Stock Exchange for example, System like TradElect are programmed with algorithmic trading patterns designed to execute stock trades in 10 milliseconds while simultaneously processing 3000 stock orders per second. The computer systems are able to act to information about market conditions even before any human traders are aware of the changing market conditions.

It is through this manner which hedge funds have the ability to determine the price of a stock, by sheer volume trading. Use together with Statistical arbitrage which isolate assets mispricings, Algorithmic trading is powerful tool which had generated billions of dollars in profits for the hedge funds. This is the main reason why hedge funds are the top performing funds in the financial markets. However the high cost of development and maintenances of these sort of systems means that only those large firms with the funds are able to acquire sophisticated systems like this for their Trading desk operations. But a former London city stockbroker, Rajeev Shah, highlighted that the same quantitative analysis methodology could be applied to the world of Sport Arbitrage. Using softwares like the ArbAlarm developed using algorithmic blueprints; traders are able to isolate price differentials also in a matter of mere seconds. The only difference between the Sport Arbitrage market and the financial markets is the volume of trading that is being done. The Sport Arbitrage market smaller size makes it a more accessible market to the smaller investor. (To learn more, read “Sports Arbitrage–How to place riskless bets & create Tax free investments”).

As the returns on superannuation funds are declining, many are finding themselves unable to make ends meet. This in turn has force thousands to go on the aged pension. Even Julia Gillard ,the Deputy Prime Minister, has admitted that she couldn’t survive on the age pension, a fact that many are indeed living near the poverty line, there is currently no other alternative beside this. Unless one starts to consider alternative means to build up a retirement fund, with the recession looming around the horizon, retirement can prove to a hardship for many Australians in the near future.

Tags: Wealth Creator (Australia)
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The Global Economies Responses to the US bailout Plan

Saturday, October 4th, 2008

The Global stock markets instead of responding favorably to news of the enactment of the Emergency Economic Stabilization Act of 2008 in the US have instead been declining. In addition, the credit crisis has now taken root in Europe as European nations scrambled to put into place their own bailout plans to save their own domestic banks. Forbis NV, the largest retail bank in Belgium, was recapitalised with an infusion of €11.2 billion orchestrated by a tripartite efforts of Belgium, Luxembourg and the Netherlands. Ireland in a unilateral move, declared that the Irish Government will guarantee all debts and deposits of its 6 largest banks. Although the move was initially denounced by fellow EU countries, fearing a flight of deposits to Ireland, the measure was later adopted by the Greeks. The latest EU nation to adopt such a measure was Germany which virtually acts as a guarantor for all its saving deposits in the retail banking sector worth €560 billion, a quarter of its GDP. This is in addition to the €50 billion rescue package for the Hypo Real Estate AG, one of Germany largest property lender.

Investors are currently still holding to a wait and see attitude as to the trickle down effect of the US $700 billion bail plan. US Treasury bonds yields have remain extremely low due to the flight to quality from the stock market. Investors are avoiding the corporate bonds market as they are wary of what could be a Warren Buffett’s “time bomb” hidden within those investments. The loss of confidence in the financial system has resulted in investors avoiding anything that is remotely deemed risky. Even though the bailout plan seeks to unlock the credit squeeze in the financial markets, banks are still unwilling to lend and if they do lend, the lending comes at a premium. The bailout plan protracted journey to become law has also resulted in the market having doubts about the effectiveness of the plan.

Many analysts agree that what was initially regarded as a domestic problem of the US has now mushroom into a global crisis affecting Europe and ultimately Asia as well. The situation now faced by the Europeans echo that of 1971 when the US abandoned the dollar’s link to the Gold standard. Currently all eyes are on the European Central Bank (ECB) to see if it will cut its interest rate. The reason is that with the establishment of the Economic Monetary Union (EMU), EU nations no longer have the powers to lower interest rates nor devalue their currencies. To give the ECB supranational control of monetary polices, all these powers were surrendered to the ECB.

Thus today individual EU nations, no longer having these powers, are resorting to protectionist methods to insulate themselves from the fallout. The irony of the whole situation is that, the EMU was established to enable the global economies move away from its dependencies on the US dollar. Instead of diversifying risks, globalisation has instead intensified risks even to seemingly immune areas. With the scale of interaction in the global economies, this has resulted increased interaction between Europe and US, making the European nations more exposed to any situation in the US.

Analysts are warning that as the contagion spreads across the globe, Australia could be in for a rougher ride than the Americans. This is because despite a boom in the commodities market, Australia has been running a budget deficit. Household debts are at 177 percent of GDP, one of the highest in the world. Since late last year, the shares prices on the Australian Stock Exchange (ASX) had declined by as much as one third. Mining shares have also been declining. If the slide in the commodities sector continues, Australia will indeed be facing a crisis worse than the US with no means to pay for its imports and no means to borrow in the current credit crunch.

Today, the economies of the world are intertwined together in ways that we cannot imagine. Globalisation has intensified risks in even in areas which we once thought were safe. The traditional model of investing used to be based on three main asset class; stocks, bonds and money market instruments each with its own level of risks and with the money market instruments being the most stable relatively from fluctuations and inflation. Today with a proliferation of exotic financial instruments like CDO’s and MBS rated triple “A” by rating agencies, nothing can be taken for granted at face value anymore. Investing in the financial market has become as dangerous as sticking one;s hand into a nest of cobras and hoping not to get bitten. Shares prices used to be based on the dividends that it pays out but today this has all changed. Movements in shares prices are dictated by its earnings potential and market sentiments instead which are subjected to manipulative creative accounting as in the Enron’s Scandal.

The one thing which has not changed with globalisation is the inefficiencies of the market. With computerisation, trading on the stock markets are done using computer programmed with algorithmic patterns designed to execute trading orders even before human traders are aware of the changes in market conditions. Combined with the use of statistical arbitrages, algorithmic trading has changed the landscape of the financial market dramatically. This is the main reason why hedge funds outperform the other funds on the financial market. Quantitative analysis like statistical arbitrages isolates the price inefficiencies of assets allowing removal of risks while algorithmic trading takes out the emotional aspects of trading removing what Alan Greenspan termed as “irrational exuberance”. The downward side to this investment strategy is that it requires volume trading and a lot of capital as the price differentials are calculated up to two decimal points.

However situation for arbitrages also exist in other markets and not just the financial markets. As former London City stockbroker Rajeev Shah pointed out, conditions for arbitrage can also be found in the world of Sports Arbitrage. Using computer programs like the ArbAlarm, one can capitalise on price differentials just like the financial markets. (To gain more insight, read “Sports Arbitrage–How to place riskless bets & create Tax free investments”).The main difference between this market and the financial market is the transparency which exist in the world of Sport Arbitrage. Mutual funds used to be the simplest and easiest way to invest in as an investment vehicle for retirement. The problem is that with globalisation and increased competitions, this no longer holds true. As demonstrated by the current financial crisis, many investors are caught with their pants down as they have no idea what they are investing in. What presumably was triple “A” class investments turns out to be nothing more than a proliferation of “toxic assets”. With the current economic climate, perhaps it is time to rethink outside the box and look beyond traditional models of investments for one’s retirement. An article published in the Financial Times called “Cherished myths have fallen victim to economic reality” explains why and how times are changing beyond our comprehension. Either way, it should be “Main Street” and not “Wall Street” who should reap the benefits. Instead today, “Main Street” is just bearing the losses of Wall Street’s greed and recklessness.

Tags: Australian Financial Review
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Sports Arbitrage & Tax On Profits

Wednesday, October 1st, 2008

One of the most often recurring questions that comes up when discussing sports arbitrage is about the tax status of the profits made by sports arbitrage traders.

There is no doubt that profits from betting & gaming are fully tax exempt in the UK. The reason for this is that a long established principle of UK tax law is that where a source of income is taxable, then relief is given for losses if you make them. As 95% of punters are losers the Treasury is naturally not keen on this idea.

In the 2001 Budget, the Chancellor went one step further and abolished all general betting duty for punters and replaced it with a 15% tax on bookmakers’ gross profits.

The situation for sports arbitrage traders may be different, however, where the Inland Revenue can establish that the trader’s “sole or main income” is derived from betting. In this special case, under the Income & Corporation Taxes Act, speculative profits are taxable under D Case I as trading income.

In order to protect yourself from any tax liability on your trading profits, no matter how large they become, all you need is to be able to demonstrate that betting is a hobby and not your sole or main source of income. If sports arbitrage was to become your main source of income (as it is for many professionals) then a simple, perfectly legal way to avoid paying taxes on the income would be to set up a tax “front” which enables you to say that your betting is a hobby.

Examples of such a front would be:

- a buy-to-let property which generates rental income
- part-time consulting work or a part-time job whose income you declare to the Inland Revenue
- details of any other activity from which you draw an income that you can declare on your tax-return

In any case, this type of issue is only likely to affect you if you are trading extensively and making sports arbitrage profits at the top-end of the scale (£80,000-£150,000 per annum). If your activity attracts the attention of the Inland Revenue, you should seek specialist personal tax advice from a qualified FCA who will be able to answer their questions effectively.

Tags: Sports Arbitrage, Tax
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Sports Arbitrage Outlook: October 2008

Wednesday, October 1st, 2008

Sports arbitrage traders have reported a remarkably successful September this year, with profitable arbitrage opportunities appearing across the complete range of sports in last month’s calendar.

During September, ArbAlarm reported a total of 11,541 sports arbitrage trades across 890 separate matches and games. The average profit yield of these trades was 3.79%.

Overall, soccer and tennis provided the most trading opportunities – well over 3000 in soccer and over 2000 in tennis

The September Darts tournaments featured well over 1000 arbs created by PaddyPower, SkyBet and Unibet and many of these were over the 4% profit mark. The same three bookmakers, together with SportingBet, also provided over 600 snooker arbs.

Meanwhile, the various fight matches that took place gave 5 Dimes and Sportsbook the opportunity to create several hundred surebets in the 2%-3% range.

SportingBet, 5Dimes and ToteXpress all featured heavily in the various golf events last month, with arbs ranging from 1% to 5%

5Dimes also featured heavily in MLB, with nearly 400 sports arbitrage trades involving their prices.

The coming month of October will be very profitable for active sports arbitrage traders. Look out for an abundance of Formula 1 arbs from Interwetten and Expekt. The races take place on October 10-12 in Japan and October 17-19 in China.

There are a total of 22 separate golf events, Asian, American and European, taking place in October as well as 9 tennis tournaments. ports Arbitrage World trading calendar.

You’ve got a few opportunities in October to capture some extra free money from bookmakers offering reload bonuses. Check out The Greek for his 11% reload bonus and Intertops for their 10% Tuesday and Thursday reload bonuses. If you’re not sure how to make the most of these free cash handouts, just take a quick look at this bonus-scalping tutorial.

And remember that ArbAlarm has a special bonus-trading feature which makes bonus-scalping hassle-free for you by automatically finding risk-free trades which involve the bookmakers you have bonuses with. If you haven’t done so already, click here to sign up for your free TraderZone account and you’ll get full and immediate access to all of Sports Arbitrage World’s software & services.

I wish you a very profitable month ahead!

Tags: Sports Arbitrage Outlook
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