Dubai

Yra Harris

We open tonight's notes with the sage words of Rudyard Kipling from the poem "IF."

"If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you," More…

"But make allowance for their doubting too."

These words we believe sum up the action that took place over the two days of Thanksgiving.

We were contemplating writing a piece Thursday evening but we just couldn't get enough info to substantiate what was taking place as traders we are aware of the impact of rumor and innuendo. We always view these twin sisters of havoc as a blessing and a curse. Rumors give rise to volatility and thus create opportunity but if we are in a position we know the pain of being stopped out on unsubstantiated info.

Now that we have had a few days to measure the Dubai news we can begin to understand its impact on the global financial markets. We were interviewed on CNBC and Bloomberg television on Friday and opined that the Dubai situation was a continuation of the global credit crisis and very much similar to the commercial real estate problems that overhang the U.S. credit markets.

Dubai is one of the seven Emirates and the one with the least amount of energy production. The authorities there had to find another source of economic growth. The Royals that administer Dubai thought to turn their principality into the financial and tourist center of the Gulf region. All was well so long as money flowed free and easy and the building boom went on, but as frequently happens, over building occurred and prices began to drop. Vacancies began to grow and the rents declined and debts couldn't be met. Many of the creditors believed that Abu Dhabi, the wealthiest of the Emirates, would make good on the debt even though there are no covenants to that effect. Bond prices dropped from par to forty cents on the dollar as the threat of default continued to grow. That was where the markets were with Friday's early close.

To make matters worse there was also an Islamic holiday which meant there was to be no official announcement until today. It now appears that the central bank of the U.A.E. is going to provide a funding facility to insure against default of Dubai debt. The sovereign wealth fund of Abu Dhabi has a purported net worth of 650 billon dollars so there is certainly enough liquidity to support the entire Gulf region as the debtors and bondholders meet to do some type of work out on the debt.

As we caution you to keep your head you must look at the immediate impact.

First, we find it hard to believe that Abu Dhabi and some others didn't step in to buy the Dubai bonds on the very cheap knowing some action would take place to support the little brother Dubai.

Secondly, it is not in the interest of oil producers to see new stress in the global economy as the drop in oil would be far more costly then the any type of bailout.

Thirdly, we are going to have to see the impact on the nascent Islamic bond market that was created for Muslim investors and borrowers to be able to be part of the modern financial world and still adhere to the stricture of Sharia.

Fourthly, this event will put the inflation hawks at the Fed on hold as they wait to see the fallout on the lending patterns of the global banks.

U.S. banks have small exposure as most of the credit appears to have been extended by European consortiums and Islamic institutions - but again we don't know for sure because of the lack of transparency.

We will be watching as the world central banks will to see the impact on lending patterns after this hit is taken. The banks are cautious as they fear that more commercial real estate hits are coming.

We now have a good sense of why global debt and U.S. treasuries have performed so well. The lending institutions are so fearful of more such Dubai's and thus lock their money in sovereign debt.

Another story out this weekend came from China as the Politburo met Friday and decided it will "maintain the continuity and stability of economic policies, and continue to implement the proactive fiscal policy and loose monetary policy."

Thus we have some insight into what the Chinese are bringing to the global arena. Pressure will be brought to bear on the Chinese for Yuan appreciation but the pressure will be minimized by Chinese promises to lift domestic consumption by continued efforts to maintain growth at a bubble like level. Even the Europeans were rebuffed this weekend by the Chinese. Trichet and Juncker came away empty handed in their efforts to get the Chinese to provide any give on Yuan revaluation. Next time they should send that financial giant to Lady Ashton!

So with the Asian giant set to maintain domestic growth and the Dubai debt situation set to work out, we can begin to think about Thursday's Australian Bank meeting and of course Friday's unemployment report.

As Fred Flinstone might have said - Yaba daba DUBAI - as the cost of emerging from the stone age has been costly indeed.

jsmineset.com