A Humble Prognosis

A few items have caught our eye as we scan the foggy landscape for guidance...

1). Despite the fact that the long-short portfolio on the right hand sidebar is performing admirably (returns generally above or in line with the index, but volatility at 40% of the latter), the fact is that it is the short side that is generating all the returns. The longs are performing execrably;

2). Searching the Madrid exchange and the Eurostoxx 50 for additions to make, the only buy candidates to be found are either in the energy or the insurance sectors - which, incidentally, are the only items showing minimal vital signs in the entire play. Everything else (even reasonably healthy looking things like BBVA - in the chart) is in some stage of uglifaction - at least by our measures;

3). On Friday, The Motley Fool published a piece, entitled The Waterloo of the Bears, in the wake of the prior day's S&P 500 joyful 2.3% reaction to American GDP figures;

4). And best of all, the recent Globe and Mail piece touting a new bit of day trading software for the home gambling market. The tell-tale phrase - The meteoric rise of stocks so far this year has summoned the decade-old spirit of a past rally: the day trader. The reporter, inadvertantly, has nailed it on the head - legions of five-minute punters, labouring under the burden of a built-in long bias, are returning to the market.

All in all, it might be time to get on the other side of that one.

Astute readers will note a slight change in the aspect of the portfolio graphic on the right. We had suspected that there was an error in our spreadsheet for some time - and finally found it. Returns, and volatility, have been lowered somewhat. Too many years of using canned programs to calculate this stuff and we'd forgotten how to cook our own. Our apologies.

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Avoid Disappointment - Book Your Seat Early

Tuesday's Jaén province edition of El Ideal notes that only 20% of the 4,500 eligible have applied for the 420 euro central government subsidy made available to all the unemployed that had run out of all other options available - the most hopeless of the destitute, so to say. This echoes the 35% figure for the same in the province of Huelva, as reported by Huelva Información on Saturday.

The most convincing explanation for this unexpected outcome - in a country sporting a depression-era unemployment rate of 18% on the back of GDP deceleration of 'only' 3.9% and these two resulting, incomprehensibly, in a total systemic loan default rate of 4.93% - comes via the requirement that those that sign up for the Programa Temporal por Desempleo e Inserción attend retraining courses to aid in their reinsertion into what will most certainly (chuckle, chuckle) be a radically transformed Spanish economy come the end of the crisis.

That the resource most scarce for many of the eligible, at least in these two provinces, might be the free time available to attend class serves as further evidence of our belief that a far from insignificant proportion of Spain's catastrophic unemployment rate is merely fruit of business owners and workers placing the burden of the recession squarely on the shoulders of the government's fiscal deficit.

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Portfolio

The new entries are in bold face.

Longs

1). Insurer Mapfre (map.mc on Yahoo!) - 2.97€;
2). Software place Indra (idr.mc) - 16.69€;
3). Banco Popular (pop.mc) - 6.975€;
4). TV station Telecinco (btl.mc) - 8.845€;
5). Natural gas utility Enagas (eng.mc) - 13.86€;
6). Infrastructure builder Ferrovial (fer.mc) - 34.22€;
7). Electricity carrier Red Electrica (ree.mc) - 35.78€.

Shorts

1). Energy infrastructure outfit Abengoa (abg.mc) - 20.825€;
2). Infrastucture constructor ACS (acs.mc) - 35.80€;
3). Bankinter (bkt.mc) - 8.745€;
4). Media company Prisa (prs.mc) - 4.115€;
5). Wind electricity generator Iberdrola Renovables (ibr.mc) - 3.29€;
6). Daimler Benz (dai.de) - 37.62€;
7). Renault (rno.pa) - 34.07€.


As usual, readers are urged to do their own investigation.

Details on the procedure here.

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Is Anybody Paying Attention?

One could be excused for thinking that a couple of events this week might have had wider market repercussions than today's late day selloff. After all, they touch on what still remains the heart of the matter - asset values.

1). Ferrovial announced the sale of Gatwick Airport for 1.5 billion pounds* - about 20% below the low end of their prior estimates of what it might have drawn;

2). Savings giant, Caja Madrid, sold its near 3 percent share of Bankinter at 7.72 euros a share - a bit over 4 percent below the previous day's close.

In the first case, FER has shed (coinciding quite nicely with our taking of a long position, thank you) about 6 percent. The other large infrastructure builders and managers have dropped between 3 and 4 percent since then - with the exception of OHL, which has taken a hit for announcing a new stock issue.

In the second instance, BKT itself has dropped over 9 percent. The remaining domestic banks on the index are flat to off 2 to 3 percent.

The market may be blithely dealing with the issue of real estate values on a case-by-case basis, but the Banco de España is certainly not. Partially reversing an early decision to allow banks and cajas to reduce provisions on properties taken back in lieu of debt to 10 percent of assessed value, the Spanish central bank and financials supervisor has now doubled that for such assets that remain on the books for more than one year. Worse, new assessments will be required to come up with the number.**

An article in today's El País suggest that, aside from the obvious of ensuring that they all are shoring up against continued economic sluggishness, bank governor Miguel Ángel Fernández Ordóñez may be turning up the heat on the regional savings banks to come up with plans to amalgamate into larger, more cost efficient entities - at the cost of throwing a wrench into the workings of the local cartels. More adversely affected by the property crisis than their bank cousins, many will have trouble raising the capital to comply with this new order.

*In case anyone was wondering, proceeds from the sale of Gatwick will not be going into new investments. They will be used to pay down debt incurred in the past pursuit of future growth. Anyone expecting the rebirth of economic expansion of any consequence should keep that in mind - the monotonist outcome in the flesh.

**A side effect of this might be more weakness in property prices, especially where the small cajas are the dominant lenders - like along the Mediterranean.

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Margins

With thanks for the idea to Macro Man (a tad over three years old and still among the best reads on the internet - if the reader is into the subject matter), the pic on the left shows the sum of the year-on-year changes in the Spanish consumer price index - the pre-2001 series hooked on without the direct involvement of science - minus the same for the producer price index*, from January 1994 to the end of August last.

Considering low readings to imply pressure on corporate margins, very notable are the historic levels at which they find themselves now. Expect little in terms of employment gains in the near future. Also interesting was the way in which this figure plummeted from January, 2006 to August, 2008 and then recuperated all that and more over the next 11 months. Our previous note on goods returned unpaid shows that these rapidly recuperating margins were accompanied by a marked inability of buyers to pay for what they took out of the stores. Lastly, can one help but notice the straight line descent to current levels - over only five months into January, 2009!!

*We've used durable goods as a reasonable proxy for finished, not intermediate, goods.

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The INE Calculates Home Ownership Costs

The INE (yet again) has just published the results of its 2008 household survey named, Encuesta de Condiciones de Vida. Perhaps best translated as 'Living Standards Survey', the study attempts to ascertain where Spaniards find themselves on some continuum between poverty and wealth. The questions were asked in the spring of that year and provided some responses that we thought interesting in light of our recent posts on the carry cost of homes here.

Among them:

1). Average reported net household income - 26,010 euros;

2). Percentage of households owning, with no mortgage, their principal residence - 50.3;

3). Percentage of households owning, with a mortgage, their principal residence - 31.9;

4). Average mortgage payment for above - 609 euros;

5). Average monthly cost of residence (including insurance, utilities, community fees, repairs and taxes) for households with no mortgage - 158 euros;

6). Same, plus interest only, for those with a mortgage - 467 euros.

Of interest, to those who might still question our previous calculations, is item number 5. It sums to 1,896 euros per year - including the very considerable, mostly non-carry, expenses such as utilities and repairs. Being a national average, this should not be considered representative of Madrid or compared to New Jersey, but it might give the reader some further indication of the ridiculously low relative cost of home ownership in this country.

The PDF of the report can be found here - and, yes, taxes and insurance are included. Read page 10 of the methodology.

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The Tarot Of Ibex

Not to say that our 650 bottom call on the S&P 500 was (to date) very far off the mark, but regular readers will have noted that Ibex Salad rarely comes out and makes more than the most vague of predictions concerning the future course of events. And on the occasion that we might venture into that silly terrain, never do we show up later and trumpet some other pundit's (no matter how universally admired) agreement with our position as a form of 'proof'* of our take. As a matter of fact, we firmly believe that the issuing of pronouncements concerning the yet-to-pass is nothing more than a pandering to the basest emotions of a readership clamouring for truth and certainty where neither exists - in the future. Carnival hype, by any other name.

On the other hand, watching the ebb and flow of public opinion on the shape of the forthcoming is of tremendous interest.

In this regard, we couldn't help but note that the august, if tarnished, Goldman Sachs is the first to abandon the Spain-doomed-forever bandwagon so universally thought to represent Truth. Not having seen the original, we will (with trepidation) repeat the salient points as recounted by Expansión:

1). Spain will be seen to have come out of recession in the third quarter of this year (note the curious prediction of how the past will come to be seen in the future);

2). GDP will have fallen 3.4% year-on-year by the end of 2009;

3). 2010 GDP growth will be 0.7%.

Without feeling we have to abandon our strict monotonist principles, we have no trouble including this bit of clairvoyance within the range of possibilities.

*Regular and egregious transgressors of the hard and fast rule that 'the probability that a person is a witch deserving to be burnt at the stake does not appreciably increase with the degree of public belief that she is' are Barry Ritholtz, Yves Smith, the Millionth Monkey and... of course, Edward Hugh - this latter having recent plumbed the depths of this practice by eliciting the intellectual support of WSJ Spain reporter, Thomas Catan, whose ample field of expertise includes not only economics, but also the status of Spain's olympic games bid, the ebb and flow of the fortunes of Real Madrid under the leadership of Florentino Pérez and the placing of bombs by Basque terrorists.

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Residential Building Statistics

In Spain, prior to the issuance of a municipal building permit, a new project must have its architectural plans approved. Equally, before the finished building receives a completion license it must undergo an inspection to ensure that it is up to scratch in the legal sense. The official organism charged with these two tasks is the Colegio de Aparejadores... and they keep and publish statistics which are available from the INE database. With the help of Google Docs, we have converted these series into charts.

The first shows (in yellow) the number of actual residences receiving initial approval monthly since January, 1992. The blue line indicates the same for final certificates and each is accompanied by a 12-period average. Standing out would be the following:

1). New initial approvals have fallen to levels never before seen in this series. And the 12-month average, as of July 2009, is a full 33 percent below its December 1992 value of about 18,000 units;

2). Final certificates, on the other hand, have so far only fallen to mid-2004 magnitudes. Assuming, for the sake of argument, a three-year lapse between the initial contracting of the project architect and the granting of this certificate, we again find ourselves marvelling at how difficult it is to identify and control a real estate bubble. The absolute peak in final certificate issuance was not reached until July of 2008 - the sad result of decisions made in mid-2005. The fact that these numbers have currently only fallen to 2004 values reflects this more than any overriding stupidity on the part of developers. These are projects initiated in 2006, when everything was more or less still functioning, although yes the writing was on the wall.

The second chart compares, since January 2007 (that the INE only started keeping sales stats at this time has to be the mother of all contrarian signals), the above two lines with that of house sales. They are indexed to enable comparison. Stated in raw figures - July 2009 initial approvals came in at 11,233, final certificates at 42,644 and new home sales at 18,351. The banks, developers and real estate promotors still have a couple of years of hard slogging ahead.

But, for those with the patience that personal circumstances and low carry might permit them, a few years up the road (and depending on geographical location) the supply half of this equation will find itself pressured to perform.

As an aside, the figure of 1,098,000 approved but not-yet-started new homes that Mr. Hugh used to invent a total excess Spanish housing stock of 3 million is not confirmed by these statistics. To come up with that number of approvals - and assuming no completions whatsoever - one has to sum all granted back to December of 2006. To arrive at this number in the real world, one has to calculate the natural excess of approvals over completions (some projects never get started, or finished) all the way back to November of 1992.

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Portfolio Changes

We have added another pair to the long-short portfolio shown on the right sidebar. It now looks like this (the additions are in italics):

Longs

1). Insurer Mapfre (map.mc on Yahoo!) - 2.97€;
2). Software place Indra (idr.mc) - 16.69€;
3). Banco Popular (pop.mc) - 6.975€;
4). TV station Telecinco (btl.mc) - 8.845€;
5). Natural gas utility Enagas (eng.mc) - 13.86€;
6). Infrastructure builder Ferrovial (fer.mc) - 34.22€.

Shorts

1). Energy infrastructure outfit Abengoa (abg.mc) - 20.825€;
2). Infrastucture constructor ACS (acs.mc) - 35.80€;
3). Bankinter (bkt.mc) - 8.745€;
4). Media company Prisa (prs.mc) - 4.115€;
5). Wind electricity generator Iberdrola Renovables (ibr.mc) - 3.29€;
6). Daimler Benz (dai.de) - 37.62€.

As usual, readers are urged to do their own investigation.

Details on the procedure here.

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Monotonist Manifesto

A number of mentions made recently of Ibex Salad seem to locate us somewhere within an ideological camp that can only be described with one word - optimist. We would like to correct that error of perception. We are not optimists. We are monotonists.

The monotonist, believing as he or she does so fervently that recessions are fundamentally boring (and that long-lived recessions are fundamentally very, very boring), may appear to be a bright eyed and bushy tailed utopian when compared to, say, others who assume that the worst is yet to come. We can divide this lot into two, sometimes overlapping, groups - each dissatisfied in its own way with the apocalypse that was the collapse, last fall and winter, of all we held true and dear:

1). Those that persist in insisting that the end remains imminent with a religious righteousness that seems to obscure from their view that they might be betting tails on a two-headed coin. But God does not play dice, etc.;

2). The malcontents that behave like customers demanding their money back from the operator of an amusement park thrill ride that proved to be not nearly as scary as advertised.

To help these unfortunates get over it and on with their lives, we present this month's boring edition of home sale statistics for Spain. Monotony, by the way, is expressed on a graph as a flat line. A resumé:

1). New home sales have been stuck in a range between 21,000 and 17,000 a month since November 2008;

2). The same for used homes is between 13,000 and 18,000 since last October;

3). The recent monotonizing of the 12-month rolling sums of these two is notable - 234,743 and 198,703 units, respectively.

Free Bonus Statistic For Optimists

Seven more new homes were sold in August than in the same month one year ago. Those with an understanding of seasonality might derive some solace from this.

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