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Words from the (investment) wise for the week that was (November 23–29, 2009)

As shoppers were emptying their purses on Black Friday bargains, Dubai’s attempt to reschedule its debt roiled financial markets, plunging risky assets into the red. The government of Dubai requested a six-month payment freeze on the $59 billion debt issued by Dubai World – a state-owned conglomerate that has become known for its extravagant real estate projects.

Worries about Dubai’s debt woes rattled investors’ confidence, precipitating a sell-off in equities, high-yielding corporate bonds, commodities and the Baltic Dry Index, while mature-market government debt, the US dollar and the Japanese yen attracted safe-haven buyers. On Thursday and Friday, many emerging-market and high-yielding currencies declined sharply.

A fact not widely known is that Dubai has the worst debt per capita in the world. Ah well …

Source: Peter Brookes, Times Online

The credit-rating agencies promptly downgraded Dubai’s government-related debt and the cost of insuring against default jumped across the United Arab Emirates (UAE) region. As shown in the Bloomberg screenshot below, courtesy of Bespoke, the price of Dubai’s sovereign debt credit default swap (CDS) last week spiked up to 541 basis points. “Now that global markets have stabilized and exited crisis mode, an isolated event in Dubai where default risk doesn’t even spike to its 2009 highs [of almost 1,000 basis points] has caused a global market selloff,” remarked Bespoke.

Source: Bespoke, November 27, 2009.

Geoffrey Yu, strategist at UBS, said (via the Financial Times): “Although the majority of market observers believe the problems in Dubai are not insurmountable, the wider fallout has simply revealed how fragile markets are – and risk appetite may not be as strong as previously assumed, regardless of how profligate central banks globally have been in providing liquidity.”

Also as reported by the Financial Times, Julian Jessop of Capital Economics argued that Dubai’s move was unlikely to affect the positive outlook for emerging markets in the longer term: “We do not believe the events in Dubai mark a new phase in the global crisis. But if they are the catalyst for a more selective approach to investment, that might be no bad thing.”

In terms of banks’ exposure to Dubai, JPMorgan Chase comments (via The Big Picture) that the Royal Bank of Scotland underwrote more Dubai World loans than any other institution. In terms of capital at risk, HSBC has the largest exposure to the UAE.

The past week’s performance of the major asset classes is summarized by the chart below. Gold bullion (not shown on the graph) touched a record high of $1,194.90 on Thursday before tumbling to $1,136.80, but subsequently recovered to close 2.4% up for the week at $1,177.63. Similar volatility was seen in the oil price, with West Texas Intermediate Crude declining by more than $5 at one point on Friday, but later regaining some ground to end the week 1.8% down at $76.05.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.

The MSCI World Index (-0.1%) last week marked time, whereas the MSCI Emerging Markets Index (-2.5%) experienced more selling from risk-averse investors. However, the aggregate indices mask greatly varying performances. For example, among mature markets the Japanese Nikkei 225 Index (-4.4%) recorded a fifth consecutive down-week, suffering from the strong Japanese yen that recorded a 14-year low versus the US greenback. On the other hand, the Brazillian Bovespa Index (+1.1%) and the Russian Trading System Index (+1.8%) bucked the broader downtrend among emerging markets.

As far as the US indices are concerned, Friday’s losses wiped out the gains from earlier in the week, reversing a new recovery high of 10,464 made by the Dow Jones Industrial Index on Wednesday. By the close of the Thanksgiving-shortened week on Friday, the S&P 500 Index remained unchanged on the week, whereas the other major indices experienced a second down-week. Five of the ten economic sectors (as measured by the SPDR exchange-traded funds) closed higher for the week, with Telecoms (+1.8%), Health Care (+1.3%) and Utilities (+0.9%) outperforming, and Financials (-2.2%) in the red.

The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.5%, S&P 500 Index 20.8%, Nasdaq Composite Index 35.6% and Russell 2000 Index 15.6%.

Click here or on the table below for a larger image.

Top performers among stock markets this week were Bangladesh (+5.7%), Ecuador (+4.3%), Kuwait (+3.4%), Kenya (+2.1%) and Estonia (+1.9%). At the bottom end of the performance rankings, countries included Cyprus (‑15.6%), Vietnam (-11.7%), Serbia (-8.8%), China (-6.4%) and Greece (‑6.2%). The declines in the Shanghai Composite Index came in the wake of a warning by China’s banking regulator that it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements.

Of the 98 stock markets I keep on my radar screen, 30% recorded gains (last week 39%), 65% (58%) showed losses and 5% (3%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

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I’m not sure I agree with very much in this NYT article, describing the current cyclical bull rally wihtin the longer secular bear market as A Rally That Needs More ‘E’.

“In the first leg of a bull market, when optimism and euphoria are ascendant, investors are willing to bet that the economy will improve and that corporate profit growth is just around the corner. This faith manifests itself not just in rising share prices, but also in rising price-to-earnings ratios.”

I do not believe that this is a) the first leg of a bull market; b) optimism or euphoria are are ascendant; c) investors are betting that the economy is improving.

Rather, this has been a technically driven rally from very deeply oversold conditions. A 6 month, 5,000 point fall will set up the conditions that lead to a massive oversold bounce.

Indeed, the article notes that “the P/E ratio for companies in the Standard & Poor’s 500-stock index has soared 87 percent since this rally began on March 9.” That is not what a typical bull market looks like, and is more accurately described as the reaction to a prior collapse.

“Though conventional wisdom assumes that P/E ratios continue to grow throughout a bull market, that’s not always the case. In fact, it’s rarely the case.”

Well, it may be rare, but it was certainly the situation the 1982-2000 — the greatest bull market of our lifetimes. About 75% of the gains took place due to P/E expansion. The end of that rally (’98-’00) saw P/E rations expand dramatically, especially on the Nasdaq.

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Source:
A Rally That Needs More ‘E’
PAUL J. LIM
NYT November 28, 2009

http://www.nytimes.com/2009/11/29/business/economy/29fund.html

Today, the WSJ ran this patently incorrect headline (which many TV stations dutifully (mis)reported:

Black Friday Spending Rose Slightly

Preliminary sales data showed shoppers spent $10.66 billion on Black Friday. That’s 0.5% more than last year. The figures were compiled by ShopperTrak RCT Corp., a Chicago research firm that tracks sales at more than 50,000 stores

That’s simply wrong. We don’t have a clue yet as to how Black Friday sales were. Not even a remotely wild guess.

What the WSJ should have written were words to the effect of:

“An analysis of mall foot traffic suggests that Black Friday saw a slight increase in shoppers. Since we did not analyze actual sales, or even credit card transaction, we actually have no idea how sales did. ShopperTrak’s guessed that sales might have been up as much as a half a percentage, but that’s just spitballing it.

Every year, various groups — NPD, Retail Federation, Shopper Track, and others — release this weak ass data that is almost never correct. And each year, the press laps it up like manna from heaven.

You call this a business model, printing bullshit press releases from trade associations and the like?

How’s that working out for ya?

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Source:
BLACK FRIDAY RETAIL SALES INCREASE 0.5 PERCENT AS COMPARED TO 2008
November 29, 2008

http://www.shoppertrak.com/black-friday-retail-sales-increase-05-percent-compared-2008

Black Friday Spending Rose Slightly
WSJ, NOVEMBER 28, 2009, 4:39 P.M. ET

http://online.wsj.com/article/SB10001424052748703499404574563940913688978.html

November 28, 2009
By John Mauldin
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 with less than 20% being natural citizens – the rest are expatriates. The gross domestic product is around US $50 billion.

(Note: http://www.ameinfo.com/67802.html and then converting the currency. I found the numbers on various websites and services strangely at wide discrepancies. This seems close to a median number. I think the discrepancy is mostly people confusing the GDP for the United Arab Emirates as a whole, which includes Abu Dhabi, rather than just Dubai.)

Dubai has become a byword for thinking large. The world’s tallest building, underwater hotels, the largest manmade islands (plural), indoor snow skiing in the desert… For links to more information try this from Wikipedia: “The large-scale real estate development projects have led to the construction of some of the tallest skyscrapers and largest projects in the world, such as the Emirates Towers, the Burj Dubai, the Palm Islands and the world’s second tallest, and most expensive hotel, the Burj Al Arab.” The list goes on and on.

UBS suggests that the $80-90 billion in debt may not include rather large off-balance-sheet debt (where have we seen that one?). So, a country with a GDP of $50 billion borrows $100 billion. They build massive projects, which are now among the most expensive real estate in the world. The latest manmade island plans for one million people to buy property there. Seriously. Talk about Field of Dreams.

Then came the credit crunch. Property values dropped by as much as 50%. Sales, say the developers in understatements, have slowed. Seems there was a lot of debt used to speculate on real estate, not to mention buying Barney’s, Las Vegas casinos, banks, etc. And while US banks have little exposure, it seems England has about 50% or so of the debt, with the rest of Europe having the lion’s share of the remainder. Admittedly, the estimates seem to confuse the debt of Dubai with that of Abu Dhabi, so it is hard to know a reliable number, other than that European banks are the most exposed.

Read the rest of this entry »

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Be sure to see Jim Bianco’s comments on Dubai in the Think Tank…

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World Science Festival 2009: Time Since Einstein, Part 1 of 5 from World Science Festival on Vimeo.

Hat tip Cosmic Variance

This mornings must read work is an article in the Sunday Washington Post by none other than Ben Bernanke, titled The right reform for the Fed.

It is a rational pushback against the like of Ron Paul and Chris Dodd’s programs to either hamstring or completely get rid of the Federal Reserve.

As I have previously noted, being the only country with out a Central Bank would be like unilateral nuclear disarmament. Its a nice theory, but you will eventually be destroyed by your enemies.

Here’s helicopter Ben:

“These matters are complex, and Congress is still in the midst of considering how best to reform financial regulation. I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

The proposed measures are at least in part the product of public anger over the financial crisis and the government’s response, particularly the rescues of some individual financial firms. The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.”

The key line in Bernankes impassioned (or is that dispassionate?) defense is simply this: Independent does not mean unaccountable.

If he can sell that to the public, the White House and just a few Congress critters, he will avoid seeing the Central Bank neutered .  . .

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Source:
The right reform for the Fed
Ben Bernanke
Washington Post, Sunday, November 29, 2009

http://www.washingtonpost.com/wp-dyn/content/article/2009/11/27/AR2009112702322.html

Dubai – The First Credit Crisis Since The March Market Recovery

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• The New York Times – Dubai’s Investment Troubles Leave Markets Unsteady
  European markets calmed Friday after falling more than 3 percent the day before when investors were spooked by news that Dubai World, the emirate’s investment vehicle, was seeking to suspend repayments on all or part of its $59 billion in debt.  In late afternoon trading, the FTSE 100 in London was up 12 points, or 0.25 percent, while the DAX in Frankfurt rose 19 points or 0.5 percent. In Paris, the CAC 40 was 18 points or 0.5 percent higher.  Wall Street, however, is expected to open sharply lower as investors try to play catch up with the Dubai report. American markets will be open for a half-day after being closed Thursday for Thanksgiving.
• The Wall Street Journal – Pressure Mounts on Abu Dhabi
  Pressure mounted on oil-rich Abu Dhabi to step in with financial support for Dubai after fears of a debt default by one of its state-owned conglomerates hit stock markets in Asia and Europe. The U.A.E. is a federation of seven sheikdoms including Abu Dhabi and Dubai. Abu Dhabi is the senior partner in the grouping and controls 90% of its vast oil reserves, considered to by the world’s fifth largest. “Abu Dhabi’s support for Dubai might be less generous than the markets have assumed so far. Perhaps Abu Dhabi has forced Dubai to tackle the problem of excessive corporate debt ‘in-house’ first before extending more financial support,” Swiss lender UBS AG said in a research note.
• The Financial Times – Lex:  Dubai World
  Argentina’s default in 2001 didn’t come out of the blue. Nor did Lehman’s collapse. Yet both caused shockwaves. Now it may be Dubai’s turn. Investors fear that a debt standstill by Dubai World, the city kingdom’s largest state-owned conglomerate, is a prelude to a forced restructuring of its estimated $60bn of liabilities. This has caused a repricing of risk both in and beyond the Gulf. Bank share prices took a pummelling on Thursday. HSBC, down 5 per cent, was among the worst hit, given its estimated $16bn exposure to the United Arab Emirates. The dollar and Bunds rose.
• Bloomberg.com – Dubai Debt May Be Higher Than $80 Billion, UBS Analysts Say
  Dubai… may owe more than the $80 billion to $90 billion in liabilities assumed by investors, UBS AG analysts said in a note. “Perhaps Dubai’s debt includes sizeable off-balance sheet liabilities that imply a total debt burden well above the $80 billion to $90 billion markets have estimated so far,” real estate analyst Saud Masud wrote in a note yesterday. “This could imply that the debt issued by Dubai in recent weeks is insufficient to meet upcoming redemptions.”
• Bloomberg.com – RBS Led Dubai World Lenders, HSBC May Have Most at Stake in UAE
  RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in a report today …. HSBC, Europe’s biggest bank, has the “largest absolute exposure” in the U.A.E. with $17 billion of loans in 2008, JPMorgan said.
• MarketBeat (WSJ Blog) – U.S. Exposure to Dubai Crisis Is Less Than U.K.’s
  U.S. banks have only $9.9 billion in United Arab Emirates loan exposure compared with $49.5 billion for U.K. banks, Royal Bank of Scotland estimates. That could assuage some of today’s jitters in U.S. markets. Still, the lack of official data has left investors wondering. U.S. bank shares are lower premarket, as expected, with Citigroup down 5.8%, Bank of America 4.6%, Goldman Sachs down 2.9% and J.P. Morgan off 3.5%. For total UAE loan exposure, the U.S. share looks small. RBS estimates that the U.K. has more than half Europe’s total. France and Germany are next, with $11 billion and $10 billion, respectively. The tally doesn’t include bonds.
• AFP – Dubai debt move ‘carefully planned’: top official
  Dubai’s move to suspend payments on its Dubai World conglomerate’s debt was “carefully planned” and done in full knowledge of how the markets would react, the chairman of the Supreme Fiscal Committee said on Thursday. “Our intervention in Dubai World was carefully planned and reflects its specific financial position,” Sheikh Ahmed bin Saeed al-Maktoum said in a statement. “The government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react. We understand the concerns of the market and the creditors in particular. “However we have had to intervene because of the need to take decisive action to address its particular debt burden.” However, Sheikh Ahmed insisted that “unprecedented growth, in Dubai and across the (United Arab Emirates), over the past decade has helped lay the foundation for what is now a broad-based sustainable economy beyond just natural resources.”

S&P Dubai

Moody’s Dubai

We mostly steered clear of shopping today — went instead to the Chicago Art Institute’s new Modern Wing.

In the AM, the girls did go to Nordstrom‘s for shoes — the parking lot was pretty filled, but the store was not exactly jammed. (Like Bloomingdales, I will admit that you can while away lots of time surrounded by pretty young things trying on shoes).

Golf Universe was empty.

We also hit the Land’s End Inlet (outlet, get it?) — back when it was a catalog online retailer only, it used to be a unique kind of store. Since Sears took them over, its no longer what it was. It was busy, but not crazy.

The nieces and nephews hit a few stores — Von Maur was empty (what else is new) and Carsons was a madhouse (ditto).

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What was your retail experience like?

Our friend and comrade Mark Pittman of Bloomberg News died unexpectedly on Wednesday.  The link to the Bloomberg story is below.  Mark was a great reporter and a great friend.  He prized accuracy over timeliness at a time when many people in the media don’t know the difference.  He led the legal effort to force the Fed to open the books on AIG and the many other bailouts. I owed him a phone call last week and now must wait to return it and his many favors.  We actually got to take in a Yankees game a couple of years ago and I now appreciate how important and fleeting are those moments.   Mark will be missed but the fight continues.

Chris

http://www.bloomberg.com/apps/news?pid=20601109&sid=af7QohP8YdRo&pos=12