First with Financial Comment from Arabia

Archive for the ‘Oil Prices’ Category

Good or bad time to launch first-ever ETF for UAE stocks?

leave a comment »

The National Bank of Abu Dhabi has today launched the first-ever exchange traded fund in Arabia that covers the 25 most actively traded UAE stocks. It is listed on the Abu Dhabi Stock Exchange, and makes its debut just a day before Saudi Arabia gets its first ETF. Both are open to local and foreign investors.

The minimum investment is a bit steep at almost $136,000 and is clearly aimed mainly at foreign institutional investors to help reduce market volatility.

Blue-chip ETF

The NBAD OneShare Dow Jones 25 ETF will comprise stocks listed on the three trading markets of the UAE. Financial and real estate stocks make up 56 per cent of the fund, while no single share will account for more than eight per cent.

The ETF will be traded and quoted like other securities on the Abu Dhabi Stock Exchange. The Dow Jones UAE 25 index is off nine per cent this year, and up 35 per cent in the past year. Meanwhile, Falcom Financial Services is to offer the first-ever ETF in Saudi Arabia from tomorrow, with further details awaited.

Now this is indeed an attractive way for foreign institutions, and high net worth individuals to invest in the UAE stock market. UAE stock markets crashed in late 2005 and have not recovered since. A market bottom could be close and a major buying opportunity evident.

Indeed, the imminent settlement of the $26 billion Dubai World debt rescheduling might be the signal that the worst uncertainty is over and that markets will make progress from here. Certainly the UAE bourse looks undervalued in relation to the much better recent performance in Saudi Arabia.

Global clouds

However, what if global financial markets choose this as a moment for a correction, and oil prices slump as they did in late 2008? Then the UAE bourses will doubtless be dragged down yet again, perhaps this time to a real bottom.

In stock markets timing is everything. All the same putting money into the long-term future of the UAE does look a winner with its low extraction cost energy sector and huge hydrocarbon reserves, progressive leadership, ambitious expansion plans and net creditor nation status.


Written by Peter Cooper

March 25, 2010 at 9:11 am

Public debt fears overshadow worst-ever US housing data

with one comment

The poorest figures for new home sales in US history were largely ignored by financial commentators yesterday as the markets focused on global debt problems that threaten a rise in interest rates before the fragile global economic recovery can handle it.

Portugal saw its sovereign rating cut by Fitch. US treasuries were hit by poor demand in an auction of five-year notes. Japan approved a new budget with a record $49 billion in new bond issuance. And a pre-election budget in Britain offered no relief for its huge debts.

US dollar surge

The main beneficiary was the US dollar with the euro down to $1.33. US financial markets also took a breather from their endless rally as risk aversion crept back into the market. The S&P is now valued at 22 times earnings, 32 per cent above its 30 year average, and clearly overvalued for this stage in the economic cycle. Gold fell to $1,085.

Meanwhile, the market largely ignored data showing that US new home sales fell to the lowest level on record in February. Sales of new homes dropped unexpectedly, falling 2.2 per cent during the month to 308,000. That was the lowest sales rate on record and much worse than expected.

US new home sales are down 23 per cent since last October. New home sales are off 13 per cent from February 2009. With sales falling for four months running, the inventory of new homes has increased, reaching a supply of 9.2 months.

Housing crisis

The construction of new homes in the United States is a critical source of demand for commodities used in building houses. Only a surge in demand from China has prevented a meltdown in building material prices and related commodities from steel to aluminum and timber.

The now frosty relationship between China and the US is symbolized by the Google condemnation of Chinese censorship and its self-imposed exit. The call for tariffs on Chinese goods to protect US industry is growing. At the same time China is tightening up on credit and could start buying less US treasuries.

Far from being in a fragile recovery the world is set for a round of further instability in global financial markets. In the initial stages the chief beneficiary will be the US dollar but the problems in the treasuries’ market is a reminder that dollar strength could be transitory.

Written by Peter Cooper

March 25, 2010 at 8:36 am

Global political consensus unravels threatening economic recovery

leave a comment »

When the global financial crisis first struck 18 months ago there was a commendable consensus among the world’s politicians about the need to tackle the crisis, and the actions that followed have done much to offset a fall into an even deeper slump.

However, global governments do not usually work in harmony. National interests are competitive and usually work to undermine a consensus. That is what now appears to be happening. It will not aid what is only a very tentative global economic recovery. It could undermine it completely.

IMF and Greece

Consider the Greek debt crisis. Far from being resolved by Germany it now appears that Greece will be thrown into the arms of the IMF for an austerity package. Which countries from the European Union will follow? Spain, Portugal and Ireland? Italy perhaps?

Then there is also the simmering potential of a trade war between the US and China. Nobel prize winning economist Paul Krugman is calling for a 25 per cent tariff on Chinese goods if China fails to revalue its currency to rebalance global trade. Google is to exit China over censorship.

It is notable that both these cases involve creditor nations protecting their national interests, and refusing to pick up the bill for debtor nations. You can certainly understand the logic of not wanting to pay off the debts of another nation. Why should German pensioners retire late to pay for the Greeks to retire early?

Yet the risk is that we deteriorate into a downward spiral for trade like in the 1930s. Both China and Germany have reason to pay attention as last year was their worst for trade since the Great Depression with export slumps of 16 and 18 per cent respectively.

Horrific trade slump

These are horrific export figures and the bounce back this year, to levels of trade still nowhere near pre-crisis levels is by no means secure.

The problem is that the creditor nations running export surpluses have been relying on the debtor nations to borrow more and more to fund their imports. Now that cycle has reached its limit or will so very soon as national debts grow bigger courtesy of stimulus package spending.

Ironically what the creditor nations say is right. There is no way out for debtor nations apart from austerity, default or devaluation and the latter is not open to eurozone countries. But this is not going to be good for the creditor countries either.

UAE case

To take the UAE as another example of a creditor nation. A business slump in developed countries will reduce demand for oil and hence the price and revenues. Then there will have to be a draw-down of savings to keep the economy going.

Where creditor nations theoretically win is that they can afford to buy things in a global liquidation sale. That might not be much compensation, however, if the world economy is shattered in the process.

In the meantime, we must hope that mutual self-interest triumphs on the global stage. But the omens are not good right now with nationalism on the rise. This sets the stage for a double dip global recession, not a recovery.

Written by Peter Cooper

March 22, 2010 at 9:58 am

Will Chinese inflation hike oil and gold prices back up?

leave a comment »

The Middle East could be enjoying another oil price boom much sooner than expected as Chinese inflation gathers pace after one of the biggest experiments in loose monetary policy in history.

Once an exporter of deflation to the rest-of-the-world, a nasty side-effect of the record stimulus plan in China last year is a surge in inflation that jumped to 2.7 per cent last month. Officials claim this is ‘mild and controllable’. Veteran observers sense an inflation genie let out of the bag.

Handbag shortage

One reader recently commented on shortage of handbags in China. This small example is illustrative of too much money pursuing too few goods. Inflation in prices is the inevitable result.

Chinese officials blame rising international commodity prices for domestic price rises. Yet where is that demand coming from but China? The latest oil studies have all concluded that demand is surging in China and flat or falling in the rest-of-the-world.

How long before the cost of Chinese exports begins to increase and this inflation is literally exported to the rest-of-the-word? It can only be a matter of time, and not so long at that.

Gold investors selling last week on fears that interest rates would go up in China are really barking up the wrong tree, as is anybody who thinks the Chinese are not buying more gold themselves.

Oil producing countries have been very content with oil prices in the $70-80 range. But they worry about higher prices because that might give their customers another economic heart attack.

There is also mounting concern about the durability of the Chinese economic recovery and the quality of recent GDP growth. Speculative bubbles inflated by cheap credit have a habit of going spectacularly bust and leaving the formerly rich and successful in deep trouble.

Stimulus risk

No country has ever masterminded a bigger per capita stimulus plan than China last year. It is the boldest ever plan of its kind, and therefore also carries the most risk.

For one thing higher oil prices will be desperately bad news for the developed economies still struggling to emerge from the worst recession since the 1930s, and having saved the world with its massive reflation China risks blowing up its client’s economies with inflation.

Not that the developed economies have been pursuing exactly deflationary policies themselves, and this just adds to the witches brew now imperiling the global economy. If there is an oil price spike now it may be nasty, brutal and short. Gold is the more solid inflation hedge.

Written by Peter Cooper

March 14, 2010 at 8:52 am

Qatar economic miracle flies into turbulence

leave a comment »

Qatar Airways kept up a bullish front at the Hyderabad International Exhibition and Conference on Civil Aviation yesterday. But all is not well in the emirate which last month sacked 40 staff from its high profile Qatar Financial Centre, including its brilliant PR chief Steve Martin.

The euphemistic talk is of a reassessment of budget priorities. The talk in Doha is of over-expansion without due regard to commercial good sense. And the big whisper is that gas prices are down, and that the outlook for gas revenues may be far below expectations.

Gas dependent

Who knows how much gas the now depressed economies in the UK and USA will actually require from Qatar. Certainly the previous plans linked to far faster rates of global economic growth will have to be reassessed.

In the meantime, the huge investments in liquefied natural gas infrastructure still have to be paid for and their massive loans serviced. There has been no indication that debt is a problem just yet in Qatar. But the credit crunch has already been manifest in a slowdown in finance for local property projects, many of which are now on a go slow or have stopped.

The new airport is said to be around two years behind schedule and over budget, so planes queue up on the tarmac at the overwhelmed original Doha airport, and a new luxury hotel is bang in the flight path.

Is the order backlog from Qatar Airways therefore as secure as its executives proclaim? The airline has 220 aircraft on order worth some $40 billion. By 2013 its fleet will grow from 80 aircraft today to 120 and its network jump from 86 to 120 destinations.

Over the past five years Qatar Airways has doubled its fleet and invested in five-star service standards that are the envy of the industry. Passengers also enjoy discounted fares courtesy of gas-subsidies. The airline has never made a profit. Is this not over-expansion?

Thin commercial logic

Without a domestic tourism industry like nearby Dubai the logic for creating a massive airline based in Doha has always been thin on commercial grounds. Bringing tourists into a city creates local spending that boosts the overall value of an airline to a local economy. Transit passengers do not have the same value.

Advertising expenditure can only go so far in any business model. Ask the now sharply cutback Qatar Financial Centre that has spent many millions on some superb adverts.

No at the end of the day any business has to stand on its own two feet and make a profit. State subsidies can fund a start-up and maintain a loss-making business. Ask Gulf Air. But there is no substitute for sound business economics and that is a fact many Gulf States are now starting to appreciate.

Written by Peter Cooper

March 8, 2010 at 8:54 am

Markets at a major turning point?

with one comment

It is not just the Bradley date in the financial astrology calender tomorrow, nor the warnings from the chart experts like Bob Prechter and Harry Dent that the end is nigh, there is also the simple flow of mood from optimism to realism to pessimism that drives markets to consider.

Global financial markets have rallied for the best part of 11 months from their lows following the 2008 crash. But the combination of excess liquidity and carefully contrived market spin that has taken the US stock market 70 per cent off its low point is almost done.

Interest rates

The Fed is now debating how to withdraw from near zero interest rates, always a policy that cannot last for long because of the inflation risk. President Obama leads the spin doctors but reality is closing in like a snowstorm in the North East or an earthquake in Chile.

And that reality is nothing like as rosy as advertised. It was always a bit of a long-shot. How can an economy built on debt expand when banks are being more prudent in their lending? How can a consumer driven economy thrive when saving is popular again?

We still have a moribund housing market in the USA with millions of of loan foreclosures to come over the next two years, further depressing house prices and construction activity.

Then again what of China? Again there is a reality check. The growth produced last year as a result of the biggest government intervention in the history of markets is very low quality, causing an inventory build and asset price inflation.

Chinese bubble

Liquidity powers up markets into a bubble. Then they crash when it runs out. This much we know from our history books. China’s 2009 performance is a classic liquidity bubble.

US financial markets’ optimism has been self-reinforcing with recession measures like job cuts boosting profits in the short-term. The problem is that raising unemployment levels does lasting damage to the real economy and domestic demand.

It could be that financial markets stagger sideways for another few weeks until the weight of negative news becomes too much and they take a real tumble. But bad news is greatly outweighing good news right now, so the turning point has to be very near.

Bob Prechter and Harry Dent both expect a big crash after the long rally from the lows of last March. The downside looks considerable and any upside very limited from this point. Sell!

Written by Peter Cooper

February 28, 2010 at 9:30 am

Hard data shows US recovery in trouble

with 4 comments

The worst new housing starts for 23 years in January, consumer confidence way below expectations and a build in oil inventories, this is not the stuff of a US economic recovery.

How much more does it take before Wall Street pays attention and stops listening to the spin doctor Bernanke? So he thinks interest rates will remain low for a long period. That is also bad news because if the economy was really getting stronger then he would put them up straight away.

Facts not talk

But let us focus on the figures not the waffle on the hill. Housebuilding is a backbone of the US economy and a major consumer of commodities. Think how much material goes into a house. If houses are not being sold then less new ones will be built. The economy goes down.

Then consumer confidence. Let us not forget that 70 per cent of GDP in the USA is consumer spending. If consumers are saving and not spending there is less demand for goods, services and imports from China. The economy goes down.

Oil is another basic indicator of economic health. Economies in recession use less of it, inventories rise and eventually prices fall when speculators get scared. The economy goes down.

You have to wonder what piece of economic data will be enough to rattle the bulls on Wall Street. Consider the outlook for housing, consumer confidence and oil.

Mortgage resets are set to surge into the millions over the next couple of years, crimping any possibility of a meaningful housing recovery. House prices will go lower not higher.

Consumer spending

Consumer confidence is clearly under pressure. There is the fear and reality for many of unemployment. The savings rate has gone back up so less goods and services will be bought.

Then there are oil prices whose rebound since December 2008 is now about to be tested by weakening demand. The retracement pattern is typical of a rebound from an oversold position and would normally now move lower in any case.

So let us not get carried away by overconfident noises in the corridors of power. They have misled us before and are doing the same again now.

STOP PRESS: Orders for U.S. durable goods excluding transportation fell 0.6 percent in January, the biggest drop since August, the Commerce Department said. The average forecast of economists surveyed by Bloomberg was for an increase of 1 percent.

Meanwhile, the Labor Department said first-time claims for unemployment insurance rose by 22,000 to a seasonally adjusted 496,000. Economists polled by Thomson Reuters had forecast a drop in claims to 455,000.

Written by Peter Cooper

February 25, 2010 at 11:06 am