THE BLOG

Dubai Debt Crisis a Fleeting Memory

The art of being wise is the art of knowing what to overlook, philosopher William James wrote.

In this case, former Goldman Sachs' strategist, Fred Dickson, urged investors to overlook the market's sharp decline in response to the worrisome news that fast growing Dubai was seeking to delay payments on $59 billion of debt. So far, he's been right on.

"A blip in an ongoing bull market" was Dickson's initial reaction to the Dubai-inspired global stock drubbing. At most, he saw it as reminder of the global financial meltdown, a one or two-day shock and certainly not the tipping point for a big year-end sell-off.

Interestingly, Russia's Vladimir Putin used some similar words, basically describing Dubai's debt woes as a blip on the international financial scene.

As far as the U.S. market goes, Dickson proved dead on as investors shrugged off the immediate response to the one-day 154-point decline in the Dow, which subsequently resumed its upward trend. In fact, in many investors' minds, the Dubai debt crisis is fast becoming a fleeting memory.

"I would be a buyer of stocks right now because the bull market remains intact," says Dickson, currently chief investment strategist of D.A. Davidson & Co., a Northwestern regional brokerage biggie headquartered in Great Falls, Mt.

On the other hand, money manager Raymond Stahler of London-based Stahler Dearborn Ltd., takes an ominous view of Dubai's debt difficulties. In particular, he says, "it tells you the global credit crisis is far from over, and it could create a domino effect of defaults."

On the other hand, celebrity global money manager Jim Rogers of Singapore-based Rogers Holdings has mixed views. The Dubai debt problem is a minor one as world markets go, he says. By the same token, he notes, it may also be part of a snowball effect that could lead to more market corrections.

Such problems usually start in minor places and spread, he points out. We are overdue for market corrections and this may now be what's happening, Rogers says. Something always happens, he notes, when markets need a correction. For example, Brazil started with currency problems a couple of weeks ago. Then Vietnam devalued and now Dubai's debt problems.

Rogers, who has deep concerns about the American market, expects the next problem to be in the currency markets because of all the imbalances. Still, he is placing big bets on a number of currencies, with two of his largest holdings being the Swiss Francs and the Japanese yen. He also favors agricultural commodities.

Dickson is convinced that investors who take advantage of the Dubai-inspired market decline by actively committing themselves to new U.S. stock purchases will hit home runs. Another shoe has dropped, but it shouldn't interrupt the rising market trend here, given, he says, that Dubai's debt problems are closely tied to European banks, not U.S. banks.

Futher, he expects the improving U.S. economy to push the S&P 500 to about 1,150 before year end from its current level of 10,91. He figures next year will produce GDP growth of 2.5% and an 8% increase in S&P 500 operating earnings. He also expects the unemployment rate to peak at about 10.6% in the second quarter (currently 10.2%), but he looks for new hirings to kick off at a very slow pace and wind up 2010 at above 10%.

Business will be very reluctant to consider new hirings until it fully knows and understands the implications of various legislation, such as health care reform and the energy reform bill. And that, he says, is not about to happen overnight.

Still, he stresses "we're in the early stages of the economic recovery, which clearly has momentum." He cites such economic plusses as a global economic rebound, particularly in Asia; low interest rates, which makes alternative investments, such as puny-yielding money-market funds, very unattractive, and a better consumer mood, what with housing prices bottoming in most markets and slowly inching higher and the rate of job losses noticeably on the decline.

He also points out that the U.S. still has more than $500 billion of its stimulus package to spend over the next couple of years.,

Where would he put money to work in the market? Dickson strongly favors quality stocks with above-average dividend yields. His top picks are PepsiCo. (2.9%), McDonald's (3.4%), Procter & Gamble (2.9%), Johnson & Johnson (3.2%), and Kimberly Clark (3.7%). The average dividend yield of the S&P 500 is 2.1%.

Dickson's bottom line: The market's best is yet to come; don't be a non-participant.

What do you think? Write me at Dandordan@aol.com.