The S&P is now trading at 1125 (its 2009 high!). Since early November, SPX has been very range bound: between 1090 and 1110. This is a great move but it is occurring on a low volume week, so hopefully it stands when normal volume resumes in early January. Using historical secular bear market recovery rally averages the S&P has another 10-15% left (using historical averages). That would imply 1250 ish. After a collapse of approximately 38% last year for the SPX a 25% return this year is a breath of fresh air – but still leaves us 28% below the peak, and at the exact same level as early 1998. A full decade of zero returns … and for all the gut wrenching twists and turns that the stock markets provided investors in this decade, you figured they would be rewarded!!!
Globally, developed markets are also hitting their 2009 highs:
DAX (Germany) at 5957 – up 27% (in US$), CAC 40 (France) at 3912 – up 25% (in US$), FTSE 100 (UK) – up 33% (in US$), Nikkei 225 (Japan) is almost at its 2009 high at 10536 – up 18% (in US$)
Interestingly, Emerging Markets are mostly below their 2009 highs (though of course these have surged ahead of developed markets) :
Bovespa (Brazil) is down 5% from its ’09 peak – but up 137% (in US$), Shanghai A Shares (China) is down 9% – but up 78% (in US$), RTSI (Russia) is down 4% – but up 121% (in US$)
Cheap money does not cure all debt ills
Monday, November 30th, 2009The market reaction to Dubai last week seems emotionally driven and an exaggeration given the size of the problem. Concerns regarding a second round of the financial crisis due to Dubai should not be taken too seriously. Lehman for example had nearly $1 trillion in debt in its books when it collapsed.
Dubai has requested a “standstill agreement”, a likely precursor for a hoped-for debt restructuring. For weeks newspaper articles have been talking about the $80 billion debt overhang and Dubai’s inability to pay its debt that was coming due. The implied guarantee by Abu Dhabi is being tested and the lack of any support last week was surprising. This weekend’s actions by UAE fueled the reflex rally today in Asia (Hang Seng was up 3.3%, Australia was up 2.8%, even the sleepy Topix was up 3.6%). Good summary article from the FT about the UAE’s actions, but long story short the central bank is setting up an emergency liquidity facility (sound familiar?) to provide banks with fresh liquidity to offset fleeing capital after the shock of Nakheel (the real estate arm of Dubai World). Sadly this sounds too familiar, given the real estate bubble in Dubai, and the over-reliance on construction and real estate as a driver of their economy.
Pressure will definitely mount to not allow Dubai to default. The United Arab Emirates is comprised of seven emirates, the largest and richest of which is Abu Dhabi, the “senior partner” in the group, controlling 90% of UAE’s vast oil reserves. Not to mention that Abu Dhabi has the largest sovereign wealth fund at a little over $650 billion. It seems that Dubai’s problems can be solved by a check from its bigger brother, even though the bigger brother claims a blank check is not going to happen. There has clearly been a global central bank push to lower rates, which has encouraged a massive refinance wave to extend maturities. I agree that sufficient debt write downs are lacking, and the Dubai news highlights that cheap money does not cure all debt ills.
In conclusion, I don’t think this Nakheel issue poses a serious threat to derail the market rally. However it is evident how “spooked” the market can get (Shanghai A shares were down 7% last week), a sign that many market participants are skittish. As John Mauldin put it recently: “when anything as relative small as Dubai spooks the market, it should serve as a warning sign.”
Article from the Financial Times:
http://www.ft.com/cms/s/0/e9334100-dca8-11de-ad60-00144feabdc0.html
Tags: Dubai, investment strategy, market commentary, Nakheel
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