Yabba Dhabba, Abu Dhabi & Dubai, what to do?
So much for sleeping in, doing a little Black Friday shopping,
and spending the day taking a second run at glazed Virginia
ham and pumpkin pie...
So what's up with Dubai and Abu Dhabi?
Well it appears the market may have wrongly assumed that
there would be full and immediate support for Dubai from
the United Arab Emirates.
It now appears that while big brother Abu Dhabi may backstop
Dubai, it's not interested in bailing out it's state run
corporations.
Imagine the UAE actually demanding debt restructuring concessions
from speculative bond holders who invested in the Disneyland
of the Middle East at the top biggest real estate bubble in
modern history?
"Dubai borrowed $80 billion in a four-year construction boom
that transformed the sheikhdom into a regional tourism and
financial hub. It suffered the world’s steepest property slump
in the global recession, with home prices dropping 50 percent
from their 2008 peak," according to Deutsche Bank AG.
And now markets are evidently shocked that there was no
immediate AIG-esque 100% blank check bailout?!?!
From the Wall Street Journal:
"Sovereign vs.Sub-Sovereign Debt"
online.wsj.com
The new fear: Any help from Dubai's oil-rich neighbor, Abu Dhabi,
may be used to help Dubai, but not its state-run corporate entities.
"I think people made the linkages they wanted to make," says
Jeremy Brewin, head of emerging-market debt at Aviva Investors
in London.
"We need to distinguish between sovereign and "sub"-sovereign debt."
--------------
The biggest fear is always of the unknown. And it appears
investors are in uncharted territory with Islamic bond
defaults...
zawya.com
"There is a lot of shock and a little bit of anger," said
Nish Popat at ING Investment Management in Dubai. "This is a
major blow to the sukuk (Islamic Bond) market.
If it defaults, it would be the third one in the Gulf, and the
largest Islamic bond default ever, and we're still waiting to
see how sukuk-holders are treated in situations like this.
There aren't any precedents."
"Sharia Law & The SuKuk Islamic Bond Market"
"The sukuk(Islamic bond) market has already been rocked by its
first big defaults this year, which many say will represent
test cases for how debt-holders are treated in the case of
restructuring or bankruptcy. Sukuk are based on Islamic law,
or sharia, which bans interest and requires a tangible asset
to underlie financial transactions. They are structured so
that investors typically receive income from a rent-generating
asset, which is technically transferred to a third-party
vehicle owned by the sukuk-holders for the duration of the
bond. Nakheel's Islamic bond, issued in 2006, is backed by
land in Dubai."
"Experts say that in most cases investors do not have legal
recourse to the underlying asset. However, until a sukuk
default is satisfactorily settled, uncertainty will cloud the
market. An investor in the Nakheel sukuk said: "This is mostly
a Dubai issue, not a sukuk issue . . (but) a default would
obviously be negative for the sukuk market."
-----------
The major concern here is with the European banks that
have the most exposure, and who have only cleared their
balance sheets of 50% of their bad debt.
reuters.com
PARIS (Reuters) - Half of the losses suffered by banks could
still be hidden in their balance sheets, more so in Europe
than in the United States, the International Monetary Fund's
chief, Dominique Strauss-Kahn, was quoted as saying on Tuesday.
"There are still some important losses that have not been
unveiled," Strauss-Kahn was quoted as saying in response to a
question on banks, according to excerpts of the interview that
were sent to media ahead of publication on Wednesday.
"It's possible that 50 percent (of bank losses) are still
hidden in their balance sheets. The proportion is greater
in Europe than in the United States," he said.
------------
So how much bad bank debt is left?
telegraph.co.uk
Dominique Strauss-Kahn, the head of the International Monetary
Fund, told Le Figaro on Wednesday that banks worldwide have so
far admitted to just half of the $3.5 trillion (£2.1 trillion)
of likely damage.
The Bundesbank said German banks alone will have to write down
50bn to 70bn euros of loans over the next year.
The venerable bank said in its Stability Report that the world
had narrowly averted a "virtually uncontrollable" collapse in
the late summer of 2008. While the credit system has partly
stabilised, the underlying problems "are still far from being
overcome" and money markets are not yet functioning properly.
"It is already clear that the financial system will be
severely tested going forward. Downside risks remain
pre-dominant," said the report.
---------
So will this Dubai news trigger a domino effect?
Mark Mobius says he expects up to a 20% correction in
emerging markets...
bloomberg.com
Nov. 27 (Bloomberg) -- Dubai’s attempt to reschedule debt may
spur a “correction” in emerging markets, according to Mark
Mobius, while the global slump in equities shows government
spending alone won’t protect financial markets, Arnab Das of
Roubini Global Economics said.
Mobius, who oversees about $25 billion of developing-nation
assets as chairman of Templeton Asset Management Ltd., said
a 20 percent drop for shares is “quite possible.”
-----------
And then there's the coming Commercial Real Estate collapse
that virtually everyone acknowledges, but the markets seem
to have yet priced it.
"$430 Billion in CRE Losses?"
calculatedriskblog.com
"Banks are projected to lose $430 billion on commercial real
estate loans in the next two to three years [said] Stan Mullin,
an associate with California Real Estate Receiverships in
Newport Beach
Highlight’s of Mullin’s talk:
•$1.4 trillion in commercial loans are coming due in the next five years.
•That’s equal to the same amount that came due in the last 15 years.
•Lenders could take massive losses on their real estate portfolios from 2010-2013.
This is similar to the recent presentation by Dr. Randall Zisler,
CEO of Zisler Capital Partners:
A crisis of unprecedented proportions is approaching. Of the
$3 trillion of outstanding mortgage debt, $1.4 trillion is
scheduled to mature in four years. We estimate another $500
billion to $750 billion of unscheduled maturities (i.e.,
defaults).
And from the WSJ in October:
Commercial real-estate loans are the second-largest loan type
after home mortgages. More than half of the $3.4 trillion in
outstanding commercial real-estate debt is held by banks.
The Fed presentation states that the most "toxic" loans on
bank books are so-called interest-only loans, which require
borrowers to repay interest but no principal. Those loans
"get no benefit from amortization," the report states.
"Today, most of the borrowers are paying because interest
rates are so low, but the question is whether the loans will
get paid off when they come due," said Michael Straneva,
global head of Ernst & Young's transaction real-estate
practice.
And of course this is why the FDIC released the recent Policy
Statement on Prudent Commercial Real Estate Loan Workouts
This policy statement stresses that performing loans,
including those that have been renewed or restructured on
reasonable modified terms, made to creditworthy borrowers
will not be subject to adverse classification solely because
the value of the underlying collateral declined.
And the "value of the underlying collateral" had definitely
declined - by 43% on average according to Moody's.
------------
If all that good news isn't enough, we've got another $700
billion to $2.5 trillion in costs from Obamacare, depending
on whose numbers you use.
And even with the hoax called global warming being virtually
debunked, Cap & Trade is an agenda driven vehicle for
global governance, and can't be given up for dead.
So what are gold bugs to do?
Number one, don't blink, because nothing fundamental has changed...
Competitive currency devaluation is still Job #1.
-- Viet Nam just devalued their currency.
-- The Swiss are are devaluing their currency.
-- The ECB is saying the Euro is too strong.
-- And Japan's exporters are crying out for intervention in dollar/yen.
And the US has done virtually nothing to solve the too big
to fail issue with the zombie banks, and there's still a
mountain of opaque derivatives bigger than Mount Kilimanjaro
on US bank balance sheets.
I posted this chart for the HUI Gold Bugs Index on Wednesday.
I think we have support at HUI 460 which held this morning's
sell off. But, that doesn't mean you can't take some money
off the table here, and more importantly, buy some puts for
insurance against not just a profit taking pullback in gold,
but also a preemptive run for the exits in the broad market
to lock in year end gains (and bonuses) if things turn ugly.
Fwiw, I bought some HL, SLW, and some AEM off the open for
a speculative bounce trade, as gold had rallied $20 off it's
overnight lows.
I'm also trimming some KGC into any strength here on thoughts
they may be coming out with another share issue, or convertible
offering...
mineweb.com
Keep stops tight and don't leave home without insurance,
but don't blink when nothing fundamental has changed.
SOTB |
