Monday Morning Musings: Is Dubai A Shot Across The Bow?

The markets were down on Friday, but are hanging in there so far today, after the news came out last week that Dubai World is having difficulty making its debt payments and is asking creditors for a 6-month delay.

The news sparked fears in the region that another debt crisis could unfold, with Dubai simply being the first to show cracks in the foundation. Some analysts have come out and said that Dubai's troubles are unique to itself, and should not spread to other regions.

Interestingly, while Dubai's markets were down sharply overnight, the Asian markets were nicely higher. Asian banks to not have as much exposure to Dubai as some European banks.

The dollar is lower again today, which is supporting stocks and commodities to a degree. Oil is steady at $76.70, and gold is up a bit to $1176.70.

In economic news, the Chicago PMI came in at 56.1 for November, better than the 53.0 that was expected. Other than that, the data is a little light this morning. The financial sector (XLF) is leading the action so far, while consumer discretionary (XLY) is lagging. Among sub-sectors, steel (SLX) is strongest and homebuilders (XHB) look weakest.

The 10-year yield is lower to 3.22; and the VIX is another +1.9% higher to 25.33, after a huge +21% surge on Friday that took the VIX from year low levels back above its 50-day average.

Trading comment: I have been saying that we need to watch sentiment closely here. Early last week, the sentiment indicators did in fact show a little too much complacency. The ISE call/put ratio hit a very high level at 184, the CBOE put/call ratio dipped to 0.67, the VIX hit yearly lows at 20, and the bears on the Investor's Intelligence poll fell to the low level of 17.6%.

As such, the odds were high that any piece of negative news could lead to a whack in the market, and the Dubai debt troubles fit the bill. Of course, this was no small piece of news, but I think its likely that the UAE will step in and show support. If another country pops up with similar problems, it will really raise the odds that it is time to get defensive. But right now, I remain cautiously optimistic that we can still see higher levels in the market by year-end.

long XLF