Because Thanksgiving week is typically one of the slowest, least eventful of the year, we normally schedule our vacation at that time. I did not expect any market fireworks this week. As anticipated, the week opened quietly, and there was little reason to expect the abbreviated Friday session to provide any excitement. As we in the United States, however, paused Thursday over turkey and all the fixings to give thanks for so many blessings, the rest of the world had to wrestle with the shocking news that Dubai is seeking a rescheduling of tens of billions of dollars in debt. Stocks plunged on scores of exchanges, as uncertainty about longer term implications prevailed.
U. S. markets, with most senior traders on holiday, opened dramatically lower this morning and spent most of the shortened session recouping part of that initial loss. In all likelihood, we will get a far clearer picture of the market’s reaction next week when the regulars return to the floor.
As I have indicated previously on this site, this is a market rally primarily controlled by technicians and momentum players. It will continue only so long as investor confidence remains high.
Valuations remain extreme by all long-term measures. Those who claim that valuations are moderate can be comparing them only to the unprecedented levels of the past decade, which we know in retrospect was characterized by a series of unprecedented bubbles.
A 60%, essentially uncorrected rally off the March bottom leaves the market at least short-term overbought. Confidence, an excellent contra-indicator, has reached extreme levels typical of at least interim market tops.
We can’t know yet how serious the Dubai problem may become, nor do we know whether this is an isolated instance or whether this is the tip of a far more inclusive iceberg of debt difficulties.
Market momentum has been waning, and this could be the logical lead into the first meaningful correction of the 2009 rally. Of course, it could even have larger negative implications, but it is premature to make that judgment at this point. Confidence may yet result in a continuation of the rally, but the fallout from Dubai could be a game-changer. We hope to be able to offer some clearer observations after we see the market’s reaction to possible weekend developments.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.