November 30th, 2009 3:28 PM by Mel Samick
Risk appetite waned considerably over the past week as "Dubai World's" credit concerns triggered safe-haven flows into U.S. Dollar and U.S. Treasury deposits. Now, the stage for bailouts might get even bigger from a corporate level to a sovereign level. In order to avoid systemic risk, many analysts feel that Abu Dhabi is likely to bail out Dubai rather than risk driving investors from the region because of a default. United Arab Emirates stocks nose-dived on Monday (today) as investors waited for clarity on Dubai's plan to delay repaying billions of dollars in debt and government word on how it would tackle a crisis that has rattled global markets recently. Dubai raised fears of a second bout of financial turmoil last week when it asked for a six-month repayment freeze on debt issued by the state conglomerate "Dubai World" and its unit "Nakheel," developer of three man-made palm-shaped islands. All of those who planned to move into those dream paradises in the desert may still have to dream a little while longer.
One may believe that paradise may be lost in Middle East, but it seems to be regaining here in our domestic housing market. The housing news has indeed been mixed in recent months. The good news is that home sales, both new and existing, beat expectations in October by a significant margin. New home sales rose 6.2 percent and existing home sales surged 10.1 percent (higher than the 8.8 percent gain in September). Home sales have improved sharply, driven partly by pull-forward effects related to concerns that the homebuyer tax credit is due to expire, although it was recently extended. However, home prices have weakened anew and most likely declined in September on a seasonally adjusted month-to-month basis. The labor market is making progress toward stabilization as the pace of layoffs appears to be falling sharply, judging from a big drop in initial jobless claims over the past two months. Perhaps the most positive signal of the past few weeks has been the sharp drop in initial jobless claims, which fell to 466,000 last week from around 550,000 two months back. Although the level of initial claims remains high, the pace of gross job losses is abating rather quickly. However, hiring remains depressed, and overall employment levels still seem to be falling.
Judging from the mood in shopping malls over the Thanksgiving weekend, all reports on the global recession seem to be made up fiction. Many more shoppers turned out for the traditional start of the Christmas shopping season over the Thanksgiving weekend compared to a year ago, but less was spent and lower-priced items were in vogue. The National Retail Federation estimated 195 million people visited shopping malls and online retailers Thursday through Sunday, up from 172 million last year, but that the average amount spent per shopper fell nearly 8 percent to $343.31. The estimated overall tally for the four days was $41.2 billion, on par with last year. This year carries particular weight because consumers have been ravaged by the recession and spending has yet to fully recover.
The falling dollar is helping keep our interest rates low. Treasury auctions have enjoyed strong foreign demand. Many analysts feel that the dollar’s continued weakness has contributed to the impressive Treasury results. On the other side, the Fed’s stance to keep rates accommodative for some time is also contributing to the weakness in the U.S. dollar. Mortgage borrowers are also enjoying low mortgage rates, which is further supported by the Fed's MBS purchasing program until March 2010. Aside from mortgage rates, low market interest rates should remain for a while. The minutes of the November 3-4 Federal Reserve meeting reveal that the members continue to support the Fed's large-scale asset purchase programs which would have the Fed purchase $1.25 trillion of agency MBS by the end of the first quarter of 2010. While there was some discussion of possible exit strategies, none of the members seemed to feel that any action was imminent or necessary.
Information provided by Amtrust Bank Capital Markets