Weekend Ramblings

Ok, I've looked more into this "Dubai World Crisis" and I've come to the conclusion that the particular issue regarding the $59 Billion in debt carried by Dubai World (which is owned by the Dubai government) should be easy manageable but this very likely a symptom of bigger trouble regarding the entire city of Dubai itself which has total debt exposure of $80-90 Billion in addition to "off balance sheet" debt which apparently is supposed to be significant but nobody appears to have an estimate of what it could be. But even with these other debts the problem in Dubai doesn't appear to be serious.

Abu Dhabi, Dubai's largest backer and neighboring city is expected to bail out Dubai and there's already chatter swirling over the weekend that they will be willing to selectively back some of Dubai's Debt. Abu Dhabi's wealth is quite large. Their sovereign wealth fund is about $650-$850 Billion (from sources I found) and their economy is probably over 90% based on hydrocarbons which means they are in great financial shape and have been so for years. They can easily make this Dubai problem "go away" by simply writing a cheque if they chose to. Keep in mind that the $59 Billion in debt of Dubai World is backed by assets of $100 Billion, so any "bailout" of Dubai would be supported by the collateral of these assets. Even if you give those assets a 50% haircut to reflect declining property values, it puts Dubai World in a slight negative equity position.

I hear chatter out there that this Dubai "crisis" is akin to the subprime crisis which triggered the financial collapse. This is farfetched if you ask me. First of all total subprime exposure was a much larger $1 Trillion (from what I gathered) but more importantly, there was a shit load of investments and derivatives tied to subprime such as MBS which dwarfed the $1 Trillion. You had MBS which where packaged with subprime mortgages and other mortgages like prime ones; you also had credit default swaps, commercial paper, synthetic MBS which are similar to cash settled options whereby there is no underlying security to deliver and leverage on top of leverage of all which were somehow tied to subprime and housing.

From what I gather there's none of this type of shit with Dubai - the only exposure is straight debt owned by Abu Dhabi and banks (mainly European)....nothing more. Therefore, with this Dubai crisis, it's not nearly as large as subprime nor is there the domino effect potential like with subprime. In addition, Dubai has a large backer who's economy is tied to oil revenues which have been soaring. And even if they don't bail out Dubai entirely, a partial bailout appears likely and the hit that European banks will take could be signficant for a couple of them but it's far from a systematic threat.

Going back to Dubai's neighboring states, I mentioned Thursday that the Dubai crisis could potentially cause a contangion effect with neighboring Arab states and that CDS rates were spiking in these countries. Here's a chart of what the CDS markets are doing there. Clearly, there's been spike but so far it's just a small blip and could just be a knee jerk reaction. Again, let me state that these neighboring states are overflowing with oil revenues ulike Dubai whose economy is about 9% tied to oil.




As far as the market goes, I've been waxing bearishly since mid November for a ST correction and when the market is vulnerable to such, any excuse will be the trigger. This Dubai incident was the excuse but if by Monday some sort of bailout is announced or is strongly suspected to be imminent we could see the market recover all the losses sustained on Friday.

As of now the main technical and sentiment indicators I look at are basically neutral meaning it's up from grabs for both the bears and bulls to make headway. Another push lower to about 1070 accompanied with a spike in the VIX to the high 20's to low 30s would likely set up for a great long opportunity that carries us through until the end of the year at least. I'm waiting for another one of those low risk high reward opportunities like the "all in" IT buy signal I issued in early November.

Given the edgeless situation of the indicators and elevated morning headline risk as a result of this Dubai incident, the best thing to do is watch and keep your powder dry (aside from any LT positions that you have strong convictions about). Gamblers like these types of situations because there's likely going to be a big move one way or the other done via a morning gap which means the potential to make quick, large gains (or losses which are what the gambler never appreciates...they only think about how much they can make not lose). I don't consider myself a gambler but rather a speculator and a successful speculator makes bets when he feels he has a strong edge...when the probabilities are in his favor. Not only that, but when he can also limit the damages when he's wrong and that too will be tough with the heightened headline risk.