Darshan's Blog

Darshan's Daily Market Ponderings

Dubai & The Convenient Panic.

Friday 27th November, 2009

Morning all!

For you Americans reading this hope you had a great Thanksgiving. If you're still on holiday and trade for a living, get back to your screens immediately. There is a world of opportunity for profits out there at the moment. Earlier this week I said quite clearly that there was a chance that the markets could head down the channel it's been meandering in, towards 10200 or 10050 on the Dow and down to 1086 or 1074 on the SPX.

For three days straight my patience was tested and then the moment the US takes a holiday, we get the move during the futures! Put the kettle on, you're going to need it today's post not only has me riled up but also laughing. There is much to say, so I'm going to get on with it.

First of all what was the trigger event blamed for the moves down on the global markets? The unemployment rate being greater than 10.4%? The FDIC going broke and already covering over a 124 failed banks this year alone? That couple that gatecrashed the White House party this week? No! The correct answer is...Dubai. Yes Dubai that great amusement park for the greed and exuberance.

The scare stories started when Dubai's Government backed investment arm, Dubai World failed to make an repayments on a $3.5bn Islamic bond. As Dubai World have a total of $59bn borrowings - there was obvious panic - as it is the majority of Dubai's $80bn in total debt. Dubai World quickly made it clear that the debt would need rescheduling and of course, this caused a massive panic the next day. Not on the day but the next day! People suddenly forgot all about the support system from Dubai's neighbours - Abu Dhabi, who have have $150 billion in currency reserves and $300 billion sitting pretty in their sovereign wealth fund. Now, let's just rewind back to the exact timing...just to show you how the market will use the news and why.

The news that Dubai's debt was under question hit the wires during US market hours on Wednesday 25th November. The Dow closed near the year's highs on that day. The US traders did not bat an eyelid at a potentially explosive Black Swan event. You know why? It was not a Black Swan event! Concerns about sustainable growth in Dubai, have been doing the rounds for over a year now. Even the normally slow financial media have been reporting it for long enough. Don't believe me? Go check with Google News you will find articles dating back more than a year.

So let's move forward to Thursday morning in Asia -with the US market closed for Thursday, Asia decided to take a swan dive and in the morning, Europe followed. By the time I woke up, the Globex session had the SPX futures down by over 25 handles. That sort of wipe out has not happened for a long time this year but it certainly was an expected probability in fact, I said as much for many days of this possibility. The other reason it was likely was because the USDX was so close to $74 a critical support level - that the likelihood of a dollar rebound was high and this would obviously see equities and commodities drop. Of course, it didn't matter because US equities would be closed that day and it would not impact real stocks. It would however, get many bears short the futures and even scare the equity bulls enough to hedge with some puts. So to orchestrate the move, while the US was closed for trading - was a trick that worked perfectly.

To make matters worse, the London Stock Exchange mysteriously went down from about 11am to 2pm. Now all this just seems too coincidental. The UK banking sector already had heavy losses yesterday by the time the systems went down, mainly because reports went out that European banks were exposed to the $80bn of debt; with the UK's HSBC, Standard Chartered and RBS being exposed to about $40bn of that. I was checking the private investor boards to see the reaction and there was hysteria. This hysteria only got worse as trading halted for those three nervous hours. One has to wonder how convenient this entire sell-off was for the bulls, who so desperately wanted to take some profits of the table and then get back in for the final flurry north in December? The answer is very and very orchestrated. This is proven today, with the FTSE rising over a 100 points, seconds after the BBC printed an article warning of heavy losses today. That very article shows how the herd think and how the market will set traps to take the most money from the majority. The fact is for almost two weeks, I was shouting about the negative divergences building up in the technicals of the rises and the fact that the broader markets (the Russells and the SPX) were not confirming the rise on the Dow. I also said we would get a reaction once the USDX started trading in the 74s. We essentially got everything we expected but the media conveniently blamed it on Dubai. If the Dubai story was really a panic event, we would have seen a much stronger move down. Anyway,I'll come back to where we go on on the markets after I talk a bit more about Dubai...

So what is happening to Dubai now?

Well, first of all - it is clear that fear is rife and some banks with much to gain from other banks failing are adding to the panic. Dubai's CDSs rocketed to 675, up by 134 basis points. Goldman Sachs were quick to issue a warning that a bank like HSBC could lose over $600 million if Dubai defaulted on the $15bn lent to it by the bank. Goldman were also quick to point out that the cost of insuring the debt was just shy of what Lehman's CDSs were marked at, days before it's collapse. Well done GS - keep causing a potential disaster to turn into a self-fulfilling prophecy, that you can no doubt make a lot of money from.

In reality Dubai's problems will be averted by restructuring and the putting off of any defaults due to political pride by the Arab nations and also the need to not let it come to breaking point, to avoid UK banks from hurting more. Sure, Dubai needs to learn from this mess you can't have an economy based on 100% consumption and 0% creation of tangible value. Abu Dhabi stepped in yesterday and said it would bail out it's neighbour. Of course, they will take as much as they can from this deal after all, this is a perfect opportunity to teach it's wild neighbour a lesson in humility. After all, Abu Dhabi has already lent Dubai a total of $15bn in direct and indirect lending. As always the creditors are just as much to blame. Why was Dubai offered never-ending credit to fuel a property boom, that was totally dependent on foreigners moving to Dubai? With over 3.6million ex-pats living in Dubai occupying 62% of the housing compared to only 812,000 nationals occupying the rest the business model was always going to be upside down Specially when you consider that over the last year, the country lost 8% of it's population by immigrants leaving again. How sustainable a business model was this? A tennis court on top of a hotel, does not make a great investment in the long run. For this lack of prudence, Dubai can now only go to the UAE capital but it must also do so, with no choice but to lose a lot of pride and assets.

All in all, even though Dubai World and Dubai itself will have to eat humble pie and probably hand over state assets like the national airline Emirates, it will all be okay. This does not mean we should remain complacent - this sort of debt fuelled mania should stop but for now, the European banks have been saved from their exposure risk. Don't get me wrong - the situation in Dubai is dire and can only get worse - there isn't going to be sudden demand pick up for expensive apartments - if anything I can see it going the other way around, as more ex-pats leave the country. However, for now - the markets will ignore those risks and it will join the queue of other pressures building up in the global economy - and rear it's head when the Central Banks completely lose control of their market pumps. For today, I just wanted to explain to you how markets can be moved with excuses and done so conveniently.

The fact is things are indeed bad out there on a macro and micro level but so far the market has chosen to ignore it. You can't let single events like this panic you in isolation. You have to judge when they happen, who reacts first and how and then decide, whether this is a flush out or a real sell-off. This entire rally has been orchestrated with governments around the world pumping money into the banks, who in turn have recapitalised themselves through trading in the market - and the ones that do not have the skills or the resources to do so, have been eliminated. It's never healthy for the entire banking industry to be controlled by a few banks - this will be the ultimate reason for the fall out - as the urge to seek great profits, from far less players, will create inefficiency. Trust me the real sell-off will come, when the dollar bottoms but that is still in the process of happening. For now, unless the weekly MACD rolls over, the indices still have one last hurrah.

So where to today?

The real action has been on currencies last night with the Yen absolutely killing every currency available reaching new highs for the year. If you're a trader, this is what real action is all about. Once that settled down, the US dollar took over and did the same to every other currency but the Yen and by the time morning arrived the entire forex market was in a state of confusion. Has the US Dollar bottomed? Is the Yen going to dive further or does it rise from here? Two carry trade currencies both battling against each other. Who would win? Well we shall see not long to go until the answer is clear.

For now, you have to admire the move in Gold finally my short is paying off we dropped almost $53 overnight, as over-leveraged hot money, sold Gold to buy US dollars and Yen. Yet, that was another move that brought confusion to the gold bugs after all, most are now looking for $1300 on Gold. The key here is that I see a move back to $1070 or $1080 and then a final sharp move north, to match the force of equities at that point. Then we will see the same thing we saw last night but it won't have an end it sight like it did today. The move in gold proved to everyone that the margined traders cannot sustain panic as their stops get hit.

On that note today we should see the the US markets try to fill some of it's gaps and if it can grab on to the momentum of the FTSE; especially since the SPX has held support this morning in the futures but hey the volume is super thin out there so a more interesting move would be for the US markets to drop soon after the session opens, after filling upside gaps and then head towards those lower targets at 10050 into Monday and then we begin our final rocket north towards 10550-600 on the Dow and 1130-50 on the SPX. Either scenario could work but I would prefer to commit most of my money to the market on Monday, when the US traders are back in force. Today will just be another low volume day, where either scenario could happen. All in all, I see higher next week but am keeping an eye out for how the USDX behaves today and how the weekly candles close on the US indices. If you have any questions then please shout!

I hope that helps. In fact, I hope this post shows you the perils of listening to the financial media (I don't count I have and never will have a press badge and I actually trade my calls:-)). If Dubai was really the trigger event for the big crash, then believe me - the US traders would not have left on Wednesday night, with longs on the table. The whole thing smells like a bear trap being orchestrated - let's see how the weekly MACD and candles behave by the end of today - I'll keep you updated if there are any warning signs and if this sell-off is for real.

Happy trading,

Darshan

*The information contained on this website and from any communication related to the author s blog is for information purposes only. The analysis and the market recap do not hold out as providing any financial, legal, investment, or other advice. In addition, no suggestion or advice is offered regarding the nature, profitability, suitability, sustainability of any particular trading practice or investment strategy. The materials on this website do not constitute offer or advice and you should not rely on the information here to make or refrain from making any decision or take or refrain from taking any action. It is up to the visitors to make their own decisions, or to consult with a registered professional financial advisor.