Cleanliness Is Next To Godliness

Without revealing too many of the intimate details of our life in this remote mountain retreat, suffice it to say that, at approximately 10 o'clock yesterday morning, this writer decided to go and take a shower. This, being a fairly regular occurrance, is in itself not worth mentioning. But the almost one percent drop in the IBEX 35 that transpired in the short meantime certainly had its merit. And that was only the beginning. By noon, the index had shed over three hundredths and the subsequent recovery was meek and unconvincing, at best. Of course, this action was taking place on what Macro Man aptly described as a 'nervous' morning on the markets, (Ibex Salad had felt the same before the deluge. How do we know these things?), and it turned out to be a down day on the continent - again not rescuable by Secretary of State Marshall - although at levels only approaching the outside boundaries of noise.

The general reaction from the press to this thumping has settled in on two culprits - the presumed Spanish property bubble, generally, and the malaise of Valencian developer Astroc Mediterraneo, specifically.

From Bloomberg: "This is the burst of the Spanish real-estate bubble,'' said Alberto Espelosin, a strategist at Zaragoza, Spain-based Ibercaja Gestion...

Reuters: Spain's blue-chip index fell 2.7 percent, with property firms such as Acciona down 5.1 percent as worries about Astroc's financial strength washed through the sector...

Forbes: Share prices closed sharply lower, as concerns of an imminent domestic real estate market slump weighed on property and building stocks as well as the leading banks, dealers said...

It all makes sense, seeing as anything to do with the real estate or banking was flogged, but it still merits a couple of clarifying comments.

In the first place, this all occurred in a general environment of worrying about the effects of real estate on the U.S. economy and may be serving as some sort of facile redemption of prognostications that have not come to pass on the other side of the Atlantic, despite a very long period of tub-thumping on the part of various 'contrarian' commentators. The fact is property prices continue to rise in Spain, albeit at a more reasoned pace. Sales have slowed, but not died, and construction activity continues at a healthy clip, if we exclude coastal areas where a lessening of foreign demand is showing its effects. If a bubble has been burst, it would be that of the valuations of property companies on the stock market - superficially similar, but not necessarily identical, and certainly not having the same wide-ranging effects on the national economy.

Astroc, a specialist in the Mediterranean market, as you can see from this chart is coming down from a spectacular ten-fold rise over 2006 and 2007. But before its sudden promotion to the status of market catalyst, had already lost around half of its value since last February. The company, being merely an overhyped minor player, is not an index component and is plagued with doubts as to the reliability of its management. The event that set off the latest bunch of selling in this stock was the revelation that the president may have been buying properties in his own name to shore up less than brisk sales on the coast. Tack this on to an extreme valuation and the very extravagant lifestyle of its master and you have, well, what you have.

The full participation of all banks in the selloff may not be entirely (discretion being the greater part of valor here) attributable to the effects a burst real estate bubble would have on their bottom lines via mortgages and foreclosures. The problem they have is that they are heavily invested in the property and construction sector, banks in Spain very often substituting ownership stakes for loans to corporations. All this not to mention that the sector in general has been underperforming almost worldwide.

Irrespective of all the foregoing, the hedges have been placed on our Ibex investment and the Eurostoxx/S&P spread has been abandonned, a bit of less-than-elegant, but well timed manoeuvering yesterday reducing our losses to around one percent. The bottom line is that things are probably not what they used to be.