Market Talk

Maybe we should’ve seen this one coming, too. It’s not as if the signs weren’t there. Remember those stories last February about the thousands of abandoned cars at the Dubai airport? Ex-pats, in debt and relieved of their jobs, skipping town before they could get tossed in jail for not paying their bills. Ironic, looking back.

It shouldn’t have been the surprise it’s turned out to be, we should’ve seen it coming, but we didn’t because we love the “story” — you know, the hyper growth, the man-made islands, the world’s tallest building, that hotel that looks like a big sail — all what seems to be, well, in the middle of nowhere. Guess we all just figured they had the dough to pay for all that stuff. Continue reading…

Considering where stocks futures were yesterday, today’s losses for US equities aren’t all that bad, and it seems domestic indexes benefited a bit from having a day to digest the surprising news out of Dubai.

DJIA falls 154 (1.5%) to 10310, down a fraction on the week. S&P 500 loses 19 (1.7%) to 1092, Nasdaq Comp drops 38 (1.7%) to 2138.

Every sector falls, with energy and finanicals losing the most. Banks are vulnerable to the situation in Dubai, but US banks appear less exposed than their European counterparts. But this is still an unfolding story, and bears watching.

Dubai’s s debt crisis has been the topic du jour as a global selloff followed news that Dubai asked for a “standstill” on its debt payments. WSJ’s Heard on the Street columnist Simon Nixon says the reaction isn’t surprising, considering the Dubai government announced the news ahead of a four-day holiday weekend.

Still, he believes markets are severely over-reacting to the news as there’s Dubai’s problems aren’t large enough in scope to threaten the global financial system. From Nixon:

At this stage, however, the risk of contagion is small. Most at risk would be neighboring Middle Eastern markets where there has been no shortage of similarly reckless spending. Dubai’s neighbors are also among its biggest creditors. But unlike Dubai, the other Gulf states have vast oil wealth, making it unlikely they will lose access to funding.

But so long as central banks continue to pump extraordinary liquidity into the system, the markets should be able to accommodate local shocks. With interest rates low and signs of recovery around the world, that liquidity will continue to find its way into risky assets. The real risk will come in 2010, as the liquidity starts to be withdrawn and the full scale of government deficit problems become apparent. At that point, risk premia may start to rise, leading to higher interest rates and the dreaded “double dip,” forcing a new wave of losses. Dubai has provided a necessary wake-up call to frothy markets currently pricing in a robust recovery. But the greater systemic risks are likely to lie elsewhere.

Still, the cost of insuring Dubai’s debt continues to soar, although Bespoke Investment Group notes the cost hasn’t exceeded full-year highs achieved in February.

The news is getting more attention this time around because it’s an isolated event on the Friday after Thanksgiving, a day in which Wall Street trading is typically thin.

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- Bargain hunters turn out, the Journal reports. “While still very early in the holiday season, the more modestly priced stores seem to be seeing robust demand, while more mid-tier and upper-end are having a slower go of it.”

- The Dubai debt crisis offers “a great precedent” for other state-owned companies that may default on their debt, Felix Salmon says.

- The Thanksgiving bailout (a true story, although the author seems to have an ax to grind (hat tip, Alphaville.))

- “What’s going on in Los Angeles will soon be going on across the US and developed world,” Leo Kolivakis writes at Zero Hedge. And he’s not talking about the Lakers.

- Banks could lose $430 billion from commercial real estate, Calculated Risk notes.

- So much for a quiet day after Thanksgiving. Dubai shows cheap money can’t cure everything, says Miller Tabak’s Peter Boockvar.

- “The impact of the upheavals in Dubai extends far beyond the middle eastern emirate. Indeed, it may be the beginning of the end of the global risk trade, if it isn’t over already,” Randall Forsyth writes at Barrons.com (which is holding a four-day “open house” that starts tomorrow.)

- Figuring out just what the story is with Dubai World is like “Rashomon in the desert,” Paul Krugman says (and we appreciate the Kurosawa reference.)

- “There remain massive debt issues home and abroad and Dubai is only the latest example of such,” the Pragmatic Capitalist says.

- The blogosphere’s role in analyzing the economy (We’ve seen this periodic table of finance bloggers. It’s almost perfect – only missing a certain Market Talk blog… just sayin).

- How big is too-big-to-fail?

But wait, we've had a 60% stock market rally. Isn't the crisis over?

So much for a quiet Friday after Thanksgiving.

As Paul earlier noted, the Dubai debt crisis has one-upped all the Black Friday hoopla, as concerns about the credit crisis have re-appeared front and center. It’s still too early to determine what kind of impact Dubai will have on the global economy. But for now, analysts and bloggers fear that worries from last year’s crisis may return to global markets.

“We have been absolutely hammering home the fact that the ‘solution’ to the credit crisis was in fact, not a solution at all,” the Pragmatic Capitalist blogger says. “There remain massive debt issues home and abroad and Dubai is only the latest example of such.”

Dubai’s standstill shouldn’t cause worldwide panic; instead it’s a stark reminder of the unhealthy state of global real estate markets, blog says. “Whether this is a minor tremor in commercial real estate…has yet to be seen, but make no doubt – we are not out of the credit crisis woods.”

A big surprise as the crisis unfolds is the lack of support from Abu Dhabi, as well as the uncertainty of which foreign banks have exposure to Dubai World, says Miller Tabak equity strategist Peter Boockvar.

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Hey, we had to look it up too.

Today’s supposed to be a day where the few bored reporters who get stuck in the newsroom spend the day eating everybody else’s leftovers, dutifully repeating the hyberbolic and inflated estimates of holiday sales from various retail trade groups and tidying up our cluttered desks.

We’re supposed to interview the lunatics who showed up outside Best Buy 24 hours before the doors opened, film the mobs as they crash the gates, and grumble that we’re already sick of Christmas songs.

But “Black Friday,” the concocted retail sales “event,” has been usurped today by an actual event, the unfolding crisis in Dubai over the debt of state-owned Dubai World. Everybody’s still reacting to the news that Dubai asked for a “standstill” on its debt payments, so it’s far too early to say exactly how big a deal this is. Still, it bears careful scrutiny. This could turn out to be something that’s mainly contained to the Middle East — and apparently some UK banks — or it could be the loose end of the ball of string that represents this global reflation trade.

At the least, as the Journal’s Richard Barley writes, Dubai has put investors on notice.

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So the Toys ‘R Us store in Times Square is humming, as is every other retail outlet in the nation, but the focus for investors is going to be the Dubai debt crisis, which has already hit overseas bourses hard and looks like it’s going to hit US equities in even this half-session.

US stock futures down sharply amid a global selloff of equities, which is driving the dollar up (except against the yen.) Some traders will seize the opportunity to take profits, but the Dubai news has clearly affected confidence. The big question is how much exposure US banks actually have. RBS says it’s only about $10 billion, compared with around $50 billion for UK banks.

S&P futures down 28.30, DJ futures down 209. Ten-year jumps, yield down to 3.20%. Don’t forget, too, that the S&P’s been bumping up against the 1110 level, which represents roughly a 50% retracement of the move from the October 2007 high to the March 2009 low.

I’ve seen a few references to former shocks to the system, like the Asian and Russian financial crises in 1997 and 1998. Those shocks, if you recall, were the precipitating factors in the failure of the hedge fund Long Term Capital Management, which sparked a near collapse in the West until the Fed engineered a bailout.

Avalanches, you know, start with small rock slides.