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You're at a fruit market. But, instead of just being able to buy apples at this fruit market, you can also sell fruit.
You're not a farmer, so you come to the market to buy some apples and you see two fruit stands. Fruit Stand A on the left
is buying and selling apples at 50 cents apiece. However, Fruit Stand B on the right is buying and selling apples at 53 cents
apiece. People are buying and selling apples at these two stands all the time, and the price at a stand could change at any
moment. But, while you're there, apples are 50 cents and 53 cents, respectively.
You're a smart person, and you quickly
realize that you can buy apples from Stand A and then sell them across the street to Stand B and make a 3-cent profit. But
you have to do it now; you can't wait. So you buy all the apples at Stand A and then run to sell them all to Stand B.
Congratulations.
You've committed fruit-stand arbitrage.
Arbitrage is exactly that: the selling of the same item between two different
markets to make a profit off the mathematical differences in price. However, it's not apples that are traded--the goods in
question are usually stocks, currencies and other securities. Arbitrage happens when you get a stock, usually a common one
like General Electric that's traded on multiple markets (Japan, Hong Kong, U.S., etc¿). The stock is usually worth within
fractions of a penny the same on each of those markets. However, there are often some minor variations.
People who
participate in arbitrage take advantage of these variations--and make a ton of money doing it. As seen in the fruit stand
example, you can make a "riskless profit" from buying and selling apples between different markets.
There are some
big hedge funds that make almost all their money off arbitrage. But, despite this simple example, arbitrage is mathematically
complex--and involves a good portion of risk if you don't know what you're doing. You probably won't be able to participate
in arbitrage directly, but you can always invest in a mutual fund that does.
Home / Markets
Thursday, April 24, 2008
Uptick
Good Day for Wall Street: Oil Dives, Financials Lead
Matt Egan
FOXBusiness
Wall Street reached the finish line on Thursday with solid gains as the market appreciated tumbling oil prices, a comeback
for the U.S. dollar and a big day for financial stocks.
Today's Market
The Dow Jones Industrial Average rose 85.73 points, or 0.67% to 12848.95, the Standard & Poor’s 500 index gained 8.89 points, or 0.64% to 1388.82 and the Nasdaq Composite Index picked up 23.71 points, or 0.99%, to 2428.92. The consumer-friendly Fox 50 rose 4.46 points, or 0.45%, to 991.94.
General Motors (GM) jumped 5.6% to lead the blue-chip index higher on Thursday, boosted by news of a delay in a strike at one of its factories. Also, financial companies like AIG (AIG) and Citigroup (C) soared, helping to offset declines in energy stocks. Meanwhile, tech stocks like Apple (AAPL) and Qualcomm (QCOM) overcame an initial decline to push the Nasdaq Composite higher than the broader marketWall Street wasn't given exclusively positive news on Thursday, as new data showed home sales plunged in March to a 17-year low, durable goods order declined unexpectedly in March and Starbucks (SBUX) issued a gloomy earnings forecast.
Much of the strength on Thursday stemmed from
the financial sector, led by a 7.1% jump from Merrill Lynch (MER). Buying in Merrill
was fueled by Chief Executive John Thain, who assured shareholders the firm is sufficiently capitalized and has no plans to
sell its stake in Bloomberg or spin off its retail brokerage unit, according to Dow Jones Newswires.
While the
broader market cheered the big decrease in crude oil prices, energy stocks like ExxonMobil
(XOM) and Chevron (CVX) fell on the new prices. After nearly hitting $120 a
barrel, oil futures dipped below $116 a barrel in New York on the strengthening U.S. dollar. Oil ended the day down $2.24
at $116.06 a barrel.
The steep drop in oil prices boosted airline stocks across the board. Shares of Continental (CAL) and Delta (DAL) jumped 10% each as fears about fuel
costs were allayed for the time being.
The market was also greeted with economic reports that gave a mixed picture.
The Department of Labor revealed that weekly jobless claims unexpectedly declined last week 33,000 to 342,000. While the latest
jobless report was a positive development, initial claims are still up 11% year-to-date amid a slowing economy. The data helped
bring the dollar to its strongest level against of basket of currencies since April 3.
On the other hand, the Commerce Department gave a much more sobering economic outlook with a decline in durable goods orders and ugly home sales figures. The government said new home sales slid 8.5% in March to 526,000 -- the lowest level since Oct. 1991. Wall Street had only been bracing for a 1.7% decline. Thursday's report also showed median prices for new homes declined 13.3% to $227,600 in March, while supplies of new homes reached a 27-year high of 11 months. Shares of homebuilders like Lennar (LEN) and KB Home (KBH) defied the latest data and rallied across the board.
General Motors (GM) jumped after The Wall Street Journal reported the United Auto Workers union is pushing its strike deadline back at a Chevy Malibu plant. The strike was set for later on Thursday but has been pushed back until Friday morning, the newspaper reported, citing a UAW memo.
Corporate Movers
Microsoft (MSFT)
disappointed shareholders after Thursday's closing bell by issuing a fiscal fourth-quarter outlook below Wall Street's view
and third-quarter revenue below estimates. However, the Seattle-based software giant did beat the Street with a profit of
47 cents per share and released fiscal-2009 guidance that was better-than-expected.
American Express (AXP) gained in after-hours trading after saying it earned 84 cents
per share in the first quarter on $7.19 billion in revenue, topping Wall Street estimates. However, AmEx said it was forced
to increase its loan loss provisions by 48% amid the weakening economy.
3M Company
(MMM), the Dow member which makes everything from road lighting to Post-Its, revealed a
28% decline in first-quarter profit but still beat the Street. 3M's earnings of $1.38 a share was 3 cents higher than estimates
from Thomson Reuters while sales rose 9% to $6.46 billion. A year ago 3M's profit was boosted by the sale of a European pharmaceutical
business. Shares of 3M fell 1.9%.
Amazon.com
(AMZN) slid 4.7% even though it beat the Street with a 37% jump in revenue and a
profit of $143 million in the first period. Amazon boosted its 2008 revenue guidance above the Street's view. However, the
online retailer's margins tightened in the first quarter, worrying shareholders.
Ford Motor Co. (F) jumped 11.7% after the auto maker unexpectedly posted a $100 million first-quarter profit, as the company slashed costs and had strong profits in Europe. Ford's adjusted-profit was 20 cents per share, easily topping estimates from Thomson Reuters for a loss of 16 cents.
Wendy’s (WEN) plans to be acquired by Arby’s owner Triarc Companies (TRY) in an all-stock deal valued at $2.34 billion. The offer price of $26.78 is a 6% premium of Wendy’s closing price on Wednesday of $25.32. Wendy’s had previously resisted at least two earlier offers from Triarc. Also, Wendy’s posted a first-quarter profit of 10 cents per share, 7 cents below estimates.
Starbucks (SBUX) plunged 11% to its lowest
level since Dec. 2003 after it warned of worse-than-expected earnings in the second quarter and also lowered its full-year
guidance. The Seattle-based coffee giant said it has been hurt by the slowing economy, especially in California and Florida,
which account for 32% of Starbucks's U.S. retail revenue.
Apple (AAPL) beat the Street with its quarterly earnings, revenue and pretty
much every other metric available but did give the market pause with its conservative third-quarter guidance. The tech giant's
revenue soared 43% and its profit gained 36%, fueled by a better-than-expected 2.3 million Mac computers sold. However, Apple
said it sees third-quarter earnings of $1 per share, 10 cents below estimates from Thomson Reuters.
ConocoPhillips (COP) easily beat the Street
with first-quarter earnings of $2.62 per share, 20 cents above estimates. Revenue in the period soared to $54.9 billion, compared
to $41.3 billion a year ago. The energy giant also said it sees stock buybacks of up to $3 billion in the second quarter.
Bristol-Myers
Squibb (BMY) rose 3.6% after it posted a decline in first-quarter profit but released
adjusted-earnings above the Street's expectations. The drug maker said its profit was $661 million, or 33 cents a share, compared
$690 million, or 35 cents a share, a year earlier. However, excluding one-time charges, earnings for the period were 42 cents
per share, a penny higher than estimates.
Motorola (MOT) tumbled Thursday after revealing a wider-than-expected
loss in the first quarter on sliding phone sales. The company lost $194 million, or 9 cents a share, 2 cents shy of estimates
from Thomson Reuters. Handset sales fell 39% in the first quarter, extending its two-year slump. Earlier this year Motorola
announced plans to split itself into two separate publicly traded companies, walling off the cell phone unit, which hasn't
been able to recover since the once-popular Razr's sales slumped.
The Commerce Department said durable goods orders surprisingly declined 0.3% last month. The results were negative especially considering Wall Street expected a 0.6% increase. On the other hand, durable goods excluding transportation orders rose by a better-than-expected 1.5% in March. Durable goods, which are products like refrigerators that have a lifespan of three years or longer, are considered a good indicator of the economy's direction.
World Markets
European markets ended mixed. The Dow Jones Euro Stoxx 50, a index tracking the 50 largest companies of Europe, fell 1.59 points, or 0.04%, to
3761.96. The FTSE 100, London's benchmark index, declined 32.90 points, or 0.54%,
to 6050.70.
France's CAC 40 Index dropped 15.10 points, or 0.31%, to 4929.55
and Germany's DAX picked up 26.29, or 0.39%, to 6821.32.
Japan's Nikkei 225 Index fell 38.29 points, or 0.28%, to 13540.87. Hong Kong's Hang
Seng Index gained 391.54, or 1.55%, to 25680.78.
Market Snapshot
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