NEW YORK (Reuters) –
Rising fears of a possible debt default at a Dubai state-owned conglomerate is the catalyst for an "overdue correction" in equities and risk assets, the chief executive of top bond fund manager Pimco said in an interview on Friday.
"Dubai is serving as a catalyst for an overdue correction in risk assets that have been supported by liquidity rather than fundamentals," CEO Mohamed El-Erian told Reuters. "While many have acknowledged in the last few weeks the growing wedge between market valuations and economic and corporate realities, few have been willing to take their equity exposure down. Dubai is changing all of this.
El-Erian oversees more than $940 billion in assets under management at Pimco.
Equity markets came under severe pressure on Thursday after news that Dubai World, the government investment company burdened by $59 billion in liabilities, sought to delay repayment of some debt.
U.S. stock markets, which were closed Thursday for the U.S. Thanksgiving Day holiday, fell on Friday. The Dow Jones industrial average (.DJI) dropped 154.48 points, or 1.48 percent, at 10,309.92, while the Standard & Poor's 500 Index (.SPX) was down 19.14 points, or 1.72 percent, at 1,091.49.
"We had taken down risk exposures in the last few weeks through sales of credit and spread products and, correspondingly, increased our holdings of Treasuries and other high quality names," El-Erian said.
Other investors were playing defense as well. The benchmark 10-year U.S. Treasury note was up 16/32, with the yield at 3.207 percent, while the two-year U.S. Treasury note was up 3/32, with the yield at 0.687 percent. At the longer end of the yield curve, the 30-year U.S. Treasury bond was up 12/32, with the yield at 4.2116 percent.
Overall, the underlying characteristics of the Dubai announcement are similar to those facing commercial real estate in other countries, including the United States and Britain, he said.
"There will be contagion to many markets, especially in the emerging world where we are witnessing broad-based sell-offs among names with very different financial characteristics."
This is especially evident in the Middle East where risk spreads have widened for all names in the Gulf even though they share none of Dubai's vulnerable debt characteristics, El-Erian explained. "With time, this will provide interesting opportunities for investors," he added.
(Reporting by Jennifer Ablan; Editing by Chizu Nomiyama)
DUBAI/LONDON (Reuters) –
World leaders expressed confidence in the global economic recovery on Friday despite fears about a debt default by Gulf emirate Dubai, while major banks played down their exposure to the debt.
Stocks from Tokyo to New York were haunted by concern that banks were exposed to state companies in Dubai, whose rise from a desert backwater into the business hub of the world's top oil exporting area lured expatriate cash and executives.
The crisis began on Wednesday when Dubai, part of the United Arab Emirates federation, asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel, developer of three palm shaped islands that once attracted celebrities and the super-rich.
"While it is a setback, I think we will find it is not on the scale of previous problems we have dealt with," British Prime Minister Brown told reporters in Port of Spain.
"The world financial system is stronger now and able to deal with the problems that arise."
French Prime Minister Francois Fillon said the Gulf had the resources to ensure the world would not sink into a second round of turmoil, but Russian premier Vladimir Putin said the saga showed how hard it is to shake off a crisis that has lasted two years.
In the United States, administration officials said the Treasury Department was closely monitoring the situation in Dubai, while Canadian Finance Minister Jim Flaherty said the Group of Seven industrialized nations has had discussions about Dubai's credit issues and was monitoring consequences.
Japanese Finance Minister Hirohisa Fujii raised the prospect of a G7 joint statement on currencies in Tokyo after the Dubai debt worries pushed the Japanese yen currency to a new 14-year high against the dollar. But no such statement has been issued and the yen retreated from its earlier highs.
DUBAI DEBT $80 BILLION
Dubai World had $59 billion of liabilities as of August, most of Dubai's total debt of $80 billion. International banks' exposure related to Dubai World could reach $12 billion in syndicated and bilateral loans, banking sources told Thomson Reuters LPC.
But the numbers pale in comparison to the $2.8 trillion in writedowns the International Monetary Fund estimates U.S. and European lenders will have made between 2007 and 2010.
"The events in Dubai in recent days are one of the hiccups if you like, one of the difficulties, which affirms that we were right to highlight the uncertainty ahead of us and that the road ahead could be a bumpy one," European Central Bank Governing Council member Athanasios Orphanides said.
Analysts expect Dubai to receive financial support from Abu Dhabi -- a fellow member of the UAE and home to most of its oil -- though it may have to abandon an economic model focused on developing swathes of desert with foreign money and labor.
But the prospect of a bailout did little to allay concerns among investors, already worried the global economy may not be recovering quickly enough to justify a near doubling of prices for emerging market stocks and many commodities since March.
WORLD MARKETS WOBBLE FOR SECOND DAY
The fears of a possible Dubai debt default rippled through world markets for a second day on Friday, but the exodus from stocks and the rush to the safe-haven U.S. dollar and bonds slowed as investors discounted the possibility of contagion in other emerging markets.
U.S. stocks fell more than 1.0 percent on Friday, the first day of trading after the Thanksgiving Day holiday on Thursday, but European stocks rebounded a day after falling 3.0 percent on the Dubai news, which particularly hit bank stocks.
"What we've seen is that once the dust settles, some of the markets that were hardest hit have rebounded," said David Katz, chief investment officer at Matrix Asset Advisors in New York. "It's a scare to the markets, but the U.S. has less exposure to Dubai than Middle Eastern and European banks."
The MSCI world equity index fell 1.0 percent, posting its second consecutive weekly loss.
The MSCI since October has had trouble extending the rally that began in March as investors have raced to lock in gains ahead of year-end accounting. The index is still up about 70 percent since early March.
The Dubai announcement served as a catalyst to an "overdue correction" to markets whose valuations have outpaced economic and corporate realities, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. told Reuters.
The Dubai news raised fears that some major banks could face yet more writedowns in addition to those already triggered by the global financial crisis in 2008.
U.S. bank debt and the broader corporate bond market sold off on Friday. The costs to insure the debt of some big U.S. banks against potential default rose between 10 and 20 basis points.
But HSBC, Europe's biggest bank and the one with more loan exposure to the UAE than any other at around $15.9 billion, said it was not concerned.
JP Morgan said it was less concerned about global banks' direct exposure to Dubai World and was not worried about Abu Dhabi, which is sitting on hundreds of billions of dollars.
"We are more concerned about the spillover effect within the UAE," it said in a note. "It remains unclear if the Dubai government will support the liabilities of government related entities."
Lenders in Abu Dhabi have lent heavily to Dubai and could suffer.
The costs to insure Dubai government debt against potential default climbed. Five-year credit default swaps widened by about 145 basis points from late Thursday, to 688 basis points, according to CMA DataVision. Dubai CDS have more than doubled since the announcement on Wednesday.
The debt crisis in Dubai also pushed up debt insurance costs for other sovereigns in the Gulf, a wealthy region Western firms had turned to for help at the height of the credit crunch, and at some major U.S. banks.
Analysts said the timing of the news on the eve of the Muslim Eid al-Adha holiday, the lack of prior communication with investors, and the scant details given on the plans dented Dubai's credibility.
"The way the announcement was made, including its timing has caused damage to Dubai's credibility," Ghanem Nuseibah, senior analyst at Political Capital Policy Research & Consulting Institute. "This will take a very long time to repair."
(Writing by Lin Noueihed and Clive McKeef, reporting by Martina Fuchs and Enji Kiwan in Dubai, Adrian Croft, Sujata Rao, Steve Slater, Atul Prakash, Caroline Cohn in London, and David Lawder in Washington DC and Al Yoon, John Parry in New York and John McCrank in Toronto; Editing by Mike Peacock/Ruth Pitchford/Chizu Nomiyama)
The approach of a new decade means a chance for a fresh start with your financial habits. Maybe your loved ones could use a nudge in that direction, too.
Either way, it's time to cast out any idea that books about money have to be boring. There's an abundance of well-written, even entertaining books on the market that could make savvy holiday gifts for either the personal finance nerd in your life or that special someone who could benefit from good information.
What follows is a sampler of books for all ages to whet your per-fi appetite. Titles featuring The Berenstain Bears and Christian money guru Dave Ramsey target the young and those looking for faith-based guidance, respectively, while others focus on teens, recent college grads and value investors. And if you don't want to give them as gifts, grab one for yourself.
TITLE: The Berenstain Bears' Trouble With Money
AUTHOR: Stan & Jan Berenstain, illustrated by the authors
PRICE: $3.99 (paperback)
SUMMARY: From junk food to environmental pollution, the Berenstain Bears haven't been afraid of tackling the issues since they first appeared on the children's literature scene with 1962's "The Big Honey Hunt." This title, first published in 1983, teaches kids aged 4 to 7 the basics about money. It's not just about spending, but earning. Brother and Sister bear find ways to build up a stash of quarters so they can play video games. Along the way, they learn how to find a middle ground between being spendthrifts and little misers.
QUOTE: "It happened that the bank was right next to the video arcade. 'Say, that looks interesting,' said Papa when he saw the Astro Bear game. 'Let's give it a try!' So the Bear family gave Astro Bear a try."
PUBLISHER: Random House Children's Books
TITLE: The Teens Guide to Personal Finance (2008)
AUTHOR: Joshua Holmberg, David Bruzzese
PRICE: $12.95 (paperback)
SUMMARY: Designed for young adults taking the first step to learn about money management, "The Teens Guide to Personal Finance" lays out the basics concepts of saving, borrowing, investing and maximizing tax advantages. It's all explained in a way that's easy to understand with graphics, work sheets and action plans.
QUOTE: "Financial independence means freedom: freedom to do what you want with your money and freedom from the bonds of bad debt, creditors, employers, the government, and others who are more than happy to use your dependence on money to control or at least significantly influence your life. Financial independence is not something that only can be achieved late in life. You can achieve financial independence now or in the near future, if you're up to the task."
PUBLISHER: iUniverse Inc.
• David Pitt
TITLE: Prepare to be a Teen Millionaire
AUTHOR: Kimberly Spinks-Burleson, Robyn Collins (2008)
SUMMARY: The authors are founders of a Texas-based business magazine called "Millionaire Blueprints" and here they compile some of the best advice from some of their issues on how successful young entrepreneurs turn their vision for a business into reality. The book features the real stories of successful teens. It details how they raised money, promoted their business ideas and other aspects of launching their ventures.
QUOTE: "To sit down with Ephren Taylor is to enter the presence of drive, determination, and charisma. Taylor represents an unbelievably rich history of overwhelming success in mind-blowing rapidness of time. Getting into the game at the very 'mature' age of twelve, Taylor was well on his way to the big bucks. By age sixteen, he had acquired his first million. Within the next few years, he founded numerous companies. Today, he serves as the youngest black CEO of a publicly-traded company and oversees millions in assets."
PUBLISHER: Health Communications Inc.
TITLE: I Will Teach You To Be Rich
AUTHOR: Ramit Sethi
PRICE: $13.95 (paperback)
SUMMARY: This six-week program to financial literacy is geared toward those just getting started with their finances. The tone is tailored to younger readers, who might be sick of parental nagging about money matters. Consider the introduction, entitled, "Would You Rather Be Sexy or Rich?" Lest readers get bored, charts, lists and even scripts for negotiating with banks are peppered throughout. Despite the sometimes casual tone, the book includes useful fundamentals on using credit cards wisely, a breakdown of credit scores and the importance of investing.
QUOTE: "Listen up, crybabies: This isn't your grandma's house and I'm not going to bake you cookies and coddle you. A lot of your financial problems are caused by one person: you. Instead of blaming 'the economy' and corporate America for your financial situation, you need to focus on what you can change yourself."
PUBLISHER: Workman Publishing
TITLE: The Intelligent Investor — Revised Edition (2006)
AUTHOR: Benjamin Graham; updated with commentary by Jason Zweig
PRICE: $21.99 (paperback)
SUMMARY: Anyone who takes stock-picking seriously should spend some time with the book Warren Buffett has deemed by far the best ever written about investing. Buffett's mentor Graham pioneered value investing — a strategy based on finding and buying underpriced stocks — and wrote the book that became a stock market bible in 1949. Many bull and bear markets have passed since then, but his practical approach and insights on everything from inflation and portfolio strategies to dividends and margin of safety remain relevant. As Buffett says, it doesn't take a stratospheric IQ or inside information to invest successfully over a lifetime. It takes a sound intellectual framework for making decisions, and this book precisely and clearly prescribes that.
QUOTE: "The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor."
PUBLISHER: Collins Business
• Dave Carpenter
TITLE: The Total Money Makeover (2nd Edition, 2007)
AUTHOR: Dave Ramsey
SUMMARY: Dave Ramsey is a multimedia star, with a syndicated radio show, a television program, several best-selling books and a Bible-based series of training videos, all focused on helping people get out of debt and learn to invest. In "The Total Money Makeover," Ramsey admits up front that the concepts he's teaching are not new or complicated. He walks readers through the dangers of debt and myths about money, and advises a stringent program of cash-only living, aggressive payments on credit cards and other non-mortgage debt that he refers to as the "Debt Snowball." He also offers advice on building up an emergency fund and investing for retirement, college savings and paying off the home mortgage. Bible quotes and other Christian references are sprinkled throughout, as are testimonials from people who followed his program.
QUOTE: "Winning at money is 80 percent behavior and 20 percent head knowledge. What to do isn't the problem, doing it is. Most of us know what not to do, but we just don't do it."
PUBLISHER: Thomas Nelson
_Eileen AJ Connelly