DUBAI : DEBT RESTRUCTURING

Dubai is all over the news today!

Dubai's debt funded real estate expansion, continues to haunt the U.A.E.

Palm islands, a world map and many other developments all funded by a mountain of debt.

An investor driven Dubai real estate market, has continued to struggle even as the world has announced that ''the recession'' is now behind us.
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Actual users are outnumbered by speculators and house ''flippers''.
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Everyone is in the market to 'make something for nothing'

Here's my post on August 5, 2009.

Dubai Financial Support Fund : DUBAI RECOVERY ?

If investors think that the credit crisis is finally behind us....well they have another thing coming.

The Dubai debt deferment announcement has taught us, that not much has changed since the dark days of the collapse of Lehman Brothers.

• Debt levels continue to stay alarmingly high.
• Real estate companies in the U.S.A are refusing to stall new projects even as the current ' property glut' continues to drag down prices. (yes they did stall projects after the March 2009 meltdown, but subsequently, companies are building inventory once again)
  
• Asset prices continue to be propped up by bailout packages and ''questionable'' accounting practices.
• It's quite obvious that unrealistically high property prices need to come down to more realistic levels. The longer that market forces are suppressed, the longer the eventual recovery will take.
• For the record, Dubai isn't bankrupt yet, but it is facing a ''liquidity crunch''. They must rollover their debt until they can bring their real estate inventory down to a more sustainable level....and avoid a property fire sale! That's going to be a mega task!
  
• The main problem they face, is that their ''frightened'' lenders must accept a delay and some uncertainty in the near term.
• Lastly, it's not just Dubai! Governments all over the world are pushing debt funded stimulus packages to boost or support real estate prices and keep consumer consumption from falling off the cliff! While these tactics may delay the eventual collapse of an unstable system, they are not a long term solution
  

Overcapacity in China

If there's one factor that destroys profitability, it's ''overcapacity''.

Take the Dubai property market for example - Skyscrapers and man-made islands:
way too many speculators, very few actual users, and all of it supported on a mountain of debt.
That's just asking for trouble.

Everyone has heard of China being the ''factory'' of the world, after all - everything seems to be ''Made in China''.

I've been scanning google links on the overcapacity in China's Industrial sector.
China Overcapacity Wreaks Global Harm, EU Group Says
http://le-iss.com/metals/?p=24319
Steel Guru : Strong demand leading to steel overcapacity in China
China's September data suggest that the long-term overcapacity ...

China moves to address overcapacity in emerging sectors like wind ...

Solar: Massive 168% photovoltaic module overcapacity to cause ...

China vows to crack down on industrial overcapacity

Stimulus could worsen overcapacity - China Economic Review

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Reasons for concern: Wafer thin margins + surplus industrial capacity + massive debt levels

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That's going to be one '''toxic''' cocktail at a time when consumers in the developed world are looking to ''save'' rather than ''consume''

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Long term opportunities aside, it's time the whole world starts to save more, and pay down debt.

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A sustainable long term recovery will be based on

• 'savings led investment'
• adequate risk capital for lenders
• fair and non manipulative accounting practices
• a sound banking system.

Stimulus packages, bailout packages and questionable accounting practices are not the way out of this mess!

GOLD vs USDX

As I said before, when does the market finally turn?

Gold looks overextended in the near term, and the USD......well it hasn't fallen off the cliff, but has continued to stay persistantly weak

Obama Job Approval rating

No one said it was going to be easy.

But, as the banker's bonuses are announced this Christmas, the crowds are going to get more restless!

S&P 500 vs. USD

Take a closer look at the chart below.

The inverse correlation we have seen since the '''bubble'' burst in the first quarter of 2008 continues.

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The USDX has not retested the lows of April-May 2008 as yet.

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At the same time it remains to be see how long the equity market rally can continue, without any significant improvement in fundamentals.

Question is - When will we get to the turning point?

ie: The S&P 500 heads downwards and the USD stages a recovery.

BEWARE THE CONSENSUS VIEW!

Here's a chart from a recent update from David Rosenberg

Dont forget Bob Farrell's rule No. 9:

"When all the experts and forecasts agree -- something else is going to happen"

EMERGING MARKETS : TOO FAR TOO FAST.....

The MSCI Emerging Markets Index, is an index created by Morgan Stanley Capital International (MSCI) that is designed to measure equity market performance in global emerging markets.

Emerging markets have been a prominent beneficiary of all the global stimulus packages and Central Bank money printing and bailouts.


As most of you already know, I have not been very active in the equity markets recently.


Looking back, maybe I should have done a lot more buying in March! My current strategy is to continue to sell into the rally here in the Indian Markets. Aaaah the benefit of hindsight!
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Stock specific opportunities may come along, but risks outweigh rewards at this stage of the game.
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Going back to the MSCI Emerging Markets Index chart above, its quite clear that markets have had a fantastic run.
In the year 2007, when bubbles were everywhere, the above index scaled to just over 1250!
After the horrors of the last two years, investors seem to be getting urealistically optimistic and greedy at just the wrong time.
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Here's a snapshot of whats going on:

• Soaring government debt is replacing sinking private sector debt.
• Real incomes continue to shrink, and debt levels are unsustainably high.
• Falling home prices and underwater mortgages are adding to the toxic waste in the books of Freddie Mac and Fannie Mae.
• Mark to market accounting has a whole new meaning these days!
• Investment Banks are all set for a round of mega bonuses, even as their shareholders, the government and regulators stand by in silence. Bailouts to Bonuses!
• Oil prices are near $80, despite an usually high inventory level. ( maybe the sliding USD has helped the upward surge in oil prices )
• Unemployment is rising, and further cost cutting by companies may result in further layoffs. Underemployment and youth unemployment are topics almost never covered by the media these days.
• Emerging market exporters are struggling to hedge their forex risks in a volatile currency market. Meanwhile, their customers in the developed world are stuggling to pay down debt and for the first time in years are looking to cut back on expensive purchases this Christmas.
• Commodity driven emerging markets like Brazil and Russia remain vulnerable to a collapse in the prices of industrial commodities if the ''recession worsens''

To sum it up, the risk reward ratio is not in your favour at this stage. A low base effect may help boost year on year results for the quarters of December 2009 and March 2010, but the rally is getting rather long in the tooth

Invest, trade and speculate at your own risk.

GOLD : $ 1150.90

Charts don't lie!

As I've been saying in recent posts, persistant weakness in the USD, has given further impetus to the rally in 'risky assets' and Gold.

We are in a seasonally strong period for Gold, so we could be in for higher prices yet.

Overvaluations in the Equity markets worry me more than Gold prices at $1150.90.

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Stock market expectations of future earnings, are far too optimistic at this stage.

Unemployment and lack of real income growth will continue to haunt the '''recovery'''

Disappointment and frustration in the equitymarkets will be drivers of a USD rally.

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For now, I'm not a buyer in Gold, and will wait for a pullback before I buy in again.

US DOLLAR: WHEN IS THE REBOUND COMING?

The US dollar has continued to trend downwards as risk aversion levels continue to recede.


Here is a chart by Clive Maund, from his Kitco update on Nov 16, 2009.

His Gold and Silver updates are always a good read, and his charts are insightful too.

Despite the fact that we are in a seasonally strong period for gold, the rally in gold appears a bit overextended in the near term.

Equity markets too are near their recent highs, even as fundamental newsflow has not improved significantly.

Question is - Are we headed for another leg down in the USD? or does it rebound just because it has been weak for so long?

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Too many people are expecting the USD to head downwards, and that is something that makes me cautious at this stage.

Past experience has showed us how the USD rebounds when there is a market sell off.

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In the short run at least, the USD could surprise the overconfident USD Bears!

Goldman Sachs : Justifying the '''bonuses''''

I thought this was a joke when I first saw this.

I'm doing 'God's work'. Meet Mr Goldman Sachs - Times Online
Goldman Sachs Head Says Banks Do 'God's Work'

GOD'S WORK!!!!!!!

While the Times enjoyed highlighting the sensational headline on Sunday , the article is worth a read.

It's incredible how these guys just don't seem to understand that systemically dangerous leveraged trading bets are exactly what caused this whole crisis in the first place.
Goldman almost went under last year, but because the government bailed them out last time; they're now back to their speculating best!

They refuse to acknowledge any wrongdoing and are convinced they are making the financial world a better place. Bonuses are their rightful reward!

GREED or ARROGANCE or SCAMMING THE SYSTEM, it's the kind of attitude that does more harm than good.
It's a party when all's going well, but it almost always ends in tears.

I don't think the guys at Goldman Sachs understand the anger of a hungry, unemployed & disgruntled blue collar worker who is struggling to make ends meet.

It's this 'in your face' insensitivity & 'let them eat cake' attitude that leads to molotov cocktails and angry mobs.
Watch this space!