Is this what we have in store for Greece? Who wants to go into a long weekend with exposure?
The price of credit default swaps on Dubai government debt jumped to 630 basis points on Friday, up from 592 on Thursday, Markit data show.
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Greece, obvious. Dubai, of course. Earlier we wrote about Austria and Spain. The WSJ is saying Russia…http://online.wsj.com/article/SB10001424052748703558004574584003569052862.html?mod=WSJ_hps_LEFTWhatsNews. I guess there are a lot of options to choose from.
Dateline Brussels: Today European powerhouse, the prime minister of Luxembourg, emphatically stated that the EURO was overvalued. We say that it is JUNCKER that is way overvalued.
——-Live from Chicago its Tuesday night——-
In typical fashion the European bigwigs were out today decrying the appreciating EURO and the more they talked the higher the currency went. We say that if you think your currency is too strong then cut the lending rates to 25 basis points and let the weakest currency come clean. As we noted last night — the rumor of the Chinese taking 25 billion in Greek bonds would remove some of the present stress in the European system. At 1:00 this afternoon out intern, Scott, ran the 10 year yield differentials within the European Union and this is what he found:
Germany:3.145%
Italy :3.972
Spain :3.72
Ireland :4.78
Greece :4.875
When you do the maths you can see why the Chinese are interested from a financial standpoint in buying that Greek debt. An investor picks up an extra 173 basis points and gets an asset priced in Euros. If you thought the DUBAI situation was a problem when the U.A.E. was thought to allow a default, imagine the instability in markets if the Germans or French failed to support the debt of any European sovereign entity. So we see the Chinese have rearranged their holdings while picking up some sovereign yield. We are beginning to see the benefits of Euro debt versus U.S. treasuries. Do the technicals and find your comfort zone.
We also heard from Russia again today talking up the Canadian dollar. This is the second time in two weeks so we know who must be long. Not only is Notes From Underground lifted from the great Dostoyevsky, but as an aside we can tell you we have been Russian watchers for a long while. We have learned that the Russians love to create chaos inthe markets when they have the opportunity. For the previous three years the financial gurus of Moscow have been busy rebalancing Russian reserves from dependence on the dollar and have the lowest amount proportionately in Dollars. This gives them the ability to rattle the markets every so often by making incendiary comments like today’s about the Canadian. Please be cautious when it comes to the BEAR. Remember back in August when they said they were selling some GOLD which caused a quick break but proved to be false. Again we stress to beware the BEAR as they relish the opportunity to tweak the markets—especially when the Chinese are carrying the brunt of the load.
While we are sending out alerts, put the concept of the Islamic debt issues on your radar screens. It will be of great market interest to see how the DUBAI workout gets done. The SUKUK market which is debt written to Islamic law totals between 500 -700 billion dollars. This is not traditional debt by Western standards so how a possible non-payment gets resolved becomes a keen issue to creditors. We have not heard the last of this –just when you think you are out they drag you right back in!
Tags: bear, China, Currency, currency trading, dubai, Euro, eurozone, France, germany, gold, Greece, russia, yra harris
Commodities/Futures, Currency, Fixed Income/Bonds, Strategy/Allocation | yharris | 
December 2, 2009 1:16 am | 
Comments (0)
The world markets are shaking off Dubai and the current workout is being hailed globally with the resumption of the short dollar, long risky assets trade. I am not convinced. In fact, I think Dubai is a low impact signal of what is to come. With real estate continuing to tumble and developers facing default globally, the underlying asset bubble will come down and domino. Here’s one scenario now coming to light:
- Dubai gets the workout at what will seem like harsh terms, but Abu Dhabi will still be left a loser.
- Greece is toast, spreads become so expensive that even the Chinese won’t want to touch it. Euro becomes the loser. Germany, as the only real economic power in the region becomes a net (long-term) gainer, France and Spain losers in the equation.
- Britain can’t sustain it’s 60%+ debt to GDP (which has risen from 40% and will continue to climb). Look for Canary Wharf default stories. http://www.dailymail.co.uk/news/article-1231563/Is-Britain-brink-financial-armageddon.html
- Treasuries will NOT go the way of Japan. Yields will rise, even as the dollar losses reverse as the dollar catches a bid as investors flee Europe.
In 1999-2000, Nasdaq continued up, being driven by fewer and fewer companies’ stocks. With low volume driving a tenuous rally, which depends on record profit margins and declining revenue, the equation is set for a serious pullback (on the order of 40-60%) in equity markets. Dubai always wanted to be a financial leader – be careful what you wish for, because here it is leading the way.
From a note by Paul Schulte at Nomura:
Our basic view for the past few years has been to run (not walk) away from leverage. Dubai is property-related leverage headquarters. The one leveraged entity in Asia which is connected to the Middle East is Korean banks. We have had reservations about the Korean banks all year, mostly for this reason. HSBC and Stand Chart have insignificant exposure to Dubai. Chinese banks have nothing to do with Dubai and nor do the Hong Kong banks. If investors feel they need to sell something because of the problems in Dubai, then Korea is the place, Woori Financial in particular, in our view. Our core view is to buy the underleveraged and sell the leveraged. China, Hong Kong, Indonesia and Singapore have among the lowest leverage globally. Leveraged property in Dubai will need a wholesale re-negotiation. Investors have known this for many months.
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
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 and 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. Being that DUBAI is one of the seven Emirates and the one with the least amount of energy production, the authorities 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 banks of the U.A.E. are 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 certainty 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 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 than 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 a 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 will the world central banks, 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 DUBAIs 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 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 Monday’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.
Tags: Abu Dhabi, China, Currency, currency trading, debt, dubai, UAE, unemployment, yra harris, Yuan
Commodities/Futures, Currency, Fixed Income/Bonds | yharris | November 29, 2009 6:55 pm | Comments (0)
So Dubai World, the government investment vehicle (is that sovereign wealth fund?) is unable to make payments on $59 billion of debt. Please tell me you are not surprised! Command economies run by bureaucrats are always doomed. Investment vehicles run by same governments are doomed. I have no problem taking the other side of a trade from any SWF. Why? Because they are usually wrong. Some in the media are calling this a black swan event. Having kamikaze planes hit buildings in New York and DC is a black swan event. Having a debt laden government default is not.
For the past few weeks, I have been pointing out to readers my logic behind buying dollars. I did not know when or what would happen that would cause a flight to the dollar, but when so many people agreed that the dollar was going down, and when so many governments were discussing selling their dollar holdings, and when the dollar was down against every currency imaginable, there just didn’t seem to be anyone left to buy it: so I had to take that trade. I really dislike being on the same side of the trade as everyone else.
So what now? Well, the deterioration of the Euro will continue and GBP will be right alongside, maybe even beating it on the way down. China: I never liked China, and I still don’t like China (http://dyn.politico.com/printstory.cfm?uuid=DAB3DF2E-18FE-70B2-A8C736A21C10553A). If you want to play the space, go with Korea or Taiwan instead. I continue to favor India and Brazil (as long as they don’t get too involved in currency controls) long, long term over most other emerging countries. Japanese Yen: this is a tough one. Money will be flowing in as risk trades are unwound, but the government doesn’t want a rising currency, so they’ll have to step in. Overall, I believe they’ll be able to sell it faster than the US government can devalue the dollar, so that’s where I stand. What about the Fed and Treasury? They are in panic mode. All their efforts at quantitative easing have been for naught. People don’t want to spend. Banks can’t lend. The dollar will go up (at least for now) and that means deflationary forces with no tools left to pump money into the system. Krugman was wrong and I now wish we had the money we spent so hastily to support non-sensical businesses, like GM and AIG. Housing, contrary to popular opinion, is not going up. This is the time where the people who have cash will want to keep it for the really good deals that will be coming, but they’re not here yet.
In May, I wrote about what will be the signs that the worse is over (http://thehardtrade.com/archives/3150): employment, real estate, tough words and actions on the foreign policy side, and addressing transfer payments. With this as our rubric, employment not stabilizing yet, real estate not stabilizing yet, no tough words or actions to stand up to Europe or China (can Obama please say something tough to Hu just once??), and transfer payments are not only NOT being addressed, they are being exacerbated with misguided bills on healthcare. So we wait.
Tags: brazil, BRIC, China, Currency, currency trading, default, dubai, dubai world, Euro, fiat currencies, gold, india, signs of rebound, swf, yen
Commodities/Futures, Connect The Dots, Currency, Fixed Income/Bonds, Strategy/Allocation | Yaron Sadan | 12:44 pm | Comments (0)