Sports Arbitrage Trading In The News
Even with the passage of the Emergency Economic Stabilization Act of 2008, notoriously known as the bailout plan, auto dealers all over the US are beginning to drop like flies as the ripples of the credit squeeze unfolds. Auto dealers, much like the banking industry, is highly leveraged and are dependent upon lending to finance their inventories. With dwindling source of credit, auto dealers are now forced to cutback on their inventories. This is in addition to declining sales as consumers shy away from making additional purchases due to the uncertainties surrounding the effectiveness of the bailout plan. “Floorplan financing” are dependent on the London Interbank Offer Rate or LIBOR for short, which is the beachmark for the $10 trillion global short term credit market.
With the current credit crisis, banks are more cautious about their lending resulting in the LIBOR increasing considerably over the past few months. This is despite interventions by Central Banks all over the world injecting additional liquidity into the financial market. As a result, even though the auto manufacturers’ finance companies are concentrated on auto loans, the situations they face are similar to conventional banks. Industry figures have shown that the US auto sales for September 2008 had fallen for the first time in 5 years to below the one million mark. Already the US largest dealer for the Chevrolet brand, Bill Heard Enterprise Inc, has become casualty to the credit crisis. On September 28, the company has filed for bankruptcy protection citing rising oil prices, declining sales and credit crunch as reasons for its demise.
Meanwhile in Europe, Germany, a country famous for its prudent management of its financial institutions, has become the latest European nation to announce a bailout plan for the Hypo Real Estate AG, the nation second largest property lender. In addition to the €50 billion bailout package for Hypo Real Estate AG, the German Government also sought to guarantee private bank accounts to alleviate fears of a meltdown. Torsten Albig, spokesperson for the German Finance Ministry, said that the guarantee covers €568 billion of deposits in the retail banking sector. This latest development came about just after the tripartite agreement between France, Belgium and the Netherlands to bailout Fortis NV, Belgium largest retail bank. Currently the hardest hit country by the fallout of the US credit crisis is Iceland. In the 1990s, Iceland deregulated its banking industry and this has resulted in its banking sector expanding considerably. Today, Iceland is facing a total foreign liability in excess of €100 billion as compared to the country GDP of €14 billion. The Icelandic Government has also recently nationalized Glitnir, the third largest bank in Iceland, prompting rating agencies to downgrade their rating on Iceland. Analysts are eyeing the European Central Bank (ECB) to see whether it would cut its beachmark interest rate as the move will demonstrate that the ECB is extremely nervous about the current crisis.
Already the stock markets worldwide are reflecting the gravity of the situation as shares prices continue their downward spiral. Investors are becoming increasingly more nervous as they see more and more banks failing. Due to lack of details in the bailout plans instituted by the central banks, investors are not convinced that all of these measures have any positive effects on the volatile markets. The declines in shares prices led by the banking sector are also affecting the mining and oil industries worldwide. Export oriented countries like Japan are especially hard hit by the latest development. Australia is currently also facing the same situation with the tumbling of share prices on the Australian Stock Exchange (ASX). Australia currently enjoying a commodity boom is seeing shares prices in its mining sector declining as well. Blue chip mining shares like BHP Billiton Ltd & Rio Tinto Ltd has been falling despite the ban on short selling on the ASX. Right now the question foremost on most investors mind is how long will it take for the effects of the bailout plan to trickle down to the financial markets.
Although globalisation has opened up trading opportunities among international communities, it has also produced an unforeseen effect among the various economies. Rather than diversification of risks, it had instead intensified risks among the interconnected economies in all aspects even in seemingly unrelated areas. Long held beliefs like “rock solid” investments no longer hold true as the value of our investments are also subjected to external influences. The time honoured model of investment used to be based on shares, bonds and money market instruments with their own respective risks level. Money market instruments were the most sought after investments as they provided a good balance between returns and protection against violent fluctuations. But when greed takes precedence over cautions, the results is the propagation of “toxic assets” which bears risks with no correlation at all to its credibility ratings.
Technological advancement has also resulted in changes in the way these investments are valued at. Nowadays, to take advantage of inherent market inefficiencies, the major stock markets in the global economies are controlled by computers programmed with algorithmic blueprints which execute trades even before we are aware of the changes in market conditions. Usually used together with statistical arbitrages, trades are now conducted in terms of milliseconds. System like TradElect on the London Stock Exchange can turn around an order in 10 milliseconds while at the same time process 3000 trades per second. Profits are no longer derived from the inherent value of a share which is reflected in its dividend. Instead, profits are derived from earning expectations as well as market sentiments to which a computer is programmed to response too.
This is the main reason why hedge funds can move market as the volume of trade which they conduct daily runs up to billions of dollars. This is also the reason why hedge funds are the most profitable among all the managed funds in the market. The hedge funds use of algorithmic trading do away with “irrational exuberance” while statistical arbitrage sniff out the temporary “mispricings” of assets simultaneously in several markets, virtually removing almost all the associated risks involved in trading. The only snag to these systems is the high cost of development and maintenances. However the arbitrage market is not just confined to the financial markets as former London city stockbroker Rajeev Shah pointed out. The world of sports arbitrages also operate on the same principles as the financial markets. (To learn more, read “Sports Arbitrage–How to place riskless bets & create Tax free investments”). With the use of softwares like the ArbAlarm developed using the same algorithmic blueprints as the financial markets, one can also locate the price differential of arbitrages internationally within seconds. The main difference between the sport arbitrage market and the financial markets is the size which makes it accessible to the ordinary investors.
Retirement used to be a straight forward matter where one can just invest in the stock market like the superannuation funds and get a decent return allowing one to retire with a peace of mind. However the current events have shown us that are superannuation funds also subjected to decline in values due to the credit crisis making our future uncertain. If the trend is to continue, we seriously have to consider other options of investments which are free from external influences of globalisation.