Monday, November 30, 2009

As more details emerge regarding the possible debt default in Dubai -- things do not appear nearly as bad as originally feared.


· The Dubai government has disclaimed responsibility for the debts of Dubai World. A Dubai government official made it clear during a press conference earlier today that while the government has an ownership stake in the company Dubai World, the conglomerate had long operated as a standalone entity and its debt was never guaranteed by the emirate's government. Because of this arrangement, the sovereign debt obligations of Dubai were in no way threatened by the restructuring of the credit obligations of the individual company.


· Global credit market investors were further comforted by an announcement by the United Arab Emirates central bank today that it would provide additional liquidity to local banks as needed -- thus averting any possibility of a major run on the deposits of the many large banks in the region.



· Last but not lest, domestic credit market participants breathed a collective sigh of relief when it was determined over the weekend that major money center banks here in the U.S. have little to no loan exposures to the debt obligations of Dubai World.



As concerns about another Lehman Brothers like meltdown in the global credit markets begin to fade -- so too will the flow of "flight-to-quality" capital into the safe-haven of U.S. government debt obligations and mortgage-backed securities. To sustain the current level of mortgage interest rates will likely require softer-than-expected November employment numbers on Friday and/or a major sell-off in the stock markets. While both outcomes are certainly possible - they are each in their own right not very probable.



In my judgment, Friday's headline nonfarm payroll report will need to show the economy lost more than 150,000 jobs and/or the national jobless rate exceeded 10.3% last month in order to induce mortgage investors to push mortgage interest rates notably lower. In terms of stock market trading activity it will likely take a convincing move below the 10,200 mark for the Dow Jones Industrial Average before a sustained flow of capital out of the stock market could be counted on to support the prospects for notably lower mortgage interest rates.