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Dubai Debt Woes Prove to Be a Poor Excuse to Sell Stocks

I have a confession to make: The global market mini-meltdown was all my fault. After writing bearish columns for two months, I wrote one last Tuesday making the case that a correction would be put off for a while because too many investors were expecting one.

"Just watch," I told myself as I clicked on the "publish" button, "now that I'm wavering about the correction, the market will fall off a cliff." And so it did.

Some sticklers for logic might question this line of thinking, but it makes as much sense as the official story, that the catalyst for the plunge was the request by Dubai for a six-month moratorium on payments on roughly $60 billion of debt.

The initial reaction in global markets after the news on Wednesday was: "So what?" Asian markets shrugged it off Thursday, finishing the session more or less unchanged. The sell-off did not begin until later that day in Europe, then it spread to Asia and then to the United States when trading resumed there after Thanksgiving.

The first impression was probably the right one. The once high-living Persian Gulf emirate has had trouble paying its bills almost since the real estate/credit crisis struck more than a year ago, so the latest development seems more out of centerfield than left.

Global investors may be overestimating the implications too. The request to postpone repayments is seen by many as a prelude to a default, but it has more of the feel of a negotiating tactic to try to extract better terms from creditors, perhaps a reduction in principal.

It is also possible that Abu Dhabi, Dubai's much wealthier neighbor and the capital of the United Arab Emirates, to which Dubai also belongs, will ride to the rescue. Abu Dhabi has already lent Dubai $10 billion this year through the UAE central bank, and the central bank affirmed over the weekend that it would provide Dubai banks with access to funds.

Even if Dubai were to default, the impact would be less than panicky investors seem to think. The potential maximum exposure of $60 billion is not all that much for its creditors, mostly big-league European banks, to absorb, and the actual exposure is probably much less. More important, the property boom in Dubai appears to be a one-off and not the first of a new batch of shoes about to drop around the world.

Traders seem to have reconsidered their rush to judgment. After plunging 4 percent or more, markets are heading back toward their highs for the year.

Another pullback is possible, but the advance since March does not appear over yet. Further new highs seem likely as markets continue to trade off the momentum generated by the nearly yearlong rally and as seasonal factors provide a brisk tailwind into January.

The renewed sense of doubt among investors should also limit declines. Fresh evidence of that comes from Tobias Levkovich, chief U.S. equity strategist for Citigroup Investment Research & Analysis. He points out in a note to the bank's clients that shareholders of mutual funds that invest in U.S. stocks stepped up their selling in October.

That's not the backdrop for a prolonged correction, but the plunge last week shows how vulnerable the stock market will be when a more plausible catalyst comes along and when investors get down to business after the holidays.

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