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Dubai’s Downfall

November 27th, 2009 Michael McDonough

Here is an excerpt from my Real Money column being published this morning:

Burj DubaiIn 1909 the completion of the Metropolitan Life Building—the world’s tallest building—coincided with the beginning of a two year recession in the US.  Between 1929 and 1931 40 Wall Street, the Empire State Building, and the Chrysler Building were all erected in a bid to build the world’s tallest building; the Empire State Building eventually won this title, but again the construction of these grandiose buildings coincided with the onset of economic strife, in this case the Great Depression.  I think you see where I am going, but I should add the construction of the Sears Tower, the World Trade Center’s twin towers, and Malaysia’s Petronas Towers—all vying for the title of world’s tallest building—culminated in similar economic turmoil.

Coincidence or not the Burj Dubai, the tallest man-made structure ever constructed, is preparing for occupancy in Dubai.  With that said credit markets around the globe were shaken this week on news from Dubai.  Dubai World, a state-owned enterprise and primary investment vehicle, asked banks to allow the organization to suspend debt repayments for six months; the terms are still unclear, but could potentially be considered a default.  According to Standard and Poor’s, “In our view, such a restructuring may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity.”

Maybe I am too optimistic, but I believe this situation should lead to some good buying opportunities over the short-term, depending on where markets trade today.  Already investors immediate rush to safety, out of what are perceived to be high risk currencies into safe haven currencies, have created an excellent entry point into a trade I pointed out a couple of weeks ago—shorting the Yen.  The JPY appreciated to a 14 year high against the USD yesterday, increasing speculation that the Japanese government may be forced to intervene in the market, potentially creating a floor for the currency.  I still hold a bearish medium term view on the Yen—please see my piece on how to play Japan—and will likely increase my position in The Yen Ultrashort (YCS) or purchase puts in Long Yen ETF (YCL) depending on how the market opens this morning.

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