Friday, November 27, 2009

Finally, A Crisis We Can Enjoy!

“People are panicking: This whole process counters everything that the rulers have been saying and the way it has been communicated before the holidays so no one can get any information is confusing,” said one hedge fund manager.

A conference call on Thursday for bondholders of Nakheel, the Dubai-owned property company at the centre of the storm, collapsed after phone lines were swamped with callers.”
—The Financial Times

The bad news is there’s another crisis. The good news is it’s not ours.

That’s right: after two straight years of erupting crises, starting with the subprime mortgage crisis (remember “What Happens in Subprime Stays in Subprime”? Ah, those were the days…) and moving on through the housing crisis, the auto crisis, the Iraq crisis, the fiscal crisis, the Bernie Madoff crisis, and now the heath care crisis, it’s a positive relief that a crisis has erupted 6,859 miles from the eastern shores of the United States.

In Dubai.

The word thus far is that European bankers may have $40 billion exposure to that debt-fueled, island-building, Las Vegas-on-the-Persian-Gulf, while U.S. banks appear to have almost none at all.

And while at least one idiot hedge fund manager, quoted above, is telling the Financial Times that he is shocked—shocked!—to discover that some form of gambling has been going on under the noses of the “rulers” of what was, until this weekend, the world’s last remaining Great Bubble, readers of this virtual column could not have suffered any such surprise.

Here’s how we wrote about it one year ago this month, on Friday, November 07, 2008:

Dubious about Dubai

In Dubai, Show Goes On for Property
DUBAI -- Housing crisis? Mortgage meltdown? Credit crunch?
After spending a few hours at Cityscape, this Mideast boom-town's annual real-estate trade show, you just might forget about the financial crisis gripping much of the rest of the world.—The Wall Street Journal, October 7, 2008

It seems like only a month ago that real estate speculators in Dubai were patiently explaining why their Real Estate Bubble was different from our Real Estate Bubble.

In fact, it was just a month ago!

On Sunday evening before the show, Nakheel, a Dubai-government-backed property developer, invited guests including the acting couple Catherine Zeta-Jones and Michael Douglas to the pink Atlantis hotel at the tip of its man-made, palm-shaped archipelago.

The occasion was the launch of Nakheel's latest project: a kilometer-tall skyscraper. The $38 billion project is supposed to someday tower above the world's current tallest building, Burj Dubai, itself nearing completion here.

Hey, with a government-backed developer and Catherine Zeta-Jones on board, what could go wrong with a kilometer-tall skyscraper?

"I'm sure most of you are asking why we're launching this, and you'd be mad not to question it," Nakheel's chief executive Chris O'Donnell said. He added, "The project will be built over 10 years, and we'll have many more [economic] cycles before then...the world will be a different place by the time it's built."

"Mad" is, we think, the exact word for O’Donnell's assurances, as reported by the Wall Street Journal, that the speculation in Dubai will survive whatever cycles the world will throw at it.

In fact, O'Donnell's words bring back memories of summer, 2007, when an investment banker stood at a podium in New York City and confidently explained to a group of investors why Bubble-era multiples on peak-cycle EBITDA numbers for deep-cycle, capital intensive businesses like Freescale Semiconductor made sense.

The key, he said with a straight face, was the lack of restrictive covenants on the leveraged loans, which would help Freescale and others survive whatever economic cycles might be thrown their way.

Still, now that the leveraged loans of Freescale and others are going begging, we find that Perini Corp, a builder of mega-casinos among other things, wants to go to Dubai and get in on the game, as management explained on yesterday’s earnings call:

“The current economic climate involving the credit markets has caused some customers delay in certain new project starts, primarily in the hospitality and gaming markets. Some customers have decided to postpone preconstruction activity until financial markets regain their footing and open up credit capacity….

“Overall, we continue to see many opportunities to secure new business in each of our business segments, both domestic and international. Bob will share more details of our prospects in a few minutes, including our strategy to become a significant contractor in both Dubai and Abu Dhabi in the Middle East.

“In Dubai, we have agreements in principle with substantial local and international partners to participate in construction joint ventures which may be awarded within 90 days. These are for large hospitality and mixed-use projects for which we have participated in several design workshops to date….”

Call us cynics, but if we were building “large hospitality and mixed-use projects” in an overbuilt, Bubble-ridden market like Dubai, we’d want the cash up front, in the bank.

—JeffMatthewsIsNotMakingThisUp, November 9, 2008

Just three months after that conference call, in February 2009, Perini management told Wall Street’s Finest that the Dubai projects “are now on hold.”

Good thing, too: everything in Dubai is now on hold.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Tahoe Kid said...

There once was a sheik from Dubai
Whose buildings all went to the sky
Racing cars and camels by day
The bankers swooped in “Make Way!”
They shouted “More debt is the answer! We know you’ll repay!”
The spending was large and ever so crass
‘Til one day the sheik muttered “I need a pass”
A gray bearded banker opined
“We should have known this couldn’t last.”

smithycroftman said...

Nice one Tahoe Kid,

Unfortunately the grey haired bankers these day opine:

" Who could have known this wouldn't last?"

Anonymous said...

Excellent foresight, Jeff!

Unknown said...

Your prescience in matters economical is exactly why I read this blog. Thank you, Jeff.

John said...

We should have known this was coming. CNBC recently opened a studio in Dubai . Here is a quote from CNBC favorite son Sheik Mohammed " I would like to tell the capitalists that Dubai does not need investors; investors need Dubai " ...Another gem i found is Joel Greene from CondoHotelCenter . He has pages of hype about Dubai up on his website. He tells us Pam Anderson is one of many celebrities that have signed contracts. He tells us Dubai is going to be the sports capital of the world with new stadiums for all pro sports. Car racing. Golf. He tells us Dubai is going to out Vegas, Vegas. Dubai will out Disney , Disney. You gotta figure Dubai had hopes to out Wall Street , Wall Street. Out NYSE the NYSE. This is great history and it will make a great book. CNBC was so enamored of Sheik Mohammed . They blew it again. The Romans got to be watching with keen interest . The Incans as well .

John said...

Here is some amazing stuff on Dubia on the NY Times ..

Jeff Matthews said...

Thanks John, these are terrific photos--and they tell the story better than any words can.

But it's "Dubai," not "Dubia."


John said...

"Its Dubai , not Dubia " In this dyslexic brain of mine it all looks the same. But the world has never seen a chinese fire drill like the one i see when trying to do algebra where they use letters and numbers. Man is that a bizarre show