Insights & Advice

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Black Friday in more ways than one

While Americans were home celebrating Thanksgiving, the rest of the world had little to celebrate. Over the last two days, some Asian markets fell as much as 5%, emerging markets overall declined by 2.7% while Europe experienced similar declines. Commodities also tumbled and the U.S. dollar suddenly became the currency of choice.
It all started when one of the tiny oil-rich countries of the United Arab Emirates, Dubai, admitted to some financial difficulties.
Most of the big companies in this Persian Gulf nation, the second largest of the U.A.E., are state-owned. Just before the credit crisis Dubai went on a spending spree. It expanded its presence in banking, real estate and transportation to the tune of $80 billion in new debt. In a surprise announcement Wednesday evening (EST), the government admitted that they needed to delay payments on this debt. It led investors to worry that there may be other sovereign nations that might be experiencing financial difficulties as well.

In this new crisis, it appears the U.K.-controlled bank, Royal Bank of Scotland, has the most at stake ($2.3 billion) while HSBC Holdings, Europe’s largest financial institution, has the largest absolute exposure with $17 billion in loans outstanding.

On the surface, why should global markets respond to a mere $80 billion in problem loans with such fear and trepidation? After all, the world has navigated far worse over the last 18 months or so, and come out on top. The simple answer is that after nine months of stupendous gains world-wide, markets are priced for perfection. Any bad news, no matter how marginal, is going to tip us over into the red.

Some emerging markets, for example, like China and Brazil, are up over 100% from their lows. At the same time, the recent run-up in gold and many other commodities, as a result of a relentless decline in the U.S. dollar, has raked in stupendous gains for investors (and hopefully some of our readers). Last week, I wrote that taking profits is a personal choice and invited readers to call or e-mail me with their questions.

“What if I’ve made back a lot of my losses from last year,” wrote one reader, “but I’m still underwater overall. Should I sell?”

After discussing his financial goals and objectives, we decided that he should take a little off the table, especially in his gold and silver investments. We got lucky, since gold is down over $23/ounce from that call.

That’s not to say that precious metals won’t go higher. Remember, I’m on record with a price target between $1,200 and $1,300/ounce. Yet at the beginning of the week, gold was almost at the lower end of my range. We took some profits, because buying and selling should be a process. Rarely can we buy at the lowest price of the year or sell at the highest, which means we sell a little as markets move higher and buy a bit when markets move lower.

To put Friday’s sell-off in context, I don’t think the Dubai debt problem is going to sink the world’s financial system. It could provide an excuse for another dip in the markets, especially if Dubai’s troubled loans outstanding total more than the publically-stated amount. A sell-off would relieve a lot of the overbought extremes that I’m seeing in markets, especially among emerging countries. Remember, too, that volume is exceptionally low the day after Thanksgiving and the markets only open half the day. Monday’s markets could open with a solution to Dubai’s problems and a rush back into stocks. Europe is already recovering some of their losses as we write this. To me, however, it is a wake-up call on just how fragile further gains in the stock market could be.

Posted in A Few Dollars More, At the Market