Posts filed under “Think Tank”

Chicago PMI best since Dec ’07 but market awaits the ISM

The Nov Chicago PMI was a better than expected 56.1 up from 54.2 in Oct and vs the forecast of 53. It’s the highest since Dec ’07 and measures the direction of change, not the degree. New Orders rose to 62.8 from 61.4 to the highest since May ’07 and Backlogs were up 4.6 pts to 46.5. Production, which follows new orders, though fell 6.3 pts. Employment remains well below 50 but did rise 3.6 pts to 41.9, the highest since Sept ’08 (48.8). Inventories rose 2.7 pts but are still very lean at 34.9 and thus still little evidence that the large destocking seen is being followed by restocking. Prices Paid rose 4 pts to the most since Nov ’08. Today’s better # follows also an upside surprise in Oct but the stock market didn’t respond then as it waited for the national ISM report to reconcile the regional surveys. The Chicago PMI though does confirm that manufacturing will be a key part of the hoped for recovery as consumer spending still remains uncertain.

Category: MacroNotes

‘Like a partial bridge over troubled waters…’

The UAE over the weekend provided a partial ‘Bridge Over Troubled Waters’ to those impacted by the Dubai request for a debt restructuring by giving assurances to local banks that have exposure to Dubai but they did not give any commentary on what they will do directly with Dubai and other creditors. Will it be…Read More

Category: MacroNotes


Peter T Treadway also serves as Chief Economist, CT RISKS, Hong Kong.


November 29, 2009

The  Global Liquidity Bubble Claims Another Victim

As this letter goes out the world is scrambling to find out which banks and which countries are most exposed to Dubai and Dubai World, which has now announced it wants to reschedule its $ 60 billion in debt. Conveniently, Dubai chose to make its announcement during the American Thanksgiving holiday and on the eve of Eid, a four day Moslem holiday which will excuse the emirate from answering questions over that period.

Nothing like a news blackout and a big default to send global markets into a tailspin. Still, it appears that overall investors can relax. There appears to be little likelihood that the Dubai default will set off a new round of similar defaults in other countries. Dubai as will be explained is sui generis.

The Magic Kingdom Hits a Bump

Dubai is the real Magic Kingdom that Walt Disney would have built if only he’d had the money. The Burj Dubai, the world’s tallest building, the Burj Al Arab, the world’s tallest hotel, Terminal 3 at the Dubai International Airport, the world’s largest airport terminal, the Palm Islands, an entire residential community for multimillionaires in the Persian Gulf, Ski Dubai, the world’s only indoor ski resort in the desert— it’s a Walt dream list. Endless rows of skyscrapers define Dubai, many with architecture so daring as to make ultramodern Singapore and Hong Kong look stodgy. Dubai is at the cutting edge of the human imagination. Financed of course by the excess liquidity from the global bubble machine and the malfunctioning international monetary system. And now its latest victim.

This author has made several trips to Dubai in the last few years. I have walked through the immense malls, listening to never-ending piped in Christmas music and observing women in black head to toe burkhas, shopping in Louis Vuitton. I have observed hordes of tired and dazed looking Indian and Pakistani laborers wandering aimlessly around the Dubai creek on their half day off on a Friday afternoon. I noted the abundance of middle aged Russian men in nightclubs, arm in arm with six foot, twentyish, blond Russian “models”. I listened as the voices from the mosques called the faithful to prayer. I felt like I was in India as most of the service and taxi personnel were from that region and spoke in English. (Mumbai should look as good as Dubai!)

I asked myself where all the money came from to build this fantasy land, where the buyers would come from for all the condos under construction and what Dubai really did for a living. It wasn’t oil, as Dubai has little of that. Were sun seeking Western tourists, Middle East oil money looking for a home, trade with India and Iran, the stock exchange with its handful of traceable stocks, Russian men with their hot Natashas, Halliburton with its corporate headquarters in Dubai, enough to support all of this? Dubai was different I was told. Bubbles happened somewhere else.

Well now we know some of the answers. The money was borrowed and not enough people showed up to buy a piece of the Magic Kingdom. Dubai can’t pay back its loans. Dubai as it turned out was no different from Las Vegas or Miami or London or the south of Spain.

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Category: Think Tank

Words from the investment wise 11.29.2009

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.



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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Category: Think Tank

Why I am an Optimist

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: 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.

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Category: Think Tank

Dubai – The First Credit Crisis Since March Market Recovery

Dubai – The First Credit Crisis Since The March Market Recovery Comment As the first chart shows, Dubai’s sovereign credit default swaps (CDS) are soaring in the wake of the news that Dubai World wants a standstill agreement on roughly $60 billion of debt.  Even though Dubai World is a corporation seeking the agreement, the…Read More

Category: Markets, Think Tank

Technical, fundamentals

As technicians don’t care about fundamentals, according to them, in light of the Wednesday morning news from Dubai that so shocked markets on Thursday, we can look at the charts to see at what levels the buyers and sellers acted today. The 50 day moving average in the S&P futures is 1070 and we traded…Read More

Category: MacroNotes


The Conference Board’s consumer confidence index may have improved (48.7 in October to 49.5 in November) and beaten consensus expectations, but it remains firmly in recession terrain. It is so obvious that consumers are tired of the over-borrowing and over-spending days of yesteryear. Despite all the temptations provided by the government, auto buying plans dropped…Read More

Category: Consumer Spending, Psychology, Think Tank

Oh well, there goes the quiet day after Thanksgiving

Well, there goes that quiet half day right after Thanksgiving. The Dubai request for a standstill agreement as a precursor for a hoped for debt restructuring is not a complete surprise considering the weekly newspaper articles on their $80b+ debt overhang. What is the surprise is the lack of any immediate support from Abu Dhabi…Read More

Category: MacroNotes

Asia trip, Dubai news, T-Day wish!

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from…Read More

Category: Markets, Think Tank