Dubai, After-Shock or Harbinger (and how about that dollar?)
 While a huge number of shoppers gave up hours of sleep last Friday to hit the ground running (one report tells of an early-riser who was in such a hurry to get to the mall that he wiped out a fire hydrant and a tree in his very own driveway), the market turned what should have been a snoozer of a trading day into a virtual rollercoaster ride.
News that Dubai, the largest (in population) of the United Arab Emirates, got way ahead of itself in terms of leverage sent the Dow (at one point) down more than 200 points. The announcement that Dubai World (the emirate’s investment company) would not make its debt payments on time served as a reminder that we may not be entirely out of the woods (no pun intended) just yet.
And that would be the question; is Dubai World’s inability to make its payments an after-shock of the recent global credit crisis or is it a warning that another tsunami is about to hit? While it’s of course too soon to tell, as CNBC guest Ron Insana pointed out Monday afternoon, we do know for sure that “Dubai was over-built, over-leveraged and under-utilized”. And for now it appears that there isn’t nearly the degree of derivatives exposure that characterized last fall’s credit market freeze – and that’s a very good thing (i.e., no Fed airbag to deploy). If nothing else (again, too soon to tell), this serves as a prime example of the degree of risk one (banks included) takes when investing in certain fast-growing emerging markets. Fortunately the U.S. Banking sector has minimal exposure.
I’m sure there’ll be more fall-out, or lack thereof, to report on in the months ahead – but for the time being I’d like to make this observation; the U.S. dollar (you know that beleaguered currency we’re all so worried about) rallied heartily as the Dubai news hit. So apparently, in spite of America’s waning rep as a (the) global superpower, her legal tender is still where the world runs (as it did last fall) when it fears the worst.
Also note that the market was at its trough last Friday when the dollar was at its strongest. Then, when things settled down and the dollar pared its gains, the market pared its losses. This negative correlation has been the single most prevalent theme throughout the now nine-month old rally in stocks.
For an understanding as to why the stock market continues to love a weak dollar, read Minnie Mouse, the Market and the Dollar …
Have a great day!
Marty
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