Sports Arbitrage News

Over the past few days, the US financial markets has been like a scene relived from the Asian financial crisis in 1997.Even with the Federal Reserve Bank injecting $85 billions into AIG, the world largest insurer, the US stock market suffer its biggest decline since the 9/11 attacks. Apparently the move was not enough to reassure the investors that the financial market in the US was still sound. Within a single day, $700 billion of shares’ values were lost. The ailing Washington Mutual Inc shares also took a beating. The event was the fourth day of financial chaos in the US financial market, which came about when the Lehman brothers filed for bankruptcy on Monday15th September 2008.

As shares prices drop, the price of Gold and Bonds shot up indicating the shift of money to something considered less risky. Global markets were also not excused from the turmoil. As investors show their lack of confidence in the US economy and the Federal Reserve ability to stem the tide of chaos, Stock markets around the world suffered from tumbling stocks prices. Brazil’s saw a 7 % drop in its market index within a single day. Mortgages rates, which had dropped since the Government’s nationalisation of Fannie Mae and Freddie Mac, rose again removing hope that the financial crisis was almost over. The US treasury department also for the first time in history undertook to sell Bonds for the Federal Reserve in the effort to help the Federal Reserve raise funds to cope with liquidity crisis.

Because of the chaos, which continues to ensue after the bailout of AIG, the Federal Reserve committed another $180 billion in the effort to boost market confidence. Even as this article is being written, Morgan Stanley in the US and in the UK, Halifax Bank of Scotland (HBOS) are looking for potential merger partners in order to prop up their shaky situation. Central Banks around the world also conducted a joint coordinated operation to control the panic in the financial markets through out the world. The Bank of England committed 50 billions pounds into the market while the bank of Japan injected over $23.9 billion into the credit markets. The Swiss Banks, the Bank of Canada and the European Central bank also conducted similar operations. Interest Rates on US treasury Bonds dropped to a historic low while the gold price shot up in Hong Kong.

By Thursday, news of the Federal Reserve willingness to buy up the “Toxic Assets” from the financial institutions helped to rally shares prices. The Asian markets were the biggest beneficiary of the news of a possible Federal Reserve rescue package for ailing banks. The Hong Kong’s Hang Seng index shot up by 6.5% while the Nikkei when up an average of 3.8% indicating the return of Investors confidences in the market. The Chinese market fared even more impressively as the Shanghai index rocketed by 9.5% after the announcement by the Chinese Government that it will buy state owned banks shares. The Australian share market (ASX) also saw some gains after a turbulent week. The ASX 200 made a gain of 4.3% to reach 4,804. Australia’s biggest investment bank, Macquarie Group Ltd also saw a 35% rebound in its share value after taking a beating throughout the week.

The volatile movements of the financial markets have prompted behavioral experts to come up with reasons to explain the boom and crash of the market. It has been argued that hormonal factors are behind the drivers for the surge in investments as well as the flight from investments. One of the underlying foundations of economic studies is that it assumed that investors makes rationally decisions based on information gathered to evaluate the level of risks. However, this belief is now strongly being criticised as inadequate to explain the series of irrational behavior in the US financial market.

Proponents of an alternative concept argue that herd-like mentality, hormones and primitive emotions are the driving forces behind the recent volatile swings experienced by the financial markets. For example, initial investors are extremely cautious about what to invest. However, when they see their neighbor doing well from buying an asset, they will be encouraged to invest in that asset too. As the value of the asset goes up, so too will their confidence. This will fuel the conviction that this is an easy way to accumulated wealth. The reverse becomes true when the value of the asset goes down. As much as we wish to deny it, we have seen this too often around us. The recent collapse of the Australian Capital Reserve(ACR) only seek to highlight how much we are driven by animalistic instinct towards our investment decision. The lure of an additional 2% return had caused many to lose their life savings.

There is actually no such thing as easy money. The wealthy became rich because they followed a strategic plan towards investments. They have patience and they evaluate all risks and considered all sort of investment vehicles and never handling over control of their investment decision to others. Warren Buffet once said, unless you could stand watching your stock depreciating by 50% without flinching, then you are advised to stay away from the stock market. People like George Soros can remain extremely calm in turbulent markets because he uses a mathematical system call statistical arbitrage to hedge his bets against any currencies movements. This form of investment is also called “Riskless Investments”. (To know more, read “Sports Arbitrage – How to place riskless bets & create Tax free investments”).This system was developed by Morgan Stanley’s equity block trading operations during the 1980s. By exploiting the price differential of an asset behind two different market, an investor can profit whichever direction the price of an asset takes.

Technology advancement like the internet and the powerful personal computer has made statistical arbitrage an easy system to adopt using softwares like the ArbAlarm to calculate the price differential of an asset within mere seconds. People say life would be very easy of what the financial planners says is true. Follow everything what they say and in “5 steps”, you are on your way to financial freedom. They chose to ignore those external factors that are beyond your control, which can wipe out your savings with a single stroke. A good example will be the decline of returns in superannuation funds. Thousand of pensioners will not be living near the poverty line if the world works perfectly. Moreover, it is very true that your own future lies in your own hands, not in the Government nor in the hands of the so-called financial experts, which caused the credit crunch in the first place

In the US, as last-ditch efforts to find a buyer for the fourth largest Investment bank. The Lehman Brothers, in the US failed, the Global financial market took a beating as shares prices nosedived resulting in losses running up to billions. People are calling it “Meltdown Monday” as the worlds’ credit markets reeled in aftershocks from the effects of the credit crunch crisis in the US. The Federal Reserve Bank, in efforts to boost liquidity and restore market confidences are resorting to innovative measures. For the first time, the US Federal Reserve undertook to accept shares in return for short-term loans to banking institutions. It is worthy to note that the problems faced by the financial institutions in the US downplay the severity of the whole situation on the global market. Almost all the major banking institutions in the developed economies have intricate ties to the crisis in the US.

The UK first banking casualty was Northern Rock, which was nationalised by the British Government earlier this year. The British Government also in its efforts to stop the slide of the UK economy going into recession introduced fiscal stimulus measures hoping to jumpstart the economy. In addition the Bank of England recently planned to inject fifty billion pounds into the financial system in order to alleviate the liquidity situations within the financial market. However, Analysts are of the opinion that the past two weeks events are just the tip of the iceberg of the credit crunch crisis. They fear that the merger of Halifax Bank of Scotland (HBOS) may trigger a bigger run on the system in the UK. Their reasoning is that, short sellers who destabilise the market are being rewarded by the actions of the Governments pointing to the US as an example, market speculators profited from pushing down share prices of Fannie Mae and the Lehman Brothers. If the market speculators were to turn their attention to the weakening banking institutions in line like Washington Mutual, Morgan Stanley and Citibank, this will cause a chain reaction. Banks will fail like falling dominoes. According to Deutsche Bank’s George Buckley, the governments cannot stop the tide of negative undercurrent in the financial system and housing market. However, it has been argued that if the merger of HBOS and Lloyds offers some form of protections to the shareholder as well, it might as well act as a firewall to stem the flow of negative aftershocks on this side of the world. Otherwise, it could mean nationalisation of the entire banking industry by the British Government.

While the world is reeling from the effects of the crisis in the US, the Australian Government is of the opinion that the Ozzie’s economy is relatively insular from all that is happening around the world. According to Prime Minister Kevin Rudd, the Australian Reserve Bank, APRA and Treasury are performing very well and up to task in managing the credit crunch crisis in Australia. This is despite the fact that this is the worse crisis that the world has ever faced since the depression and we are in “uncharted waters”. The Prime Minister also assured that Australia is insulated from much of the global fallout from the credit crunch crisis.

However, analysts had observed that, Australia despite being in the biggest commodity boom it had ever experienced, the Australian economy is still running a current account deficit. This goes to say, Australia has been fueling its growth on debt just like the US. In addition, with the capital inflow in particularly from Japan, all these funds channeled into real estate fueling a price hike in that sector. To pay for all these, analysts are calculating that Australia will need to generate 4% of GDP to fulfill payment obligations to these foreign assets holders. Jobs cuts made by Qantas , Ford and Mitsubishi are telltale signs that the Australian economy is very much affected by the credit crunch crisis. Even the National Australia Bank has chosen to make provisions on its US mortgage debt holdings by opting for a 100% write off amounting to one billion Australian dollars. Shares in major Australian banks have also taken a beating with some dropping in value by as much as 50%. This is also one of the reasons, why the returns on superannuation funds have been declining.

The moral of the story is the banks, the governments and impartial experts like the mortgage brokers and financial planners all have their agenda. Now, in lieu of properties, shares are now been touted as being a better form of investment by numerous financial planners. According to Warren Buffet, unless one can stand watching their share holding shaved by 50% without being panicky then one should not be in the stock market. The truth of the matter is that to be a successful investor, you have to follow the footsteps of the truly successful individuals and observe how they invest. The rich have two main key differences from the average investors. One is that, they have a different mindset and they use different investments structure to achieve their investment goals. By doing so, they do not lose control over the situation. For example, George Soros uses the system of statistical arbitrage to gain an advantage over the market. With this system, whether the market is falling or rising, he is able to reap a positive return on his hedge bets. In layman’s language, this is called “Riskless Investment”. (To know more read, “Sports Arbitrage – How to place riskless bets & create Tax free investments” by Former City stockbroker Rajeev Shah).

However, unless one has billions to play around with on the capital market like George Soros, one should opt for the smaller and lesser-known arbitrage market known as sport arbitrage. The present financial market is too complicated for the average investors and there are numerous factors, which one has to take into considerations before making an investment decision. The sport arbitrage market is based upon the same mathematical principles as those used in the hedge market with only one main difference, the volume of trade done daily. Because it is smaller and can be monitored easily using softwares like the ArbAlarm, this market allows the average investor to profit modestly with careful planning and patience. Furthermore, the capital gains made from these form of investment are not subjected to tax according to the Australian Tax Office. (See  Australian Tax ruling TR2004/DR17).

The Government had said one thing regarding the financial crisis and the experts are predicting another outcome. Whoever is correct now does not matter, as those who are suffering are the public in general. The UK and US are using the taxpayers money to bail out the corporate world. In due time, Australia might be in the same uncomfortable position that so many foreign governments are finding themselves in. In order to be ahead of the situation, one has to take responsibility for their own actions. The government certainly thinks so as they are not doing much to help pensioners who are living close to the poverty line. The decline in the superannuation funds has also force more people seeking to be on the aged pension system. Though we may be in “uncharted waters now”, it does not mean that we cannot chart our own direction in life by seeking alternative investment vehicle to secure our future