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It’s not every day you see a FTSE 100 company more than halve in value during a single trading session.
But then, it’s not every day that you see a FTSE 100 company lose nearly 80% of its customers in a single day.
The unlucky stock was online poker group PartyGaming. The company is set to close its US operations, which account for about 77% of its revenues. The move comes after a bill making it illegal for banks and credit card companies to take payments destined for internet gambling companies was pushed through by US lawmakers.
President Bush has yet to sign off on the bill, but it seems almost certain to be signed into law in the next few weeks. PartyGaming shares closed down 58%.
They say you should buy when there’s blood in the streets – and the online gambling sector is positively awash. But is it really a smart move yet?
The US anti-internet gambling bill was driven through by tying it to another law about security at US ports. Its sponsor, Senator Bill Frist said: ‘Gambling is a serious addiction that undermines the family, dashes dreams and frays the fabric of society.’
We’re sure Senator Frist has the nation’s good character at the heart of his interests. We look forward to his bill proposing the demolition of Las Vegas, the sinking of riverboats off the coast of Louisiana (strangely enough, another state ardently trying to arrest non-American gambling company executives), and the banning of all lotteries and horse-racing within the country.
But putting aside rank hypocrisy – what does it all mean? No one really expected the anti-internet gambling bill to be pushed through by the US. But then gambling sector analysts have been unduly optimistic about a lot of things.
And not unlike your average gambling addict, hope springs eternal in the heart of the industry, in the face of all the odds. The US gambling industry believes there are plenty of loopholes in the bill that will enable them to launch their own sites.
According to BusinessWeek, the Bill does not explicitly ban betting on casino-type games, like poker and blackjack. It bars financial groups from accepting ‘illegal’ bets – but it doesn’t say which forms of online gambling are actually illegal.
So the casino industry lobby, the American Gaming Association (AGA), has taken a neutral stance towards the bill. And small wonder – another bill was introduced in May that would look at whether online gaming sites based in the US could be regulated. These sites would, of course, be run by US companies, and it has the full backing of the AGA.
As for foreign gambling groups, other analysts are arguing that the bill is unenforceable. They say that all that will now happen is that US gamblers will avoid using credit cards to pay for their gambling, and use internet payment services based outside the US.
But all of this is clutching at straws. The US government’s intentions seem clear, even if its language isn’t – a not uncommon problem for the current administration. Senator Frist says: “For me… the bottom line is simple: internet gambling is illegal.”
Whether this legislation is toothless or not, is irrelevant. The people who run these companies are not hardened criminals. Few non-US gaming companies will be prepared to take the risk of operating in the US – especially not out of the UK, where the Government is perfectly happy to hand over British business people at the say-so of a US court. The merest hint that they might end up like poor David Carruthers of Betonsports is more than enough for most middle-aged company directors to err on the side of caution – and quite right too, we may add.
And the same goes for online payment services – how many of their chief executives will be content to avoid the US for the rest of their lives, just to scrape some business from gambling addicts in southern states? Far easier to simply stop taking money from US citizens.
Put it this way – if people like Senator Frist decide to wind the clock all the way back to the good old days of Prohibition, would it stop people from drinking? Of course not – it didn‘t work then and it wouldn‘t work now. But it’s also highly unlikely that any of the drinks companies in the US would survive in their current form.
And as the Evening Standard points out, that’s the likely fate of online gambling firms. Investment bankers are now “smacking their lips at the prospect that a tide of consolidation could now sweep through the industry.” One source states: “Take the risk associated with operating in the US out of the equation and these companies look like a solid growth bet.”
This is a good point. The trouble is, the US isn’t the only country with a strong line in rank hypocrisy and protectionism. Internet gambling companies have also experienced regulatory problems in both France and Germany. And with the success of the US campaign against offshore gambling, who’s to say that other countries won’t decide to take a harder line too?
With the costs of shutting down US operations uncertain, and the threat of regulation in other markets, we reckon it’s still too early to be bargain-hunting in this sector. As John Foley on Breakingviews puts it, “the online gambling sector looks – for the foreseeable future – like a busted flush.”
Turning to the wider markets…
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The FTSE 100 closed 3 points lower, at 5,957, after a volatile session marked by losses in the online gambling sector and weakness among insurers. Partygaming was the biggest blue-chip casualty of the day, plunging nearly 58%. However, utilities and miners performed strongly. For a full market report, see: London market close
Across the Channel, the major indices were also down. The Paris CAC-40 ended the day 6 points lower, at 5,243, whilst the Frankfurt DAX-30 was dragged 4 points lower by a weak automotive sector, ending the day at 5,243.
On Wall Street, the Dow Jones pulled back from record highs yet again following disappointing results from retail giant Wal-Mart, ending the day 3 points lower at 11,670. The Nasdaq ended the day 20 points lower, at 2,237 and the S&P 500 was 4 points lower, at 1,331.
In Asia, the Nikkei closed 12 points lower, at 16,242.
The price of oil was lower again this morning, with crude last trading at $60.97 and Brent spot at $59.29.
Spot gold also fell overnight, to $596.10 from $597.50 in New York late yesterday.
And in London this morning, Britain’s biggest supermarket Tesco announced a 23% jump in first-half pre-tax profit, beating expectations. The retailer had cut prices in order to maintain market share and expanded its non-food business. Tesco shares had risen by as much as 3.75p this morning.
And our two recommended articles for today…
Why oil is still a long-term buy
– Unless you’re a trader, says Merryn Somerset-Webb, it often pays to ignore volatility in markets, especially when it comes to oil. To find out why you should pay attention to long-term commodities trends, rather than all the short-term noise, read: Why oil is still a long-term buy
What ‘Deal or No Deal’ can tell us about hedge funds
– As popular gameshow ‘Deal or No Deal’ shows, individuals will make extraordinarily risky bets with other people’s money if they stand to make big gains. The same is true of money managers. To find out why hedge fund managers are taking ever-greater risks – and what the consequences are likely to be – see: What ‘Deal or No Deal’ can tell us about hedge funds