Dubai Troubles Loom:

As the news of Dubai made its global ripple on the financial markets, Europe stocks fell over 3% on Thursday, marking the steepest decline since this past April. Meanwhile, Friday’s opening market in the US quickly headed south, as investors ran for cover. By 9:30 the Dow had declined over 200 points, sending a troubling message to investors and non-investors alike. After several attempts to rally the Dow ended up just over 150 points down.

Dubai, known for its massive investments and development of the world’s most breath taking resort and hotels for the super rich, requested a 6-month stand still from its creditors. This sounds like nothing more than structured bankruptcy, without the stigma. Probably a wise decision, averting drastic decline in assets value and investor abandonment. Smart move. The reality remains that Investors held high hopes for high-end returns, which were reduced to pipe dreams since the Persion Gulf Debt Crisis unfolded last week.

On November 24th, the request for a stand still made to the Dubai World creditors involved interest payments on an estimated $60 billion worth of debt. The News prompted insurers to increase the cost of insuring Dubai’s debt, which was swiftly followed by Moody’s and Standard and Poor’s downgrades of the government-related entities in Dubai. Justin Urguhart Stewart, co-founder and director of Seven Investment Management, is quoted in the Wall Street Journal as saying “many [investors] have had their heads in the sand regarding Dubai”, adding that there was a lack of understanding of what the investment risks might have actually been.

To midigate fallout, the country’s government is doing everything it can to limit impact of its debt woes. Dubai United Arab Emirates(UAE) pledges to stand by Dubai foreign and domestic banks in the country. The country’s federal government, which is obviously backed by oil money, states that the UAE’s central bank has made overtures to all banks with branches domiciled in the country, making it clear that they will have access to cheap money, as well as the establishment of a special “additional liquidity” facility.

This morning, Squawk Box reported that an analyst at Credit Suisse estimated that European and American investments in Dubai amounted to only 5% exposure. That’s a relief. I am sure more will unfold as the week progresses.

K. Reilly

Housing Market: Struggling to Find Stability

The Federal Reserve Board of Governors is maintaining interest rates at or around zero percent, as an incentive to lure home buyers back into the market. The Feds are also buying up mortgage paper, which is a purchasing binge that is scheduled to end fairly soon. Nevertheless, the message is clear that the government is trying to do everything it can to stabilize the housing market. Two weeks ago housing analysts were overly excited about the rise in consumer spending in the housing sector during the 2nd quarter of this year. The reality eventually set in and we are now forced to face the fact that there will be no miracles or swift recoveries waiting around the bend.

The 30-year mortgage interest rates have declined in the last two weeks to 4.91 percent, down from 4.98 percent. Just one year ago the average 30-year mortgage interest rate was over 6 percent. There are signs that the housing market is improving, but we have previously noted that 80 percent of the FHA purchase loans this year have been first-time buyers, motivated by the tax incentives.

Determined to keep the ball rolling, the government has proposed a bill that will force banks to assist home owners who are facing foreclosure, in an effort to curtail the avalanche of foreclosures expected from the subprime loans underwritten in 2007 and 2008. Unfortunately, the Banking industry and real estate lobbyists’ made hefty donations amounting to over $350-million dollars to congressional campaigns during the height of the housing market, which may explain why the proposed bill appears to be on a slow path, and may never see the light of day. Let's hope, for the sake of the homeowners that will be facing foreclosure in the coming months, I am wrong.

k. Reilly

Out Of Control Credit Card Rates Add To Consumer Woes

It is bad enough that millions of Americans are out of work or employed in lower paying jobs, struggling to make bill payments. A number of credit card companies are adding salt to the wound by charging exorbitant interest rates on outstanding balances. In fact, they are beginning to take on loan sharking characteristics by charging as much as 36% to customers, as well as doubling the minimum monthly payment required to avoid penalties, making payments nearly impossible for some people.

Although President Obama signed a new law last May for credit card reform, the companies are making every possible effort to maintain their bottom line income. Under the new law, issuers will be curtailed from raising rates on existing
balances. However, customers are seeing new annual fees and inactivity charges that were not imposed before. At Bank of America, some clients were told that their no-fee credit cards would be subject to a new annual fee. At Chase, some clients must pay 5% of their monthly balance as a minimum payment - up from 2%. That translates to a 150% increase!

With other negative changes such as diminished rewards programs and shrinking credit limits, along with a record number of bankruptcies and declining buying power, the vice has tightened yet another notch to squeeze the American consumer by choking off the credit lifeline.

C. Cohn