When Dubai Means "Don't Buy!"

Last week, a Middle Eastern city-state that represents approximately 0.1% of global GDP sent shockwaves through world financial markets. Dubai, part of the United Arab Emirates (UAE), requested a debt standstill on behalf of its flagship holding company, Dubai World, on the back of a debt-fueled investment binge. That's a clear-cut concern for international bond investors, but why should U.S. stock market investors care?

Does it matter?
In terms of its impact on the U.S. companies and the U.S. economy, the impact of Dubai's problem is a rounding error. Among foreign banks, British institutions, including Royal Bank of Scotland (NYSE: RBS  ) , Standard Chartered, HSBC (NYSE: HBC  ) , and Barclays (NYSE: BCS  ) , have the highest exposure to Dubai. The direct exposure of U.S. banks such as Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , or JPMorgan Chase (NYSE: JPM  ) is negligible.

However, its impact on investor psychology is material, as the reaction on global stock markets demonstrated last week. In an environment in which U.S. stocks (and many other assets) look overvalued, that is a very real problem; indeed, when prices are inflated by sentiment, they are vulnerable to even a tiny pin prick that can burst investor confidence. In a global economy, it's impossible to predict when that pin prick will originate.

A warning for U.S. investors
The other lesson from the UAE's atrocious mishandling of Dubai's plight is that governments aren't always as predictable -- or as skillful -- as investors would wish them to be. At a time when the U.S. stock market's valuation implies "business as usual" (better than usual, in fact), it's a useful reminder that the U.S. now faces an unusual set of risks, and investors would be better off treating a seamless exit from this situation as a remote assumption, not a standard one.

The Federal Reserve's current policy is creating tangible risks for investors. Global Gains co-advisor Tim Hanson explains why you need to get out now!

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Fool contributor Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (22)

Comments from our Foolish Readers

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  • Report this Comment On November 30, 2009, at 3:11 PM, pondee619 wrote:

    What is it you are telling us, Alex? Get out now? Hold on, but be ready to flea? Be cautious? Stay out while I buy in? If we don't buy, what should be done with our investment money? I missed that part of your story.

    What is it you are telling us, Alex? Anything at all, or just writing stuff?

  • Report this Comment On November 30, 2009, at 3:28 PM, TMFAleph1 wrote:

    @pondee619,

    Thanks for your interest. Bear in mind that this does not constitute financial advice -- I'm not familiar with your particular circumstances.

    In my opinion, however, it is no time to be overweight with respect to the broad U.S. stock market. If you must be overweight U.S. stocks, they should be carefully selected as opposed to an broad market index fund -- I suggest tilting one's portfolio towards higher quality names.

    Furthermore, both government and corporate bonds look unappealing right now.

    I think being overweight cash while one waits for valuations to become more attractive is an acceptable choice.

    You can search the site for some of my other articles in which I discuss the rationale behind these suggestions.

    Best,

    Alex Dumortier

  • Report this Comment On November 30, 2009, at 3:36 PM, jaderdavila wrote:

    i think there's good money to be made here

    investors that dont have other sources of income

    will sell it cheaper than it would yield if things were right

    oil is gonna last for ten more years

    there's nothing 'green' right now

    if you can hold the paper for three years

    oil will pay for everything handsomely

  • Report this Comment On November 30, 2009, at 3:49 PM, ChannelDunlap wrote:

    Clever title

  • Report this Comment On November 30, 2009, at 4:10 PM, pondee619 wrote:

    Thanks for the answer, Alex. It's a shame it wasn't in your story. Always get the feeling the the fool leaves important information out intentionally. There is the guise of giving advise, but you are always left short. It's one thing to be told "Don't Buy" and quite another to then be given suggestions as to what you should do. Your answer completed the story. Shouldn't it have been completed prior to publication?

  • Report this Comment On December 01, 2009, at 4:38 AM, stocktrader007 wrote:

    They said US dollar is dead. Then why can't Dubai find a few dollars to pay off debt? The truth is that this is a deflationary crash and US dollar rally is imminent.

    http://www.tradingstocks.net/html/death_of_the_us_dollar.htm...

    It is not just Dubai. Home owners cannot find dollars to pay their mortgage. Employers cannot find dollars to employ their people. Where is all the printed money? We printed 2 trillion. But the borrowed amount is 50 to 300 trillion. And we promised to pay it back with interest!

  • Report this Comment On December 01, 2009, at 10:44 AM, TMFAleph1 wrote:

    @stocktrader,

    The "borrowed amount" is $50 to $300 trillion? This looks like nonsense. Do you have a source for these figures?

    Best,

    Alex Dumortier

  • Report this Comment On December 01, 2009, at 10:58 AM, TMFAleph1 wrote:

    @stocktrader007,

    "But the borrowed amount is 50 to 300 trillion."

    I'm not sure what borrowed amount you're referring to, but that statement looks like nonsense. Do you have a source for those figures?

    Best,

    Alex Dumortier

  • Report this Comment On December 01, 2009, at 5:40 PM, moose70 wrote:

    I imageine Tiger Woods invested in Dubai World....perhaps that's is the root of his crash!

  • Report this Comment On December 07, 2009, at 1:26 AM, Big50Shooter wrote:

    I spent a good portion of last week "cashing out" of the US market (and even a Chinese stock or two that I held which made me a good profit), but my question is: Since the USD is going to pooh-pooh, what do I do with all of the cash now?

    More gold & silver (I already hold @7% of my total portfolio in Gold/Silver; not the "funds" actual-physical)? Do I need more, even at these seemingly high prices?

    The prices of PM's sure don't seem to be heading south in a hurry, and the slight dip in PM pricing we are experiencing right now might be a signal to increase my holdings... No?

    If not, where would you put your cash right now? I was looking at some Canadian railways and Australian miners to hedge against the $$$ and inflation... Good idea?

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