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Counter Trade Dubai

Bruce Krasting's picture




 

I wrote a piece on Wednesday evening that discussed my own experiences with market volatility over Thanksgiving. It ended with:

The rates on your screen Friday morning will be meaningfully different than the ones you are looking at today.

I
got the Vol. right. But I had no clue that the source of the hiccup
would be Dubai. The reason is, as many have pointed out, this is “old
news”. To be sure, there have been some new and important developments.
But I doubt that Dubai is the issue that sinks the ship.

The
talk is of $80-90 b of exposure. Say half of that is lost money. Of
that, 70% is deep pockets in Abu Dhabi. That gets to an ‘outside the
Gulf’ loss of only $15 b. A few European Banks will get hit. There is
very little US exposure to this mess. The numbers do not look that big
to me.

How big of a surprise was this? I suspect not so big for
those who have big stakes in Dubai. These were WSJ headlines from
11/23. Three days before before the Tday blowup.


If
you are a big bondholder you keep an eye on whether the contractors are
getting paid. If there is no money for the vendors then it is just a
matter of time before the creditors get stuck. This comment from a gulf
paper Six months ago:

Nakheel, for example, has asked its suppliers to take discounts of between 25 per cent and 35 per cent.

There
are dozens of examples of press reports that Dubai was in arrears for a
long time. So I do not buy that this is a nexus for the market.

I
think that by next week market focus will again return to those that were steering markets on Wednesday. A weak dollar, strong gold and busted monetary policy. Dubai
is a side show that was aggravated by our holiday and an overreaction
in Asian markets. We will revert back to the main event.

Note: In looking at this I saw these comments. Someone has to say things like this. It still strikes me funny:

November 24, 2009!!! US Consul General Justin Siberell to “Emirates Business”.

"We are certainly bullish on Dubai".

 

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Sat, 11/28/2009 - 00:06 | 144604 Harbourcity
Harbourcity's picture

For some reason I was suddenly reminded of THX 1138.

 

Fri, 11/27/2009 - 16:26 | 144318 Anonymous
Anonymous's picture

Ditto.

Fri, 11/27/2009 - 13:44 | 144151 phaesed
phaesed's picture

Woah... aren't you guys all the same people who said they didn't understand why bonds were taking off on Wednesday?

 

Well now you know.... or apparently don't.

Sat, 11/28/2009 - 01:43 | 144650 Mr. Mandelbrot
Mr. Mandelbrot's picture

Whoa

Fri, 11/27/2009 - 13:19 | 144111 Fibozachi
Fibozachi's picture

The critical issue here is not the actual size/ extent of the Dubai 'news' but rather the public reaction to the 'news' that is of most interest.  And yes, while there is a literal kick in the groin here for Dubai and related counter-parties the figurative one is much greater and of central importance.  It is never the 'news' which matters but rather the actual reaction/ response to it that indicates the nature of underlying sentiment.  Just my opinion but a staunchly adamant one.

And by the way, great call Bruce !

Fri, 11/27/2009 - 15:33 | 144267 Windemup
Windemup's picture

Size doesn't Matter?

Fri, 11/27/2009 - 12:04 | 143999 Leo Kolivakis
Leo Kolivakis's picture

Nice one Bruce, proves that investors had their heads up their asses and overreacted to the Dubai news. This will look like a blip in the chart in a week. Wait 'til they announce November job figures. Then you'll see this market really take off and the USD rally.

Fri, 11/27/2009 - 20:35 | 144521 anynonmous
anynonmous's picture

agree - jobs will be a favorable number next week - but I'm not sure USD and equities will be able to go in the same direction - Also this Dubai thing on the surface is indeed chump change and while investors/traders can react badly on light volume - is there a subtext i.e. the signs and signals of a larger Dubai type event

Fri, 11/27/2009 - 15:37 | 144273 Anonymous
Anonymous's picture

Leo

Does the reality that the job numbers are dummied up and the fact that all of this talk of recovery is patent bullshit mean anything?

Why pitch "last one outs a rotten egg" trading ideas here to people who know better?

Waldo

Fri, 11/27/2009 - 14:42 | 144219 Anonymous
Anonymous's picture

LEO;
Claiming most investors have their heads up their ass by their reaction to the Dubi news. Then declaring a simultaneous market and USD rally is proof your head is down the rabbit hole!
First to understand what is wrong with this picture??? Three things have to be looked at and understood. ( most investors do understand this)
1. Political corruption: From Acorn to Obama and everything in between!
2. Organized crime: From mortgage originators to Ben at the Fed.
(It's very tempting to retroactively blame Bush. Just like he blamed Clinton and that is exactly what this batch of crooks and criminals wants you to do!)
3. Corrupt politicians and criminals can't do what they want to do without covering it with a lie. Once this is understood it all makes sense!

Here is one example: The stimulus package. ( the bank bailout is another one so is global warming!)
No one in their right mind would have approved a political slush fund for the 2010 elections. But call it stimulus and promise that unemployment won't go above 8%. Set it up so the majority of it gets spent by Democrats in their districts right before the 2010 elections and that is exactly what you get!

Krugman thinks the slush fund is stimulus. It's driving him crazy trying to figure out why it's not working! He doesn't understand that you can't apply Keynesian economics to political corruption and criminal behavior without winding up in the nut house!

Stop believing the LIES!!! It's just smoke and mirrors designed to keep you looking down the rabbit hole.

If it looks like a duck
Walks like a duck
Quacks like a duck
It ain't a chicken!

Fri, 11/27/2009 - 21:59 | 144558 New_Meat
New_Meat's picture

+5, but I pulled out my old spark gap gauge and, well the 0.022 blade doesn't fit between O and Acorn.

Bawney Fwank (I spell it like he says it) is my congress-critter, summer '07, he said everything was fine.

Krugman understands all of this, he advised Enron and got a Nobel, all is good.

Ned

 

Fri, 11/27/2009 - 15:09 | 144242 Leo Kolivakis
Leo Kolivakis's picture

When the USD and stock market start rallying in tandem, you can come back here and quack all you want.

Sat, 11/28/2009 - 09:33 | 144738 Problem Is
Problem Is's picture

Hey Leo, a novice question: If Dubai was buying and expanding ports through loans and bonds, is it like CRE where declining rents (revenues) can put the loans into default? If I understand that correctly, would declining port revenue from massively declining shipping and world trade be a major factor in default?

Thanks Leo, I always enjoy your analysis.

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