Still Waiting

The Spanish Instituto Nacional de Estadística has released the residential property price index* for the third quarter of 2008. Year-on-year, the price changes are...

New Homes: +3.7%;
Second Hand: -8.6%;
Combined Index: -0.3%.

We guess a bit of interpretation might be in order.

The fact that the price of new homes continues to increase, although at a decelerating rate, likely reflects the closing of purchases contracted off-plan two or more years ago, rather than the sale of already completed residences. The more interesting figure, then, is that for second-hand houses and flats. Illustrating the ongoing and current market for homes, the 8.6% decrease is, nonetheless, probably not as severe as many would have imagined.

*The IPV, as it is known, is calculated from the price stated on the notarial documents accompanying the sale of properties to private individuals. Hence, the recent large-scale purchases of properties by creditors, in lieu of foreclosing, are not part of this calculation. Excellent on paper, this methodology does not fully account for the fairly common practice of understating the price in order to avoid the payment of taxes and to assist in the laundering of money.

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Where We Will Spend Our Christmas

Happy Holidays to all our readers...

Intelligence Test

Are these two news items identical in content?

From Bloomberg: Banco Santander SA, Spain’s largest bank, said clients had positions valued at 2.33 billion euros ($3.1 billion) invested with Bernard Madoff.

From the Telegraph: Other victims include the Spanish bank Santander, which owns Abbey in Britain and may have lost more than $3 billion.

Bonus question...

For which of the above publications does Ambrose Evans-Pritchard write?

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Neighbourhood Banking Redux

Despite spending approximately 0.021% of his time socializing with the foreign contingent of this town, not even knowing most of them by name, the writer occasionally finds himself approached for advice on how to deal with sundry local peculiarities. The most recent was a couple of months of ago when a concerned ex-pat with a two decade history in these parts asked us how to protect herself from possible Banking Sector Problems. Accepting our take that, barring withdrawing the cash to the matress, the best bet was to spread it around, one hundred thousand max per institution, she enquired . Apparently, our suggestion that it made no difference whether the bank be big or small fell on deaf ears.

Having kindly invited us for lunch on Sunday, B had the opportunity to report on her less than satisfactory experience at the nearest Banco Santander branch - some 44 kilometres away - to which she travelled seeking safety in sheer bulk. Apparently, the manager was absolutely oblivious to her desire to invest only in guaranteed deposits of the CD, GIC and TD types and all attempts to get to the quick of the matter were rebuffed with sales pitches for productos - all estructurados in their nature. That would be the same complaint that members of this association have. They went to Santander, Bankinter, Barclays, and so on and on, seeking a safe place to park their cash and ended up owning Lehman paper.

The event though, adding up to a mere few hundred million, pales when lined up beside Santander's latest customer relations fiasco - the possibly 3 billion euros that they invested for their risk averse clientele in Bernie Madoff's three-legged one-to-ten shot. Emilio Botín is not alone here, either. Add BBVA, M&B Capital Advisers Gestión (run by Botín's son and son in-law) and, rumour has it, possibly Banesto, presided over by his daughter - the heiress-apparent Patricia. Fortunately, the investing damned are also well accompanied. In for an unknown amount is Thybo, the family investment vehicle of 'Tita Cervera', the baroness Carmen von Thyssen-Bornemisza. There are few higher rungs in the Spanish business and social ladder.

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Probably Maybe

Among our favourite reads are the thought provoking vignettes on a wide range of topics published in Deus Ex Macchiato. The most recent entry, dealing with the statistical unpredictability of markets, provides us with this succinct description...

Think about it like this. Mostly in finance we assume that we have the equivalent of a standard dice. That is, while we assume we don't know what number will come up next, we think that we know the distribution of numbers perfectly. In fact the real situation is much more akin to throwing a dice where we have imperfect knowledge of what numbers are on the faces. They might be 1 to 6; but they also might be 1 to 5 with the 1 repeated; or 2 to 7; or something else entirely. Worse, the numbers are changed by the malevolent hand of chance on a regular basis. Not so often that we know nothing about the distribution, but often enough that we cannot be sure that the current market will be like the past.

The problem of how to make money, by necessity, suffers from the same drawback. Punters, for example, who try to suss out repeating patterns in stock prices, however simple or complex, make the assumption that future distributions will bear some resemblance to past and that the risks also will have been previously delimited. Typically, it is thought that the more examples one has of a given relationship`working out well, the more 'robust' a trading system based on one's method will be. Events of the last year and a half, following a five year period in which mechanical trading dominated the floor, should have put that illusion to rest.

Consider that there might not yet be enough data available despite that an investigator may have found hundreds of examples to prove the hypothesis - this because, thinking half rationally, the hard-wired trades that work when the numbers on the dice are 1 to 6 are not suitable when that distribution changes to 2 to 7. Betting on the height of the next person you come across in the Sixers' dressing room on the basis of data collected at a meeting of the Dwarfs Benevolent Society is not a winning plan. The safest assumption you could make under the circumstances would be that all midgets sum to 1, the same value applying to a profitable run during a stretch of market coherence.

To the end of perhaps further obfuscating the matter, the writer dedicated a bit of time on one of the recent rainy days that have prevented him from attending to his true destiny as olive farmer to compiling the chart at the top of the page. The cause of the confusion on the horizontal axis is that it is a record of the value of the DJIA with the four data points of each candle corresponding to the open, high, low and close of that index when it is, alternately, above or below its own 40-week moving average. The result is that each bar is of a time duration not predetemined. For example, point 1 of the 234 displayed begins on October 25th, 1929 and ends on the 19th of August, 1932. The bar upon which we currently reside began in January of this year. We chose 40 weeks as the averaging period because it corresponds the 200 days that many, rightly or wrongly, consider vital in determining investment possibilities.

Our pedantic suggestion is that a collector of statistics using above the 200-day average (or anything else) as a filter, upon finding that over 20 such periods in the past some system turned a profit on 150 long trades, count that as only 20 positives. Add to the mix that the index has crossed above that line 117 times since 1929 and the reader might let us know if he or she wants to play the game with the rent money.

*Note the very extensive periods in which buy-and-hold was utterly the wrong strategy, by the way. They are marked by the vertical lines.

Click on the chart to make it full size.

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Ecological Fashion

Among the fascinating things that took place over the course of 1970's was, aided by the transformation of the 'guerrilla press' into the entertainment weekly, the absorption of the rhetoric (and much of the momentum) of the environmental movement by the ever socially conscious fashion and beauty industries. Not being the type that adapts quickly to rapid change, the writer is pleased to announce that, despite much wringing of hands, doubting of doubts and promises of repentance from all and sundry due to the current economic situation, we can expect this to continue - if the Madrid bolsa is any indication.

As it has become abundantly clear that governments around the world will be emphasizing sustainable and clean energy initiatives as they dish heretofore inconceivably large amounts of stimulus money around, the reaction over the last two days of Spanish punters has been to bid wind electricity generator Iberdrola Renovables up 6.2%, and fashion empire, Inditex, 14.4 of the same.

Regular readers will know where our allegiances lie with regards to those two. Others may guess - or look on the sidebar.

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More Beggar Thy Neighbour

We note with interest the support that the Spanish government is offering local auto plants and their employees in their current time of need. What with the number of new vehicle licences issued down 37%, and sales nearly 50%, year-on-year in November, it is no surprise that manufacturers are laying off workers right, left and centre - with the embedded threat that factories could be closed permanently.

In response to this crisis (and crisis it is, given that this chronic current account deficit country manufactures virtually nothing else for export), the Ministerio de Industria has announced an 800 million euro assistance package for the industry. Aside from this being a beggar-thy-neighbour program directed at a more reticent in this policy regard Germany, the plan comes with one string attached. Companies applying for assistance must guarantee to not convert the current spate of temporary layoffs into permanent. The not so unreasonable fear of the governing PSOE is that the auto makers will take advantage of the current conjuncture of moribund sales accompanied by seriously bloated capacity to move production out of now high-wage Spain into eastern European countries.

It is nice to know that the Spanish government is finally recognizing that it has its back against the wall and that they no longer have the liquidity-enabled luxury of hurling ideological solutions at whatever crosses their path, but it simultaneously raises a dilema for European Union integrity - this tactic being near identical to the blanket bank deposit guarantee issued by Ireland which caused so many strains a couple of months ago.

As for the issue of job protection, this again appears to be more public relations than anything else. The process which larger employers have to go through here before laying off or firing employees is known as an ERE - Expediente de Regulación de Empleo. What the government is demanding is that these be temporary rather than for forever. In the likely event that auto sales do not pick up in the immediate future, these would end up being renewed, making moot the difference. As in the recent case of the government providing partial guarantees of the mortgages of the unemployed (thus saving the banks and cajas from loading up more property on their books), the social policy element of this is purely cosmetic. Recall that renters were not seen as meriting salvation.

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Jonestown Meets Wall Street

CNBC Europe yesterday provided us with this analytical gem from the mouth of interviewee Meredith Whitney, recently famous banking analyst for Oppenheimer & Co. Commenting on the benefits and liabilities of the various plans of financial salvation that currently have us a touch besotted, she had it be known that some proposed policy or another would provide markets with...

...better granularity of transparency...

As far as we can tell from the distance provided by our mountain outpost, this too-many-syllabled phrase, imbued with the scientific vapours emanating from the -cy and -ity suffixes, merely means that it would be 'more transparent'.

If it surprises the reader that so many financial companies have fallen off the same cliff at the same time, he or she should keep in mind that the obfuscating reconstruction of everyday language is among the primary tools used by religious cultists and other utopians to convince themselves that they are offering a qualitatively different solution to the eternal problem (or the problem of eternity). The erroneous message conveyed to the newly enlightened is that the past has been irrevocably broken with - allowing the future to be heedlessly and obliviously hurtled toward in full confidence. The cult, in this case, is the Baby Boom. And the sub-sect, Wall Street.

*Nit pickers might point out that the photo of the aftermath of the Jonestown suicides, with its advisory plaque, goes contrary to the writer's take. In our own defense, we would argue that residents of that paradise had convinced themselves that their remembering of the past (whatever that might be considered to be at any point in time), in fact, distinguished them cleanly from all prior histories. Notwithstanding that the logical outcome of such an argument is to place this scribe firmly in the school of believers in fate, it remains exceedingly difficult to catch one's own shadow.

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