Posts Tagged ‘Dubai’

Notes From Underground: Much Ado About Nothing?

December 15, 2009

The financial news was sparse today.

Abu Dhabi stepped into the breech and provided the cash necessary to prevent a “default” on the Sukkuk instruments. This is no great surprise as the move buys DUBAI some breathing room to do a credible workout, and the credit markets get a chance to bring some light onto the Islamic debt market. The Greek government came up short on a credible plan to curb the spiraling deficit so the German/Greek 10-year differential increased 15 basis points to 225.

Interestingly, the rest of Europe quieted down and even the GILT market was bid helping to give the British POUND some support. Also in Britain it appears that the battle for CADBURY will heat up as the KRAFT offer has been deemed  insufficient so we look for other “players” to enter the game. This could give a bid to the POUND as the bids for the confectionary company get sweetened. Also in the realm of more negative divergence, S&P downgraded the Mexican DEBT market, but the Mexican PESO barely budged. The PESO has shown some strength of  late so the fact that the MEXICAN stayed strong makes it necessary to watch. Peso strength may well be a proxy for a positive outlook for North America.

As we noted in undertaking the writing of NOTES, we wanted to generate qualitative discourse in the realm of trading. Yesterday’s post brought forth a need to expound on two separate issues. First,a thinker of the highest order inquired about the line: “When the U.S. truly starts on a growth path this issue will be brought to the fore.” We were discussing what could bring downward pressure on the EURO when we wrote that line. Until now the U.S. has not been a destination for foreign investment as there has been too much uncertainty over U.S. policy, from the FED, and executive and legislative branches.

As the fog begins to clear, foreign investors who are laden with DOLLARS are going to be in search of assets–hard assets besides precious metals. Sovereign Wealth Funds (SWF) will be scouring the U.S. investment landscape for industrial concerns and various types of real estate. Prior to the collapse of Lehman and Bear Stearns, foreign funds had invested heavily in the U.S. financial markets. The fact that they have been so badly shaken by poor timing they will be more cautious this time around. They will avail themselves of using a depreciated asset (THE DOLLAR) in the only place its value has been sustained. In addition, they will be buying at depressed prices rather then at top.We believe that the private equity groups such as Blackstone, Ochs-ziff, Apollo and others, have been seeking out SWFs to help finance the purchases of large real estate portfolios. This is what we mean by the growth path–until now this equity rally has been basically a domestically based carry trade. The next leg up, if it occurs, will be led by foreign investors believing they are missing out on a great opportunity.

Another response came in seeking more info on the misunderstood Maastricht accord. When you hear the talking heads on TV, pay little attention  when they pontificate on the European Union. If you need to polish up your knowledge the best book to read is Bernard Connolly’s “The Rotten Heart of Europe.” The original Maastricht accord was crafted to appease the demands of the Bundesbank. Strict guidelines of debt and deficits were to be adhered to so that the peripheral countries would not continue their profligate spending habits and expect to be bailed out by the more disciplined nations. There is no bailout clause as the spendthrifts were actually to be fined and forced back in line. Well as usual the guidelines were very rarely adhered too–especially when it suited the stalwarts of the EU: Germany and France.

Therefore all the peripherals felt that in stressful times the Maastricht strictures should be tossed aside for all. Once the economy went into a major recession in 2007-2008, all rules were laid aside  except that Germany was better positioned then the others and wanted the Maastricht rules adhered to and there in lies the problem.Germany has gotten wages under control during the last six years and is in the best competitive position–both in Europe and globally. The German economy is running the third-largest trade surpluses in the world and especially so within Europe. Will the good Bavarian burghers be willing to transfer their hard earned D-marks–sorry Euros–to pay for the profligate ways of her fellow European citizens? The wanton sinners are supposed to be fined not rewarded and their in lies the rub. Something is truly rotten in the state of Denmark!

Oh well, neither a lender or borrower be.