Monday, November 30, 2009

Cyber Monday Overshadowed by Dubai Issues

The continuing worldwide real estate debt saga was revived last week when developer Dubai World announced to anyone interested that it might like to rework the terms on some of its loans. In particular, the developer of some of the most expensive and outlandish buildings and communities in the world wanted a six-month moratorium on its outstanding debt.

That message roiled markets worldwide as bankers around the globe rolled their eyes. It was as though the entire financial community was to revisit the financial crisis of 2008 that nearly crumbled the entire global structure. That was last week.

On Monday, markets worldwide recovered, on consideration that the Dubai issue would be contained. In the US, stocks spent the majority of the session in the red, but leapt into positive territory after 3:00 pm on word that Dubai World would seek to restructure $26 billion of its debt.

Crisis averted? For now, that seems to be the case, though there are still billions of dollars worth of commercial and residential real estate worldwide that is similarly upside-down, with what's owed being more than current valuations, so, debt, blow-ups similar to what's occurring in Dubai may become more and more commonplace rather than an outlier event.

Such a backdrop makes investing of any kind somewhat more risky than normal. Imagine that all assets are under scrutiny, that the valuations of everything - right down to the currency in which the assets are denominated - are of skeptical nature. That's at the crux of not only the decline in residential real estate values, but also in the rise of gold, the decline of the US dollar and the upward swing in stocks.

Wherever investors feel less risk, or more opportunity for arbitrage, that is where money will flow. Whenever there's a crisis, such as over the past five days with the Dubai issues, money flows into the US dollar, seen by many as the absolute last safe haven. On mellower days, stocks are the choice, and the dollar is sold off. Through it all, however, two constants have remained: gold is moving steadily higher; residential (and now commercial) real estate is devaluing. There's more safety, supposedly, in bricks of ore than in houses.

Realistically, neither the gold bugs or real estate speculators have all the answers. Some areas of the world are in better shape than others, obviously, but so extreme is the fear that gold is seen as a better bet than houses. In other words, the market is telling us, shouting at us, to become more liquid. Cash, gold and stocks, which can be converted readily and without much fuss, are currently preferred to hard assets like buildings, homes, and land, which cannot be moved and are not easily liquidated.

What the ongoing Dubai issue says is that the world is facing a very uncertain future, one in which value may be placed more upon the liquidity of assets rather than some intrinsic value. After all, you can live in a house. You can't do that with bars of gold, cash money or stock certificates. Thus, all trading is risky, though, bottom line, cash remains king (until that is devalued, too).

Dow 10,344.84, +34.92 (0.34%)
NASDAQ 2,144.60, +6.16 (0.29%)
S&P 500 1,095.63, +4.14 (0.38%)
NYSE Composite 7,092.36, +22.27 (0.31%)

Simple indicators confirmed the small gains of the day. Advancing issues, which had been lagging all day, turned around and beat decliners, 3463-3031. There were 145 new highs to 96 new lows. Volume, like it or not, continues to moderate around 2 billion on the NASDAQ and 5 billion on the NYSE, in what has to be recognized as a kind of "new normal." Obviously, there are more than just a few investors - of all sizes and stripes - who have not re-entered the market after last fall's collapse. Those types can hardly be blamed. Surely some of them were completely wiped out. Many others simply prefer now to preserve cash rather than invest it. This could become all the rage as the baby boomer generation - badly burned in last year's financial conflagration - pulls back from riskier behavior as they approach retirement age.

NYSE Volume 4,935,098,500
NASDAQ Volume 1,926,715,500

Commodities snapped back as the dollar fell late in the day. The price of crude oil was also affected by news that a British yacht had been captured by Iranian sailors on November 25 and the crew are still being held. This brings into play not only international relations, but trust of the news media, as the world is just now hearing about an event 5 days old.

In any case, when the news broke late today, the price of crude catapulted higher, closing at $77.28, up $1.23. Gold advanced $7.50, to $1,183.00, with silver gaining 21 cents, to $18.54 at the close.

Anecdotal evidence from Black Friday seems to be confirming that shoppers spent slightly less than last year, though results have been mixed. Not surprisingly, nearly every report states that consumers are shopping for "value."

During times when the value of everything is in question, that ordinary people would be careful of their spending confirms the global, macro-economic outlook.

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