Posts Tagged ‘Wealth Creator (Australia)’

Sports Arbitrage Trading In The News

Even those who undertake the time honoured method of investing in bricks and mortars are not immune from the crisis. Investing in properties has long being regarded as the safest and most practical way to build up our equity value. But as recent developments in the global economy have shown, when the US sneezes, the whole world catches a cold. Here down under, we are not immune as well. Over the past few months, it has become harder to get a loan from the banks to pay for our housing purchases. Interest rates have also got up making it more expensive to borrow as well. This is on top of the fact spruikers generally have a free rein to milk unwary investors of their life savings like in the case of Fincorp, ACR and Westpoint. Together, the collapse of these companies has resulted in losses of A$1 billion for thousands of unsuspecting retirees. Regulatory authorities like the Australian Securities and Investments Commissions (ASIC) could have done more to protect investors but did not. Their reasoning was the fact that the ASIC cannot be accountable for approving any investment prospectus but rather that burden lies with the issuer or its advisors.

In addition to investing in properties, most Australians also resort to financial planning to build up a portfolio of assets. Being a social welfare state, we also have the option of not doing anything but just relying on the aged pension. But like Ms Gillard, our Deputy Prime Minister, has mentioned even she will not be able to survive on the pension currently doled out by the pension system. If living impoverishly appeal to one as an ideal way to retire then the state welfare system can be depended upon on to provide for this living standard. In fact, the majority of these pensioners are living near the poverty line. Alternatively, we can also choose to self fund our own retirement with the superannuation funds. Regrettably, the superannuation funds are not immune from the effects of the credit crisis that the global economies are facing today. Due to the tightening of credit in the financial markets, share prices on the Australian Stock Exchange (ASX) have been declining by as much as 30 percent since late last year. The ultimate result is that returns on superannuation funds have also declined.

The tightening of credit on the world’s financial markets is due to the fact that the financial system is currently being poisoned by the exotic money market instruments like Collateralised Debts Obligations (CDO’s), Mortgage Backed Securities (MBS’s). Most of us have never even heard of CDO’s, MBS’s until we are witnessing the effects of these “toxic assets”. For many of us, especially those who are nearing retirement age, the credit crisis is proving to be excruciating costly lesson. To add insult to injury, the effects of the credit crisis are not just confined to declining shares prices and superannuation funds. Local councils like the Wingecarribee Shire council have lost monies earmarked for the development of schools and road due to these “toxic assets”. The money market instruments have traditionally been regarded as prime value investments due to the fact that the fixed yield and stability of these instruments are a well balanced mix over shares and bonds.

Because globalisation has changed the way the world’s economies interact with each other, the traditional views and models of investments are no longer applicable. Even the way share prices are determined has also changed. Dividend payouts used to be the beachmark on how a share is priced. With increased competitions among the market traders, news ways of generating revenues are being adopted. Computers, algorithmic trading programs and quantitative analysis like statistical arbitrage are now leading the way how market traders generate profits. When used together, these factors become a powerful trading tool for hedge funds to milk billions of dollars in profits daily from even two decimal points differences in share prices. With the volume of shares traded by these hedge funds, they are able to cause share prices to rise or fall due to their trading methodologies. It doesn’t matter which way the market is moving as the use of statistical arbitrage allows hedge funds to cover both ends of the market movements. Their risk level is effectively zero or near zero level.

Unfortunately for many of us, we will not have the ability to capitalise on these systems on the financial markets as the cost of development and maintenance of these complex system runs into millions of dollars. Nevertheless, a former London City stockbroker, Rajeev Shah, demonstrated that with a customised algorithmic program called the ArbAlarm, one can also apply the same mathematical principles to sport arbitrage. (To gain more insight, read: “Sports Arbitrage–How to place riskless bets & create Tax free investments”). The globalised economy has opened up increased trading opportunities among the nations of the world. It has also allowed corporations to raise capital globally to fund their investment. However with the increased interaction between trading nations, globalisation have also brought with it risks that has a profound effect on our lives whether we like it or not. Our retirement nest, like many retirees in the US are finding out now, is slowly diminishing in value day by day. Perhaps it is time for us to open up our minds and look for alternative investment vehicles to fund our retirement. Maybe the only safe haven to fund our retirement is from somewhere which has no relationship with the global financial market, regardless of how unorthodox it may be.

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.

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.