Mideast Contagion?

By: Mike Shedlock | Fri, Mar 17, 2006
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The Washington Post is reporting Gulf Markets Hit With Widespread Selling.

DUBAI, United Arab Emirates -- The relatively new stock markets in the Gulf have been getting a lesson in the old stock market saw that no market rises forever.

Bourses in Dubai, Saudi Arabia, Qatar, Oman and Bahrain have dropped recently, after soaring oil prices and strong economic growth over the past few years pushed shares into overvalued territory, analysts said.

The Dubai Financial Market has taken one of the worst drubbings, dropping nearly 2 percent on Wednesday after losing 11 percent on Tuesday, the worst one-day loss in the market's history. Stock market losses in the Gulf have been so sharp that Kuwaiti investors angered by the slump held a rare, but peaceful protest Tuesday urging the government to intervene.

"After a stellar performance for the past few years in which most of these markets have shown an increase of more than a 1,000 percent, it was inevitable for a correction to take place," said economist Beshr Bakheet of the Saudi-based Bakheet Financial Advisers.

Early Wednesday trade in the DFM had seen a short-lived bounce of up to 5 percent, a result of snap-up bargains following Tuesday's drop, which was partly triggered by the plunge in oil-rich Saudi Arabia's stock market.

The DFM closed Wednesday at 599.88 points, down 1.96 percent from Tuesday's close.

In neighboring Saudi Arabia, the region's largest market, the benchmark Tadawul index on Tuesday dropped another 5 percent, the maximum allowed by regulators, bringing the market down by a quarter over the past three weeks.

The selloff continued in early trade Wednesday, with the index down another 4.86 percent, or 723.54 points at 14,176.5. The market recovered slightly by the day's end, closing at 15,606.57, up 706.53 points, or 4.74 percent higher than Tuesday's close.

Saudi authorities on Tuesday scotched speculation that the government would intervene to protect investors caught out by days of declining prices, with a government-run think tank in the United Arab Emirates urging against such action.

"Any direct government intervention to affect prices will have long-term negative effects," the Emirates Center for Strategic Studies and Research said. "Governments must free the markets and consolidate transparency. The reality of what the market is going through poses an urgent need to make room for the market mechanism to operate in total transparency."

Bakheet also objected to calls for government intervention.

"Governments should not interfere or intervene, on the way up or the way down, because this is a free economy. You can't prevent investors or speculators from throwing their money at bad stocks. All you can tell them is this is not the right way to do it," he said.

Saudi billionaire Al-Waleed bin Talal said Wednesday he was planning to prop up the market with a cash injection of up to 10 billion riyals ($2.6 billion).

The Saudi market decline also prompted Saudi King Abdullah to call on authorities to allow non-Saudis to deal in the market, in an apparent attempt to inject more funds into the market.

Previously, non-Saudis were restricted to dealing in investment funds.

Trade Arabia is reporting Prince vows $2.7bn investment amid market crash

Saudi Arabia's Prince Alwaleed bin Talal said his firm, Kingdom Holding, will invest SR5-SR10 billion ($1.3-2.7 billion) in the Saudi bourse after the current correction he blamed on speculators. His pledge came as analysts said a strong correction that had hit the Saudi stock market and others in Gulf states would continue for several weeks.

'It (Kingdom) will allocate 5 or 10 billion to enter the market,' the prince told Al Arabiya television. 'There are now special and great opportunities,' he added.

Reports, meanwhile, said the value of Gulf bourses dropped today to around $900 billion down some $200 billion from their 2005 value and more than $300 billion below the peak.

Prince Alwaleed said Saudi economy was strong and that speculators caused the stock market's 'plight' by driving weak shares up to unjustified levels. 'What happened a few months ago on the Saudi market is that speculators dominated the market and created a bubble,' he was quoted as saying in a Reuters report.

A two-week long correction has trimmed the capitalisation of the bourse by more than 31 per cent.

Saudi shares rebounded more than four per cent after Alwaleed's comments and an announcement by the Finance Ministry that Saudi Arabia was mulling allowing foreign residents to invest directly on the local bourse and lowering the nominal value of shares.

Alwaleed welcomed the proposals by King Abdullah. 'Splitting shares is beneficial and allowing foreign residents (to invest) is a very good decision,' he said. The prince warned against speculation for short-term gain. 'The profit factor now is very strong ... There are many solid and respectable Saudi firms which derive their strength from that of the Saudi economy,' he said.

'The stock market in any country is a reflection of the economy. The Saudi economy is very strong and this gives reassurances and encourages the Saudi investor to return (to the market), buy and participate in companies that are respectable and have a (good) history.'

The prince also urged the Capital Markets Authority to expedite the listing of firms to absorb excess liquidity. 'There is a lot of liquidity in Saudi Arabia but not many investment opportunities.'

Panic among the majority of small Saudi investors pushed many of them to sell their stocks, which greatly contributed to the slide.

The Abu Dhabi Securities Market dropped below the 4,000-point mark to close at 3,986.96 points, down 0.85 per cent yesterday's close. It has so far lost 23.4 per cent on the end-2005 close of 5,202.95 points and 37.7 per cent on its all-time high.

The Kuwait Stock Market dropped 1.1 per cent to close below the 10,000-point mark at 9,939.30 points, 13.2 per cent below its 2005 close of 11,445.10 points.

The Doha Securities Market dropped below the 9,000-points mark to close down 4.4 per cent at 8,873.08 points. It is 19.7 per cent below last year's close of 11,053.24 points.

It's Mish question time:

  1. Is this similar to the attempts to prop up the US markets by bankers in 1929?
  2. Why would one want to prop up speculation anyway?
  3. Non-Saudis can invest in their market now that it is tanking. Excuse me but who wants to?
  4. Since the Mideast is busy propping up their own markets, does that mean they will have less cash to buy ours?
  5. Is this some sort of "Mideast Contagion" similar to the "Asian Contagion"?
  6. Is this page 15 news that will stay on page 15 or a Harbinger of things to come elsewhere?

Some of the answers will become readily apparent in due time but there is one thing we know for sure right now: intervention to prop up markets never works.

 


 

Mike Shedlock

Author: Mike Shedlock

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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

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