Sunday, February 13, 2011

Super Bowl Derivatives Results Can Teach About Second Supply Cycle Impacts

  • Sports betting trends can provide investment insight
  • Derivatives acceptable to US

Betting on The Game

For Americans, the most watched television this year was the Super Bowl, a championship football game between the Green Bay Packers from Green Bay, Wisconsin and the Pittsburgh Steelers from Pennsylvania. The game was watched by an estimated 111 million viewers. This impressive number is about 1/6th of the audience for the World Cup. As much of the interest in the World Cup started in English-speaking countries, where waging and bookmaking are established traditions, betting sizeable amounts of money is normal.

While Americans bet substantial amounts of money informally in various office pools on sports, (including the results of the Super Bowl game), the only state that allows sports betting on team results is Nevada. Many Americans view the use of derivatives for stocks and bonds with disfavor, however derivatives appear to be acceptable in the sports gaming world. My local newspaper informed me that if I chose, I could bet on at least 16 different aspects of the game, including the length of time the singer of the National Anthem held the last note, as well as the time of the first successful pass by each quarterback. I am reasonably sure as a client-focused industry, that almost any sort of bet at given odds would have been accepted. The people who book all of these myriad of bets are well-schooled odds-makers that set the betting spreads narrow enough to entice the betters and wide enough to make money. As with other analysts, the odds-makers analyze all the available past records and current available information and rumors. (One can see why I was intrigued with becoming a bookmaker as a kid growing up in an era when neither individuals nor instruments of the state were allowed to accept bets. Thus, I had to accept second best and join the investment community, where odds-making and spreads were common practices.)

What Happened in 2011?

The same local newspaper informed me that while some $ 90 million was bet with the sports books on the Super Bowl game, it was not a great business success for them. As good analysts and with the results that did not surprise, I suspect that the odds-makers got their spreads right. What may have surprised them was that the volume of betting was not up to the expected levels, thus their calculations of overhead absorption were faulty. The avid fans of the Green Bay Packers were too small in number compared to those of Manchester United in the UK or any of the major eastern National Football League teams in the US. I suspect that the betting spreads will widen for the 2012 game, if there is one.* Whether the larger spreads will detract from the level of the betting is not known, but is probably unlikely. What is likely, based on historical odds, is that the return on the winning bet will not be as good as this year’s. It is this change in payout odds that is a change factor in the second supply level that was the focus in last week’s blog .

* For many years I have had the pleasure and honor to advise the defined contribution plans for the National Football League/ Players Association. As almost every American sports fan knows, the current collective bargaining agreement ends on March 3rd, 2011. If a strike/lock-out occurs, all of the individual player contracts would end. What the teams would then do is not known, but it is possible (but highly unlikely) that no Super Bowl game will be played in 2012. I wonder what odds the Las Vegas Sports books will be on that outcome or whether the UK bookmakers will offer a wagering facility on whether there will be a Super Bowl in 2012.

Derivatives are OK

All of the above suggests that many Americans accept the use of derivatives if they understand the terms of the trade (which may not have been clear to them in the financial community’s instruments).

Applying the Second Supply Cycle Concerns to Gold

In response to last week's blog, one member of our blog community questioned whether I thought the gold market was real and that a collapse is inevitable. The simple answer is no to both questions. However, the wise investor in gold, (and there are many), should understand that there are two levels of supply and demand for gold (and other investments as well). I believe the fundamental value of gold is as a contra asset to the world’s paper currency, but principally to the US dollar. The fundamental long term trend in the price of gold will pivot off the supply of US dollars in global circulation and the purchasing power of those dollars. These considerations will push the first level of demand, where supply will be driven by production which is quite low and the dis-hoarding from central banks and private investors. The second element of supply includes the various ways one can access the gold price-coins, (conversion cost to bullion) options and futures (with counter party risks), exchange traded funds holding gold and/or gold mining stocks with production and political risks among other considerations.

I can perceive an unexpected increase in margin rates, tax changes, and transportation or custodian difficulties exciting current owners to dump their holdings. This would be a situation where, at least on a temporary basis, the second source of supply could overcome the reasonable price level created by the primary demand.

Dear Reader: Nothing in this world is absolutely inevitable, with the exception of death and taxes.

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