Friday, December 4, 2009

Dubai Default... Crisis Part II Or Overreaction

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

While the U.S. enjoyed the big Thanksgiving feast and the Cowboys put a licking on the Raiders, the rest of the world was dealing with the latest shoe to drop in the financial crisis. It should come as no surprise that Dubai World is having problems servicing their massive debt. I remember reading an article in late 2006 that 75% of the entire world's construction cranes were on the ground in Dubai: 75%!!!

I would partially accept it if it was Japan after WWII and it was being rebuilt. Or a country the size of Russia embarking on major urban renewal and expansion. But this is a tiny little state. I shook my head when I read about building the world’s tallest skyscraper, something that hasn’t panned out for other countries attempting the same thing. And the indoor ski mountain. But I was in utter disbelief when I saw the palm tree fingers real estate project being developed from the sea. And the thousands of those million-dollar properties waiting to be sold.

Talk about a bubble that was easy to spot and was almost guaranteed to implode. In my "Shockers of 2008" piece, I forecasted the end of the great Dubai experiment. It wasn't too difficult, especially after a good friend said he was hopping on the bandwagon and opening an office there since it was becoming the financial capital of the earth. That was one of my better calls in '08 to balance against two horrendous ones, where I forecasted a new bull market beginning. I also forecasted extreme dollar strength, which worked out well, along with a collapse in commodities. But forecasting Japan to lead the developed markets wasn’t so good. I am just starting to work on some shockers for 2010, which should be out next month.

Anyway, I do not believe the Dubai news is the beginning of a new chapter in the crisis, just the same old story regurgitated in a different part of the world. It has the feel of a remnant or outlier more than anything else. And if it was so terrible to threaten their financial system or economy, I believe the powers that be in Abu Dhabi would use part of their $500B war chest to do an AIG rescue.

Below is my first attempt to post charts in the blog. It’s a 60 minute chart of the S&P 500 trading around the clock. That means that each bar, red or green, represents 60 minutes. Although the U.S. markets were officially closed for Thanksgiving, the S&P 500 futures market continued to trade as you can see by looking at 11/26 on the bottom. In fairly short order, the market fell from 1111 to 1068 (-3.8%) and then rallied back to 1111.


Sometimes, it's better to be lucky than good. Last Wednesday morning before the Dubai news broke, I did CNBC's International Exchange as I do on a monthly basis. (See Clip Here ) Part of my comments focused on a stock market pullback after Thanksgiving. I just didn't think it would literally start with a Thanksgiving Day collapse around the globe and end early Friday morning! Thank you to the folks at CNBC for making that segment into a story on their website.

Since Friday morning, stocks have been in strong rally mode that, frankly, has me torn. With such powerfully poor internals on the holiday shortened trading day, there should be more weakness to follow. But this week has shown very positive seasonal tendencies to make it more interesting. While there “should” be another pullback next week, it’s likely to be shallow and followed by higher prices into year-end.

There's been lots of concern lately that the small cap Russell 2000 and mid cap S&P 400 have severely lagged the large cap Dow Jones and S&P 500. While true, that kind of divergence (all indices not confirming each other's move) can exist for weeks, months and even quarters before it ends up mattering. And I am not worried about it yet. It's just sending a message that liquidity is not as strong as it once was and should be monitored.

In short, the Dubai "revelation" is old news and should not impact the markets much longer than a week or so, if at all. The potential debt default in Greece would be a different story. Too much bullish market sentiment still bothers me, but time is running out in 2009 for the bears to do much damage.

As always, please feel free to email me with any questions or comments at

Until next time…

Paul Schatz

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