Why you shouldn't bet on internet gambling stocks
Despite the decision by BetonSports to cease trading in the US in the face of legal challenges, shareholders in other online gamblers seem remarkably sanguine. We don't share their optimism.
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It seems that the legal 'grey area' of US internet gambling is a lot more black and white than the sector's components would have liked us to believe.
Last week BetonSports, which recently fired former chief executive David Carruthers after he was arrested in the US on various gambling-related charges, shut down all its US websites.
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The company - and shareholders - have been left with its Asian operations. The trouble is that the US businesses accounted for around 80% of the groups revenues. Analysts described it as "a worst-case scenario" for the company.
But shareholders in rival companies seem remarkably sanguine about the news of the US shutdown, hopeful that its a company-specific problem.
We don't share their optimism
Judging by the reaction to BetonSports's US closure, you'd have thought that no one had ever warned investors that gambling in the US might be a problem. The Observer reports that shareholders in BetonSports are "considering taking legal action against the company's advisers - Evolution Securities and Baker Tillyinstitutional investors are unhappy that the history of Betonsports founder Gary Kaplan was not made clear in the company's offer document."
Mr Kaplan, who has reportedly fled to Israel, is also wanted by the US authorities. He previously had gambling-related run-ins with the US in 1993 and has a somewhat colourful past.
It's hard to have much sympathy with the institutions involved. The founder of BetonSports may indeed have a shady past. But the reality is that all of the risks that lead to this situation were made clear on the prospectus. The selling document for the initial public offering even stated: 'At least some of the group's activities are illegal under US law.'
We ourselves mentioned at the time of the PartyGaming float that investors might be better to avoid the company given the grey area' status of gambling in the US. In fact, we suggested that those with a gambling streak might be better off buying Kazakh copper miner Kazakhmys, which floated around about the same time, and has seen its shares more than double in that time.
But it's not difficult to understand why investors are panicking. Given that the BetonSports still has to settle up with betting account holders in the US, it may find its Asian businesses under threat. Greg Feehely at Altium told The Independent: 'This is pretty much a worst-case scenario for shareholders. The group's Asian-facing businesses may need to be sold to settle all outstanding liabilities leaving little or nothing for equity investors.'
And yet, investors elsewhere in the sector seem to be taking the rather optimistic line that BetonSports is a unique case.
This is a mistake. When the original indictments of David Carruthers and others were released, US attorney Catherine L. Hanaway said: "This indictment is but one step in a series of actions designed to punish and seize the profits of individuals who disregard federal and state laws."
The US Department of Justice has always maintained that though the 1961 Wire Act (which bans phone betting on sporting events) did not anticipate the internet, it does cover it. And last month the US House of Representatives passed a bill extending the Wire Act to all forms of online gambling - so that includes poker and blackjack and all the other gray areas. The act is now being considered by the US Senate - if it and the President agree, it will create the Internet Gambling Prohibition and Enforcement Act.
As US newspaper Poker Player puts it "if the bill becomes law, online poker will be changed forever."
To be fair, the bill is seen as "a very low priority" and may well never come before the Senate. But as the Daily Mail's Lucy Farndon points out, "there is no clarity about how the Bush regime plans to tackle internet gambling sites, but it will not stop here. Even without a change in the law, many US companies have been leaned on and persuaded not to deal with the gambling firms."
Now more than ever, the Bush administration needs holier-than-thou distractions to keep its core voters happy - and a bit of old-fashioned prohibition might be just the ticket.
The apathy among gambling sector investors has a poor track record. No one expected David Carruthers to be arrested. And yet now that the unthinkable has happened, they continue to hope that the others companies in the sector will be OK.
Refusing to accept reality and chasing a losing streak is a classic sign of problem gambling. Anyone still backing online gambling companies with exposure to the US should understand that the investment is not much safer than sticking your money on black or red and crossing your fingers.
Turning to the stock markets
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After a strong start, the FTSE 100 steadily worsened throughout Friday, closing just 3 points down at 5,820. Tesco was the day's biggest riser following news of the supermarket giant's plans to launch a homewares catalogue. Fund manager Schroders was the biggest faller of the day, down nearly 10% on reports that assets under management had slipped during the first half. The index was down by over 1% over the week as a whole due to Thursday's sell-off. For a full market report, see: London market close (/file/16725/london-close-footsie-ends-barely-changed.html)
In Europe, strong earnings boosted stocks, with the German Dax-30 up 14 points to 5,644, prompted by a doubling of profits for steel maker Thyssengrup and better-than-expected record profits for recruitment firm Adecco. The Paris Cac-40 also closed up 21 points at 4,998.
On Wall Street, stocks closed lower as investors expressed concern over the likelihood of an economic slowdown. The Dow Jones and S&P 500 both ended their three-week winning streaks, closing down 36 points at 11,088 and 5 points at 1,266 respectively. The Nasdaq also fell 14 points to 2,057.
In Asia, the Nikkei 225 closed 292 points higher at 15,857, despite a technical glitch knocking out pricing data for a spell during the afternoon session.
The price of crude oil was down over 1% in New York this morning, trading at $73.74 a barrel. In London, brent spot was also trading lower, at $75.07 a barrel.
After a day of volatile trading, spot gold was at $632.20 late on Friday in New York.
In London this morning, shares in builder Interserve plunged 19% on news that the company would have to write down its assets following the discovery of accounting errors. The share price fall has wiped £60m off Interserve's market value. Elsewhere, US billionaire Randolph D. Lerner had his £62.6bn bid for football team Aston Villa accepted.
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Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: FREE daily Money Morning email.
After a strong start, the FTSE 100 steadily worsened throughout Friday, closing just 3 points down at 5,820. Tesco was the day's biggest riser following news of the supermarket giant's plans to launch a homewares catalogue. Fund manager Schroders was the biggest faller of the day, down nearly 10% on reports that assets under management had slipped during the first half. The index was down by over 1% over the week as a whole due to Thursday's sell-off. For a full market report, see: London market close (/file/16725/london-close-footsie-ends-barely-changed.html)
In Europe, strong earnings boosted stocks, with the German Dax-30 up 14 points to 5,644, prompted by a doubling of profits for steel maker Thyssengrup and better-than-expected record profits for recruitment firm Adecco. The Paris Cac-40 also closed up 21 points at 4,998.
On Wall Street, stocks closed lower as investors expressed concern over the likelihood of an economic slowdown. The Dow Jones and S&P 500 both ended their three-week winning streaks, closing down 36 points at 11,088 and 5 points at 1,266 respectively. The Nasdaq also fell 14 points to 2,057.
In Asia, the Nikkei 225 closed 292 points higher at 15,857, despite a technical glitch knocking out pricing data for a spell during the afternoon session.
The price of crude oil was down over 1% in New York this morning, trading at $73.74 a barrel. In London, brent spot was also trading lower, at $75.07 a barrel.
After a day of volatile trading, spot gold was at $632.20 late on Friday in New York.
In London this morning, shares in builder Interserve plunged 19% on news that the company would have to write down its assets following the discovery of accounting errors. The share price fall has wiped £60m off Interserve's market value. Elsewhere, US billionaire Randolph D. Lerner had his £62.6bn bid for football team Aston Villa accepted.
And our two recommended articles for today...
The global economic downturn, as seen from Marrakech
- Conflict in the Middle East. Interest rate hikes in the US and Europe. And a slowing tourist trade in Marrakech. In our globalised economy, a downturn will be felt throughout the world, and those who eke out a living on the back of rising affluence elsewhere are already beginning to feel the pinch. To find out what Charles Stanley's Jeremy Batstone thinks the future holds for the businessmen and women of Morocco - and the rest of the world economy - see: The global economic downturn, as seen from Marrakech
Why the US credit machine is running amok
- Low rates of capital investment and scant domestic saving have given a distorted impression of high growth rates in the US and other English-speaking countries, says Dr Kurt Richebcher for the Daily Reckoning. But low rates of saving and a glut of cheap credit have stored up problems for the economy. And as the US housing bubble threatens to burst, what will happen to Americans who have been borrowing against their house to support their spending? To find out how the US got itself into this state - and whether a recession can be avoided - read: Why the US credit machine is running amok
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
