Dubai Catches a Cold
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Matthew Buckley Options University.com |
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Before last week, many of us would’ve been hard pressed to find Dubai on a map. But after the tiny emirate put up the bat signal and announced they’d need to restructure billions in debt, we all know where Dubai is and that we were the only country that could spend like a drunken sailor (speaking from experience off course…).
I’ve spent a lot of time in Dubai. I did 2 deployments to the Persian Gulf on the USS Abraham Lincoln and USS Kitty Hawk and pulled into Dubai about a dozen times. I spent quality time in the desert at night smoking a hooka (legal tobacco…I think…) as well as making the rounds of their world class night clubs, trying to pick out the Russian agents who were trying to gather intelligence. No comment on what they looked like.
Dubai is the Las Vegas of the Middle East…in more ways than one. Vegas has gone through booms and busts and me being able to get into XS Nightclub at the Encore last week means that it’s currently going through a dry spell. Dubai on the other hand has been on a constant ascent. The emirate set out to make itself a financial and business center, knowing one day that its oil would eventually run dry, a great move to diversify, especially ahead of its neighbors and fellow emirates. And with finance and business comes real estate and tourism.
Unfortunately, as we all know, booms and bubbles don’t go on forever. And as we learned with the flu the U.S. markets caught in 2008, financial markets are more connected than ever before. Credit knows no borders. Nor does greed and a lack of risk management.
Dubai commercial real estate has imploded and their large financial institutions are scrambling to refinance their debt. Adding to the confusion is the gray line between the sovereign and commercial institutions and who are really in trouble. I thought only other countries had these types of issues, but after Uncle Sam bailed out many U.S. financial institutions it looks like membership in this club is increasing (see: C, AIG, FNM, FRE, GS, etc).
How can we play this turmoil as options traders? Capitalize on the increase in volatility around companies associated with Dubai. For example, the talking heads immediately focused on MGM since Dubai World is a large shareholder and investor in the mega Las Vegas City Center project. It didn’t matter that the project was fully funded and is about to open, making even a forced asset sale extremely unlikely. And even if they dumped all of their MGM shares it would only equate to a fraction of the daily trading volume.
Knowing this initial reaction was wrong, I wrote some insurance as MGM took a hit by selling puts when the stock slid a buck, and bought them back when it recovered.
U.S. financials also took an initial hit as the big brains scrambled to see who had exposure to Dubai debt. The XLF and large firms like GS initially took a hit but as the dust cleared, not many were tied to Dubai’s credit issues. I’m bullish on the financials, especially after the positive unemployment report today.
I like GS on a pullback, and the Jan 160/150 bull put spread could be sold for $3. There’s a 60% probability that GS will be above $160 by Jan expiry, and a 66% chance it’s above the breakeven of $157 using at-the-money volatility of 33.25%.
A lingering question remains: Are the credit problems with Dubai limited to the tiny emirate, or is this evidence of larger problems in world credit markets? The answer remains to be seen, but it appears that other sovereign governments have learned from our experience in 2008 and are willing to step in to prevent Armageddon. But this strategy also creates a moral hazard; people can take on too much risk thinking big brother will always be there to help them out.
It has been said that capitalism without bankruptcy is like Christianity without hell. As we’ve seen in the U.S., and now with Dubai, governments appear willing to let us all live forever, which I’m fairly certain won’t happen. But I’m certainly going to capitalize on this mindset and trade like we are.
Matthew "Whiz" Buckley is the Chief Strategy Officer of the Options University, the leading provider of options education for options traders of all levels. He is also the Managing Partner of Check6 LLC, a business-consulting firm specializing in leadership development, risk management, and strategic planning for Fortune 500 companies and related organizations. Whiz flew the F-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings, and flew 44 combat sorties over Iraq. After leaving active duty he rose rapidly though corporate America, starting as Managing Director of Strategy at a Wall Street firm, to CEO of a financial media company. He is an internationally recognized speaker and combined his unprecedented experiences in the military and corporate America in the writing of From Sea Level to C Level.