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First with Financial Comment from Arabia

Time to sell and lock in profits on stocks or go short

with 3 comments

The news from China about credit tightening and the Dubai debt moratorium brought global stock markets tumbling yesterday while the Middle East markets were closed for the Eid holiday and the US for Thanksgiving.

US futures suggest that Wall Street will catch up today. This is likely a very good point for those who have ridden the rally since March to sell.

Dubai suspends debt payments

Arguably the debt moratorium at Dubai World, which has total debts of $59-60 billion, is the trigger to send markets much lower. If nothing else it is a wake-up call that the global banking system still holds many potential bad debts, and of course the market does now have to factor in the actual impact of such potential bad debts – something it had not previously done.

It will be up to Dubai’s creditors whether this mammoth moratorium turns into an actual default. If they can agree to a rescheduling then there will not be a default. The debts of DP World, the publicly quoted Dubai World port operator, are not included and that will bring the original headline figure down, according to a note of clarification.

If Dubai did default this would be the largest since Argentina in 2001. The Gulf region is already grappling with bad debts from the $20 billion Algosaibi scandal in Saudi Arabia and that is currently doing serious damage to bank lending in the Kingdom. Kuwait has already seen some payment defaults.

The news from Dubai comes as a nasty shock to global markets that have enjoyed a rally of historic length and strength since March. It has been fueled by the cheap money given to the banks to save them from bankruptcy during the global financial crisis, but liquidity fueled markets always crash when the cash runs out.

Time to sell up

It is therefore time to sell up and lock in profits from the rally, and await a new low point to re-enter markets. The main problem for the Fed is surely that it can not cut interest rates in response to a market correction this time, as rates are already on the floor.

That should make for a particularly deep and violent correction. The complacency of investors at the start of Thanksgiving, with confidence at a five-year high, is about to be tested by nasty surprises from emerging markets. Sell while you still can!

Or short emerging markets – there is power short for emerging markets EDZ which ought to rocket as markets sell down. Financial short ETFs like FAZ and SKF should also do very well. Shorts make the money in a crash.

Ed Note: On Friday EDZ was the best performing ETF, up 11.8%, FAZ up 8%, SKF up 5.7%. You have to wonder what next week will bring for these short ETFs. They could be on a rocket ship back to the highs from which they have tumbled so far this year.

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Written by Peter Cooper

November 27, 2009 at 7:58 am

3 Responses

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  1. All kinds of information is available for the unwary. Here we get the suggestion “Time to sell up” whereas on Friday, Bernie Schaeffer (who is very at good market timing) said that “Markets are in Excellent Shape”.

    So, you take your choice and pay your money.

    Bud Wood

    December 1, 2009 at 12:26 am

  2. The concern is that the banks may have sliced and diced the Dubai loans using leverage and no collateral like they did the mortgages. That could mean $4-500 bil or more is about to be vaporized even though the face value of the actual loans may be around $80 bil

    RDS

    November 30, 2009 at 10:30 am

  3. Normally, I would agree, but these aren’t normal times, at least for the US stock market. If it looks like a big drop is starting, the Feds will tell their primary dealers to buy some stocks themselves, until they can unload them. Why not, when they can borrow for nothing. And they can’t go broke. The government won’t let them! Ain’t it nice being too big to fail. Look at UBS. They pled guilty to helping people evade taxes and still have a banking license here.
    The Fed will continue to create enough money to prop up the stock market until the middle of next year, maybe longer.
    But I love conspiracy theories, especially after reading the article a few weeks ago in Rolling Stone about the naked short sales of stocks that don’t even exist. Matt Taibbi wrote it. Scary.

    Ed Note: Bill, yes and we thought Abu Dhabi would bail-out Dubai!

    Bill Simpson in Slidell

    November 27, 2009 at 1:59 pm


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