The 1929 crash and bear rally:

The 2008 crash and bear rally:

The 1929 final outcome:

The 2008 final outcome?

As investors look back at this week’s Dubai debacle, many wonder what implications this may have on the future of global credit markets. Frankly, the impact and fallout will be negated in the long term more than likely.

Dubai World, which manages investments for the Dubai government, hasn’t actually defaulted on their debt; they are simply asking for a standstill until they can re-negotiate short-term debt coming due. That, combined with the fact that a bailout from the UAE governments is imamate should total default loom, will most likely lead this to be a bleep in the grand scheme of things a year from now.

North American bank exposure is limited to Citigroup for the most part, which has about $2 billion in exposure. Citigroup’s stock on Friday pushed down less than 3% from this news. The DOW, which gapped down nearly -250 points at the open Friday, rallied to close down only -154 points.

Expect next week to bring a short squeeze for the overzealous bears that jumped the gun Friday and positioned themselves for a large drawdown in equities. Most likely, news will leak out next week that Dubai has re-structured the debt with creditors. This, of course, will send investors into a frenzy as the bulls begin bidding up prices and bears are forced to cover their shorts, further pushing up prices.

While limited exposure is always the best bet, positioning yourself long for next week seems to be a highly-probable place to be.

Personally, I have used this pullback to buy the dip in Amazon. In the last minute of trading Friday afternoon, I went long AMZN December 140 calls. Amazon, since their blowout earnings in October that sent the stock from $95 to$ 120 per share overnight, has since drifted higher before finding some resistance at the $133 level.

Amazon is the leader in online shopping hands down in my opinion. Expect this holiday to be another successful season for Amazon and for investors to pile into the stock on an upgrade or positive announcement from the company at some point this month. $140 per share is a very likely price target for the company between now and December option expiration.

I have been a proponent of directing responsibility in last year’s credit crisis for some time now. The banks, which played a major role in the breakdown, were bailed out by the same people who had to endure the punishment.  Where is the logic in that I ask?

Banks such as Goldman Sachs and Citigroup created and distributed toxic assets, better known as mortgage-backed securities. AIG wrote billions of dollars in insurance policies on these securities, full well knowing they would have no chance to actually make good on the policies if the housing market collapsed.
But another player in the housing crisis was the rating agencies. There has been little talk up until now of them and the role they played. Quickly, rating agencies are responsible for assigning risk default likelihood on everything from government debt to junk bonds.

Much like short-term government T-bills that receive AAA ratings (considered to be risk-free), these mortgage-backed securities were being slapped with the same grades. Basically, the agencies were proclaiming that these subprime-backed securities posed as little risk of default as debt issued by the U.S. government. A monkey could tell the difference.

While I feel it was the responsibility of investors to do their own homework and see through this deception, I also feel the rating agencies have a moral obligation to correctly rate these securities.  Agencies knew full well these were not AAA material, yet most likely the pressure to generate profits for the firms led them to do so anyways.

When the same firms issuing the securities are the ones paying you to rate them, there is a flaw in the system as obviously a conflict of interest exists.
Until now, the rating agencies have come away clean. There is chatter sometimes but the media tends to point to the banks as the major culprit. While this is true to a point, the rating agencies have not been held accountable as of yet.

That all changed yesterday when Ohio General Attorney Richard Cordray sued the three major rating agencies- Standard & Poor’s, Moody’s and Fitch. Cordray was quoted as saying that the three companies disregarded their responsibility to provide “accurate credit ratings of investments.” I applaud him for stepping up to the plate and I hope there are many more lawsuits to come.

The government has spent the last year doing nothing but creating a major moral hazard that will lead to more bubbles and larger problems in the future. By bailing out banks that were insolvent and keeping them alive, the government is essentially fixing the market. Allowing failed banks to fail is what makes the free market free. The strong will survive and step in to pick up the pieces, ultimately making the market stronger.

The example that is clearly being set is that it’s alright to take huge, leverage risks that may spiral into a national epidemic. It’s alright because the taxpayers, who are represented by incompetent politicians, will be there to bail out any of the backlashes that occur from taking the huge risks.

The arguments being made by the rating agencies to justify their grades is what makes me sickest of all. They are claiming that their grades assigned to these securities are protected by the first amendment. What a bunch of hogwash. These ratings were clearly assigned because of the underlying motivation of greed. I hope the rating agencies are exposed for what they really are- puppets of the banking system.

As hard-working Americans deal with the aftermath of the mortgage meltdown, the rating agencies have up until this point escaped unscarred. Finally, someone is attempting to hold them accountable. Even our own government has demonstrated no desire to hold anyone accountable- a lot of talk and no follow through.
I hope this lawsuit is the first of many to come.