Vern Hayden, president of Hayden Financial Group LLC, and Mark Dow, a portfolio manager at Pharo Management LLC, talk with Bloomberg’s Jon Erlichman about Dubai’s credit crisis and the possible impact on investor strategy.
Dubai’s man-made islands are stunning technological achievements. But they may end up being the poster-children for this era’s reckless real estate ventures. These projects are turning out to play a big role in the ongoing debt crisis in Dubai.
And here’s one of the three palm tree islands, where you can see construction underway:
I remember being struck by the scale of the project while watching a Discovery Channel documentary. What a cool concept. Unfortunately, it looks like reality is catching up to this pipe dream.
Recent revelations show that the islands’ parent company, Nakheel PJSC, is in trouble. Their attempt to delay debt payments sparked a global selloff on 11/27. Fears of a debt crisis in Dubai spreading to other emerging markets (EM) roiled stocks.
Investors collectively paused the day after Thanksgiving, “Wait a sec… I thought emerging markets were going to be the engine driving us out of this mess… Now their bubbles are popping? Uhhh-Ohhh.”
Bloomberg provides a detailed example of island building gone-wrong:
Samsung C&T Corp., builder of the world’s tallest tower in Dubai, said it stopped work on a $350 million bridge in the city after a unit of Dubai World halted payments.
Construction of the half-finished bridge, to the man-made Palm Jebel Ali island, was suspended earlier this month after Nakheel PJSC made no payments for about two months, Cho Keun Ho, a spokesman for the Seoul-based builder, said today. Calls to Nakheel’s spokeswoman Anna McGovern went unanswered.
Not all emerging markets have the same debt issues Dubai does, of course. But there are tons of risky investments lurking out there, and they’re not just in EM (hint – many are hidden off US bank’s balance sheets).
Some are speculating that Dubai’s debt problems will be a catalyst, sparking major selloffs worldwide, particularly in EM. If so, I would think those countries with stronger balance sheets, like China, will fare better than those with high debt loads. That said, I am considering reducing my personal EM holdings, but haven’t done so yet.
Subprime Dubai
More Government Data Fun:
Unemployment Claims Were Not Down
Why I Am Optimistic About the Future
The Millennium Wave
New York and My Own Psychic Income
I admit that of late my writings have had a rather dark tone. There are certainly a number of severe long-term problems that we must deal with, and they’re going to serve up a lot of economic pain. But the Thanksgiving weekend with the kids has me in a reflective mood, and one that has only served to underscore my long-term optimism. This week we look at why 2007 will not be the good old days we will yearn for in 20 years, after we briefly visit Dubai and the latest unemployment numbers.
Subprime Dubai
While we in the US spent our Thursday eating turkey and watching football, the rest of the world’s markets went into a downward spiral as Dubai announced it wanted its lenders to give the country a six-month moratorium on some $80-90 billion in debt. This has the potential to be the largest sovereign debt default since Argentina. Somehow this was a shocking development. (How can too much debt and real estate be a problem?) And by markets I mean gold, commodities, oil, stocks, and risk assets everywhere. They all went down. Today the US markets experienced their own sell-off, though not as deeply as the rest of the world.
As I wrote last Friday, the world is now negatively correlated with the dollar, and as money went into the dollar and US treasuries, everything else went down. Vietnam devalues, Greece is looking increasingly risky, Russia wants to devalue some more, the world is still deleveraging, etc. Is this another repeat of 1998, when Russia and the Asian debt crisis tanked the markets?
To get an answer, let’s look at some facts about Dubai. It is one of the Arab Emirates; but unlike its neighbor Abu Dhabi, oil is only about 6% of the economy. While the foundations of the country were built with oil, the country has diversified into finance, real estate, tourism, trading, and manufacturing. It is a small country, with a little under 1.5 million residents, but…
When the European Central Bank’s Jean-Claude Trichet said last week that certain sinners on the edges of the eurozone were "very close to losing their credibility", everybody knew he meant Greece.
The interest spread between 10-year Greek bonds and German bunds has jumped to 178 basis points. Greek debt has decoupled from Italian debt. Athens can no longer hide behind others in EMU’s soft South.
"As far as the bond vigilantes are concerned, the Bat-Signal is up for Greece," said Francesco Garzarelli in a Goldman Sachs client note, Tremors at the EMU Periphery.
The newly-elected Hellenic Socialists (PASOK) of George Papandreou confess that the budget deficit will be more than 12pc of GDP this year, four times the original claim of the last lot. After campaigning on extra spending, it will have to do the exact opposite. "We need to save the country from bankruptcy," he said.
Good luck. Communist-led shipyard workers have already clashed violently with police. Some 200 anarchists were arrested in Athens last week after they torched streets of cars in a tear gas battle.
By now you have heard that Dubai World, the investment company, has asked its creditors for a six-month delay in repaying its debt (see articles in links). This is what is commonly referred to as default. Now many are wondering if Dubai the country is on the verge of default and asking who is most exposed. Markets are selling off in a major way. While this situation has been building for sometime, the announcement was an unexpected shock – an exogenous event – which has some talking about Creditanstalt and 1931.
Dubai is not an oil-rich country. It certainly has the greatest population amongst the United Arab Emirates, but oil and natural gas provide only 6% of income to the country. The country’s oil is expected to be depleted in as little as 20 years. Dubai is now much more dependent on its services like sporting events, trade and entrepôt services, and financial services and especially on property. So, when the Dubai property bubble went spectacularly bust in the credit crisis, Abu Dhabi, a UAE emirate with considerably more oil revenue, stepped into the breech in February.
Even before the Abu Dhabi bailout, I thought the Dubai property boom and bust was a marvel to watch. In January, I commented:
I am fascinated by Dubai. They don’t have oil and they massively overbuilt. I would very much like to keep tabs on this economy because its position in the Middle East makes it a symbol for much of the interconnected financial bubble-like world we have just exited.
I think of the events in Dubai as having a bit of the butterfly effect to it – with everything…
Kian Abouhossein at J.P. Morgan delivers some excellent insight into the Dubai crisis. The wealthy UAE will be able to easily bail out Dubai if need be, this time. It just might not be so optimistic to do so in the future.
We are less concerned for global banks about Dubai World’s direct $59bn outstanding debt exposure with $4.3bn due to mature in Dec-09 and a further $4.9bn in 1Q10, considering “only” $13bn of syndicated loans across global banking sector based on Dealogic data. Assuming a 10% “hold” strategy, the most exposed banks would be RBS with $0.23bn, DB and CS with $0.17bn each.
…
The view from our MENA team is that this event reflects cash flow challenges rather than refinancing ability. They believe that obligations on Dubai World and its property unit Nakheel PJSC are likely to be fulfilled at the new May 2010 earliest repayment date, and that Dubai should be eventually be able to fulfill its debt obligations maturing in the short-term ($4bn in Dec-09, relating to Dubai World, and $9 to $10 in 2010) with continued Abu Dhabi support. Abu Dhabi is strong financially with fiscal and current account surpluses, ~$150bn in FX reserves and a ~$300bn sovereign wealth fund. However it seems that Abu Dhabi will no longer be happy to underwrite all debt, and rather will differentiate more strongly between supporting Dubai’s strategically important assets (such as DEWA, and Dubai Ports), and the non strategic assets – hence the concurrent timing of the Dubai World debt restructure and the Abu Dhabi underwritten government of Dubai debt raising.
Here’s one rough measure of relative bank exposure to Dubai, based on Dubai World syndicated loans since 2007. Overall, JP Morgan believes the exposures are relatively small compared with the major banks involved.
Here’s probably a better estimate of relative exposure, by loans made to the UAE as a whole. The amount of direct loan exposure to Dubai specifically, within this UAE-wide figure, are apparently very difficult to know.
Although details are still emerging, the Dubai news will prove to be more company specific than Lehman Bros. was. I don’t believe the news is a reason for investors to panic as loan losses from a potential Dubai default would represent a meager portion of total banking assets. Contagion does not appear to be a large concern either, but perhaps more important is the reminder that Dubai sends – these problems of massive global debts are far from being settled despite all the v-shaped economic recovery chatter. Dubai’s standstill is a reminder that real estate markets around the world remain unhealthy and susceptible to sudden and dramatic downturns. Whether this is a minor tremor in commercial real estate (and potentially a sign of impending aftershocks in residential) has yet to be seen, but make no doubt – we are not out of the credit crisis woods.
This does little to change my cautious investment outlook. We have been almost entirely cash since selling into the rally over a month ago at S&P1,100 and remain cautious on markets heading into the year-end. This confirms my belief that the recovery is very fragile and the road ahead is likely to be difficult primarily due to the fact that our cancer (debt) is still very much alive. The governments in the U.S. and abroad have done little to attack this problem. Unfortunately, I believe this is unlikely to be the last of these reminders in the coming years. These debts are likely to plague the economy until we find leaders that are courageous enough to stand up to the banks and the fiscally irresponsible participants of the global economy.
Thanks to Zero Hedge for the Barclays piece. It’s worth a quick read.
Asian stock markets followed yesterday’s European stock markets and US futures markets straight down.
Yesterday, European markets saw their biggest one-day losses since March. Dow Jones Industrial Average futures were off 187 points.Everyone is talking about the effects of Dubai World asking creditors for an extension on its debt.
So here’s a quick whip around what happened when Asia woke up to its first day of trading following the Dubai World news.
Fears of a dangerous new phase in the economic crisis swept around the globe yesterday as traders responded to the shock announcement that a debt-laden Dubai state corporation was unable to meet its interest bill.
Shares plunged, weak currencies were battered and more than £14 billion was wiped from the value of British banks on fears that they would be left nursing new losses.
Last night after a 10 hour drive I was up at 5:00AM watching the futures plunge but not knowing why. Now we know: Dubai default fears spook investors
Global stock markets endured heavy selling on Thursday as investors were spooked by the spectre of a default by Dubai and after a febrile foreign exchange market saw the yen surge to a 14-year high against the dollar.
The turmoil caused a flight to less risky assets. Gold, which had challenged $1,200 in Asian trading, fell back from its highs and money flowed into havens such as German government bonds.
US markets are closed for the Thanksgiving holiday, but electronic trading of the benchmark S&P 500 equity futures contract showed a potential drop on Wall Street of 2.2 per cent.
As the European trading day progressed it became clear it was Dubai World’s difficulties that had hit a particular nerve, reminding investors of the lingering damage wrought by the financial crisis.
Banking stocks tumbled on concern about their potential exposure to Dubai. Indeed, the cost of insuring against default by the emirate jumped, with Reuters reporting the Dubai five-year credit default swap being quoted as high as 500-550 basis points. This means it would cost about $500,000 a year to insure $10m of Dubai’s debt. On Tuesday it would have cost about $360,000.
Greek and Irish government five-year credit default swaps also moved higher as nations with supposedly precarious fiscal positions were punished. In contrast, investors sought out comparative haven assets, pushing the yield on the German Bund down by 8 basis points to 3.16 per cent.
Dubai Debt Delay Rattles Confidence in Gulf Borrowers
Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.
The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors.
Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through asset-management firm Istithmar PJSC. The
The European markets turned into a total debacle today. The Dubai default, and its effect on European banks, is the most-cited reason.
WSJ: European shares recorded their biggest one-day drop since April on Thursday, with banks leading a broad tumble for markets amid worries about exposure to Dubai debt.
The pan-European Dow Jones Stoxx 600 index closed down 3.3% at 239.85, a level not seen since early November.
The U.K. FTSE 100 index closed down 3.2% at 5194.13, the French CAC-40 index ended down 3.4% at 3679.23 and the German DAX index closed down 3.3% at 5614.17.
Enjoy the rest of the day off, and for the sake of the economy, please base your shopping decisions based on how rich you thought you were Wednesday, thank you very much.
Jobless claims improve while leading indicators decline in today’s economic report card
by Wall Street Sector Selector Staff
Weekly jobless claims declined to 424,000 from last week’s 432, 000 but stubbornly stayed above the all important 400,000 level for another week.
August Leading Indicators came in at +0.3% compared to 0.5% for July, as the economy continues registering weakness.
Good news came from July Home Prices which rose to +0.8% from the previously reported +0.7%.
But the biggest economic news of the week came yesterday when the Federal Reserve said it saw “significant downside risks to the economic outlook, including strains in global financial markets.”
Global stock markets responded negatively yesterday an...
Shares of Priceline.com Incorporated (NASDAQ: PCLN) are trading higher in the after-hours following the release of its Q1 earnings results. Currently, shares are up 2.74%, trading at $548.60; they closed the regular session down 0.67 %, at $533.97.
The company said that its Q1 EPS came in at $2.66 on revenues of $809.3 million; this compares to the Street's estimate of $2.46 per share on revenues of $779.5 million. Revenues rose 38.6% year over year.
"In the 1st quarter, the Group benefited from strong growth in our global hotel business, particularly at Booking.com and Agoda," said Jeffery H. Boyd, Priceline President and Chief Executive Officer.
He added, "Room nights booked grew by 55.8% and our international gross bookings grew by 79% compared to prior year...
The damage control to the Fukushima explosion reported earlier is coming fast and furious. According to CNN, "the explosion at an earthquake-damaged nuclear plant was not caused by damage to the nuclear reactor but by a pumping system that failed as crews tried to bring the reactor's temperature down, Chief Cabinet Secretary Yukio Edano said Saturday. The next step for workers at the Fukushima Daiichi plant will be to flood the reactor containment structure with sea water to bring the reactor's temperature down to safe levels, he said. The effort is expected to take two days." While the government is trying to play down the threat from the explosion, it has nonetheless double the evacuation zone radius from 10 to 20 kilometers: "Radiation levels have fallen since the explosion and there is no immediate danger, Edano said. But authorities were nevertheless expanding the evacuation ...
Note from dshort: I retired this chart series last summer in deference to my prefered inflation-adjusted series that aligns the S&P 500 2000 high with the Nikkei peak in 1989. However, I continue to receive requests for this version, despite the "V" shape of the the recovery since the March 2009 low. This chart series overlays the current S&P 500 with the L-shaped "recoveries" after the Dow Crash of 1929, the Nikkei 225 after Japan's 1989 bubble, and the post Tech Bubble NASDAQ. Click the chart below for a larger version and use the links to see various comparisons.
Top 5 RisersStockRatingAnalysisVLOSTRONGBUYAn increasingly positive growth rate of past earnings, along with improving expectations for long term growth, make Valero a good prospect for high returns.KROSTRONGBUYKronos Worldwide has been gaining recognition from analysts as a good canditate for achieving higher than expected earnings along with higher overall projected valuation.SFIBUYiStar is one of the top candidates projected to achieve both higher than previously projected earnings in the short run and a higher earnings growth rate in the long run.AMATSTRONGBUYApplied Materials has been...
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February is now past, and the Biotech Porfolio is loaded with winners and a miss (PLX). MRK is down a bit, but I expect that trade to recover, and one could be more agressive and double down on it, or play another round at the Jan13 $30 options for roughly the same price. Below is the summary, and note the grey boxes are ones that did not fill. I am still a fan of BMRN, and like DEPO as well. Now let's look at a few others.
Table 1. PSW Biotech Plays Since January 2011
 
Our newest play is Momenta Pharmaceuticals (MNTA), who is pursuing a three-part business model which includes complex generic equivalents in partnership with the Sandoz division of Novartis, proprietary compounds, and follow-on- biologics (FOB). It seems that this company is tied up in competition/litigation wit...
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(