It was shaping up to be such a calm and enjoyable Thanksgiving week.
A lot of important economic reports were crammed into the first three days of the week. Most of them provided positive surprises, supporting the scenario of a nicely-improving economy. It wasn’t good that the economic recovery in the third quarter wasn’t as strong as previously reported, with third-quarter GDP being revised down to 2.8% from the previously reported 3.5%.
However, other economic reports included that new unemployment claims fell by 35,000 the previous week (to the lowest level in 13 months); existing home sales shot up 10.1% in October; new home sales rose a better-than-expected 6.2%; home prices rose again in October; and consumer confidence was up again. The stock market was following its tradition of usually providing a positive Thanksgiving week, closing up each of the first three days of the week.
What a nice backdrop for the beginning of a long and relaxing Thanksgiving holiday weekend in the U.S., with the market closed Thursday and open only half a day Friday, and a three-day Islamic holiday in much of the Middle-East,
However, Dubai World, Dubai’s government owned ‘sovereign investment company’ stuffed the Thanksgiving turkey with a bombshell announcement that gave many investors indigestion before the bird was even carved.
As everyone is well aware by now, Dubai World announced a plan to delay payments on its global debts for six months. Dubai acknowledged that it realized how global markets would react, but will not provide more details until next week, for which it is being accused of irresponsibility and ineptitude.
Stock markets in Europe, open at the time, plunged an average of 3.2%. When Asian markets opened Thursday night they plunged between 3% and 4.8%. Dow futures were down more than 300 points overnight Thursday before improving some by Friday morning. But even so, when the U.S. market re-opened Friday morning the Dow was down 230 points in less than five minutes.
Meanwhile, the U.S. dollar and Treasury bonds soared as safe havens, while gold, oil, and most commodities plunged along with stock markets.
The Dubai announcement is generating enough ghosts, goblins and things that go bump in the night to remind me of Halloween rather than Thanksgiving.
Investors are worried that a default on its debts by a government-owned ‘sovereign investment company’ will create a ripple effect through global financial markets. Most of Dubai World’s debts are related to its massive commercial real estate developments in Dubai, as well as mortgage-debt on its large global real estate investments. Most readers will remember the considerable publicity and political debate a few years ago when Dubai World bought the seaport operations of major cities on both coasts of the U.S. It has much more quietly acquired other large holdings around the world. Freezing its debt payments cannot help but cast a pall over global banks already experiencing rising defaults on commercial loans and mortgages, perhaps leading to even less willingness to make loans.
However, the initial reactions may have been overdone.
Dubai’s total debt is estimated as between $60 and $80 billion, large in relation to the country’s GDP of $75 billion. But, since any losses would only be some percentage of that, defaults spread globally could be quite easily absorbed, not likely on their own to create a new global credit crunch.
The danger of course is that fear could cause a ripple effect in financial markets similar to the aftermath of the failure of Lehman Brothers last September, a panic by investors to get out of all investments without discrimination.
We will have to wait and see. It was encouraging that after plunging more than 3% in knee-jerk reaction on Thursday, European markets closed up on average of more than 1% on Friday. Meanwhile, the U.S. market, which was closed on Thursday, had a less panicked reaction than the rest of the world when it opened on Friday, closing down ‘only’ 1.7% on the day. It also almost salvaged a traditional positive Thanksgiving week, the Dow down only nine points, or 0.1% for the week, and the S&P 500 exactly unchanged for the week.
However, the Dubai announcement did ruin what had promised to be an unworried weekend for investors, and adds considerable importance to next week. Retailers reports of Black Friday sales, and anticipation of the important employment reports due out next week, may take a backseat to renewed debate over the financial foundation of the fledgling economic recovery.
