A New Year May Merit New Investments: A Quick Look at Spain

On this change of year, on the last day  of the twelfth month of the twelfth year of the third millenium of the Christian Era, the lyrics of another Jew with a bent to preaching (and a convert to Christianity), Robert Zimmerman, (better known as Bob Dylan), come to mind  (LINK):

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is rapidly fadin’
And the first one now will later be last
For the times they are a-changin’

So it often is with investing.  Trends begin, often out of obscurity, they mature, they attract adherents, they get overdone, they crash.  The best performers become the worst.  And, vice versa.  Herewith, is an examples of a “last one” that investors may wish to look at as a candidate to become “first” in the minds of investors in the months and years ahead.

Spain, and Spanish real estate and its stock market, is today’s topic.  A major ETF that invests solely in Spanish companies (many of which are multi-nationals, to be sure) has the symbol EWP.  This ETF, which is heavily weighted toward financial companies, trades below book value of its constitutents, 13X trailing earnings (which are depressed), and at 2.4X cash flow (per Yahoo’s Finance section).  So it may be “cheap”, and as shown, Spain has some serious hate directed toward it.

Spain was a “fair-haired” country for investors until the 2008 crisis hit.  Is it now doomed?  Might another boom not lie ahead?

One of Britain’s most influential financial columnists, Ambrose Evans-Pritchard indeed suggests that the bad news will keep on coming for years to come.  In his mind, to merely call it Dylan’s “slow one” would be to praise it too highly.  Of his last three columns for the Telegraph, two are focused on Spain.  His milder piece, from December 20, begins this way (LINK):

Doubts remain over Spain’s austerity miracle

Spain has made dramatic strides in cutting labour costs and reviving exports since the debt crisis erupted, turning the country into the new poster-child of Europe’s austerity regime.

After a small amount of additional “praise” for Spain for cost-cutting, AEP returns to his usual pro-inflation theme (his “praise” is really criticism as he decries wage adjustments if they are downward), and devotes almost the entirety of the rest of the column to bemoaning the situation, as with the following quotes:

“This has come at a massive cost. If you put a whole generation out of work, you damage your trend growth rate for a long time,” said Marchel Alexandrovich from Jefferies Fixed Income.

“There will be more and more calls for drastic solutions if this drags on, with people asking whether the euro is fundamentally the right currency for Spain.”

Can it really be that bad?

No, per AEP, it is worse, it is horrible, there is to be no end to the horror.  On Dec. 27, he goes all in (LINK), with an article showing the obligatory picture of partially-built high-rises:

Spain’s house prices to fall another 30pc as glut keeps growing

Spain’s property slump will deepen for much of the next decade, and tracts of buildings along the Mediterannean coast will have to be demolished, the country’s top consultants have warned.

The tenor of his comments is seen by the following:

RR de Acuña & Asociados expects home prices in Madrid, Barcelona and other major cities to fall a further 30pc in a relentless slide until 2018, but it may be even worse in sunbelt regions where 400,000 Britons either live or own homes.

Fresh losses could reach 50pc and drag on for 10 to 15 years in those places where construction ran wild during the bubble, bringing the total decline from peak to trough towards 75pc.

“The market is broken,” said Fernando Rodríguez de Acuña, the group’s vice-president. “We calculate that there are almost 2m properties waiting to be sold. We have made no progress at all over the past five years in clearing the stock,” he said.

“There are 800,000 used homes on the market. Developers are sitting on a further 700,00 completed units. Another 300,000 have been foreclosed and 150,000 are in foreclosure proceedings, and there are another 250,000 still under construction. It’s crazy.”

The overhang is vast for a country with 48m inhabitants and annual demand near 200,000. It is coupled with an outflow of workers and the start of an aging population crisis.

But, and this is an important but, look at the ending:

The big trio of healthy banks – Santander, BBVA, and Caixa – have all rushed to sell their backlog before the state’s “bad bank” unloads its holdings. They have already written down 95pc of the value of their land portfolio. “There is little more to lose,” said Mr Rodrigues de Acuña.

Wait!  Everybody who counts already knows what AEP is saying, and has taken drastic action.  The banks have written off 95% of their land value.  95%!

Is it not possible, even perhaps likely, that they will actually have some write-ups of the same land in the future?  Are we not living in an inflationary age?  

All these housing units that stand empty and the new ones that are being built into the glut– assuming they were built and are being built to code, will they not attract residents from the hundreds of millions of people who have to live through winter?  Are there not a lot of Germans and Scandinavians, Brits, “southern” South Americans, New Yorkers, Russians and Ukranians, even South Africans, who would love to either spend winter or retirement on the Costa del Sol?  What about Arabs and Iranians who wish to move assets into the euro?

A decade ago,  Spain and Greece began to have wage increases far greater than that of Germany.  The credit boom was on in those countries in a major way.  Now that the bust has happened, they have been undergoing wage and property “deflation”.  AEP and other monetarists do not like it, as they prefer unending money-printing (inflation).

It just may be that in several years, the financial press will be singing the praises of Spain’s “reformed” economy.

The Spanish stock market has begun to rise.  Investors may wish to look more deeply into it.

Discussion of additional “ugly ducklings” is contemplated for the weeks ahead. 

The Daily Capitalist wishes its readers a happy and prosperous new year. 


7 comments to A New Year May Merit New Investments: A Quick Look at Spain

  • JB McMunn

    Interesting thought and some nice yields in there. Are the dividends safe though? For instance, according to Yahoo Finance Santander’s payout ratio is over 200%. They also have a lot of exposure to European sovereign debt.

    I wonder what else might be culled from the weeds? TOT (France)? E (Italy)?

  • EWP is shown as having a dividend yield over 9%. Obviously the market is pricing in substantial dividend cuts. How many dividend cuts were priced in in 2000 in the US, which was the best selling opportunity for stockholders at least since 1929?

    • JB McMunn

      The banks have few eligible borrowers. They are capital impaired. Maybe they shed their real estate risks but they still hold a lot of euro paper. I think this is like tap-dancing in a minefield.

  • JR

    Here’s a more pertinent verse for you ‘money managers’, from some guy named Alexander Pope way back around 1720:

    How goes the Stock, becomes the gen’ral Cry.
    Rather than fail we’ll at Nine Hundred Buy.
    Instead of Scandal, how goes Stock’s the Tone,
    Ev’n Wit and Beauty are quite useless grown:
    No Ships unload, no Looms at Work we see,
    But all are swallow’d by the damn’d South Sea.

  • Bonsoir juste pour te rassurer Bob Dylan est retourne au judaisme !!!
    natania etienne

  • Wikipedia gives conflicting evidence about his current religion, if any:

    In a 2009 interview with Bill Flanagan promoting his Christmas LP, Christmas in the Heart, Flanagan commented on the “heroic performance” Dylan gave of “O Little Town of Bethlehem” and that Dylan “delivered the song like a true believer”. Dylan replied: “Well, I am a true believer.


    Dylan has been a supporter of the Chabad Lubavitch movement in the last 20 years,[344] and has privately participated in Jewish religious events, including the bar mitzvahs of his sons and attending Hadar Hatorah, a Chabad Lubavitch yeshiva. In September 1989 and September 1991, Dylan appeared on the Chabad telethon.[345] Dylan reportedly visits Chabad synagogues; on September 22, 2007 (Yom Kippur), he attended Congregation Beth Tefillah, in Atlanta, Georgia, where he was called to the Torah for the sixth aliyah.