The most recent worries about Dubai World and its ability to pay its debts has opened up a whole new can of worms and has many questioning whether the delinquencies of sovereign debt could potentially put a damper on a global economic recovery.

Sovereign debt is the total amount of sovereign bonds, which are bonds issued in foreign currencies, owed to bond holders. In general, the issue of delinquencies in these bonds, or type of debt, arises when a nation cannot afford to repurchase the necessary foreign currency when the bonds mature and repayment is due.

With this in mind, some equities that may be affected by delinquencies in sovereign debt include:

• The iShares S&P Latin America 40 Index (ILF Quote), which has more than doubled from a March low of $21.64 to close at $46.93 on Thursday. Mexico comprises nearly 22% of the total assets of ILF.

• The iShares MSCI Emerging Markets Index (EEM Quote), which is up 102% from a March low of $19.94 to close at $40.40 on Thursday. Nearly 26% of EEM’s asset base is allocated to Latin America.

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While there’s no universally accepted bear market definition, it’s often posited that a 20% drop in a commodity or security places it in bear market territory.

However, the Wall Street Journal Almanac offers a bear market definition that includes additional criteria.

• The DJIA drops 30% after 50 days
• The DJIA drops 13% after 145 days
• The Value Line Composite undergoes a 30% drop

Both definitions attempt to place a numerical measurement to recognize the difference between a bear market and a correction.  In general, a bear market is a lengthy period of falling prices and investor sentiment. A market correction is normally short and immediately followed by a resumption of an up trend.

According to data provided by Bloomberg using a model devised by JP Morgan, the price of this insurance currently implies that the odds of banking giant Morgan Stanley defaulting in the next five years are 45%. For Citigroup, another financial linchpin, they’re 21%. “This is astonishing,” says Weiss. “If Citigroup fails, it could be disastrous.”

“To appreciate the speed of the declines in the markets, the Dow ended trading on Sept. 12, just 17 trading days ago, at 11,421.99. That span of time began with Wall Street blueblood Lehman Bros. Holdings Inc., which survived the Depression, filing for bankruptcy.

“The way we’re going,” said David Kovacs, chief investment officer for Turner Investment Partners Inc., of Berwyn, there is a prospect of a mega-bear market “in a few days.”

October is a notoriously difficult month for stocks when the economy is weakening. The crashes of 1929 and 1987 took place in October. There also is uncertainty about the depth and character of a recession forecast for late 2008 and early 2009.”

“After months of failed negotiations with creditors and counterparties to its troubled sewer debt, The county, which is home to Birmingham, the state’s largest city, isn’t expected to meet a Friday deadline for an interest payment, after it received numerous extensions for earlier deadlines.”  Source: WSJ

The bill, which has been approved by the California Senate, is designed to help stem the home foreclosures by requiring lenders to give homeowners a earlier warning that they are entering in to default. It is hoped that this will allow homeowners and lenders to work out a new deal, rather than rush to foreclose on the property. 

The California Foreclosure Bill, officially called SB1137, will also require banks and lenders to maintain properties that have been foreclosed on and are sitting empty.

Senator Don Perata authored the bill, say that the bill “is an important piece of the puzzle of how to best protect California homeowners and communities from the fallout from the nation’s mortgage crisis.”

Opinion: California Foreclosure Bill Won’t Help

The foreclosure bills being proposed by California are a typical reaction in a bear market. Regulators rushing to pass bills to alter behavior is natural when negative mood sets in. (Read Bear Market Psychology at its Finest.)

While a small percentage of foreclosures may be the result of not having enough time for the homeowner and lender to talk, the majority are because the banks have over-extended themselves and face massive sub prime losses. They only want to lend to prime borrowers. Global credit contraction is the issue here…not a lack of negotiation.

The price structure of many indexes appears to be taking the shape of a 5-wave decline and that is very typical bear market action. Within the 5-waves, there are three waves down and two counter trend or corrective waves up. Wave 2 cannot retrace all of wave 1 while wave 4 cannot move above the bottom of wave 1, otherwise the wave counts are invalid. Many times, the fourth wave is a triangle formation, which we have been talking about over the last couple of weeks.  …Read more

Source: Business Week