Variant Perception Responds

We were contacted by the writer of the piece mentioned in the last entry and asked to correct some perceived errors - particularly our assertion that Metrovacesa was not intervened by creditor banks. We thought that we should check that out just in case something had gotten by us.

The case was that the creditors took control of the company (by then half its original size due to a deal reached by the warring controlling shareholders) by calling the collateral offered by the Sanahuja clan in guarantee of a loan made to various of their holding companies in order to finance a proposed takeover of the entire original company. This collateral consisted of shares in Metrovacesa itself.

This is not the same as thing as Metrovacesa not being able to make payments on loans - insolvency as in the case of Martinsa-Fadesa. The money was not lent to MVC in order to further, or salvage, its business plans but to the controlling family, purely for the purpose of effecting a change in the ownership structure of the company - something more along the lines of an ill-considered LBO.

One could argue that, to the large degree that the Sanahuja's ability to pay depended on the fate of Metrovacesa (and the real estate business itself) and hence that it is the same thing. On the other hand, one does not read that various cajas de ahorros are foreclosing on SOS-Cuétara as they call in loan guarantees, in the form of company shares, put up by the Salazar brothers. Nor was the turning in to creditor banks of Repsol-YPF stock, put up as collateral by Luís del Rivero and Sacyr, ever interpreted as an intervention in the Spanish petrol firm.

The Sanahuja family was kicked out and stripped of most of their shares, but the company was not intervened by the banks by any known definition of the term.

The other criticism leveled at us was that the article did, in fact, refer to the up-to-date current account deficit statistics. If that is the case, it escaped our attention and we apologize. Unfortunately, we have no way of knowing because the item is no longer available on the Variant Perception website. Nevertheless, popping up a stand-alone paragraph citing the most negative out-of-date data struck us, and continues to strike us, as being an Ambrosian scare tactic and completely unrelated to the argument presented.

Properly presented, our entry might only remove our interpretation that the writer had confused Metrovacesa with Martinsa-Fadesa - a perfectly understandable slip owing to their similarities when spoken, for a hispanophone. That has been done. We also removed a closing spurious wisecrack concerning the identity of the author. We did not know him.

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Perception At Variance

The little detail that caught our eye in the investment report on Spain recently published by some outfit called 'Variant Perception' was the writer's citing of the statistic that the current account deficit was a very high 10% of GDP in 2007 to prove a point about the present when data dating from two months before the piece's publication was available at the time, data which unfortunately does not nearly as well support the article's thesis (as we might imagine). To wit, the CAD is currently down 40% year-on-year and GDP, about 4. The end result is that it is now about 6% of the Spanish gross domestic product.

And it's not even that we even disagree with the general gist of the piece, but when it is also claimed that the construction company, Metrovacesa, was intervened in by its creditors when it wasn't, we start to dig. And we came up with the following bit of fantasy...

The chart at the top of the page, entitled 'External Debt' - a screengrab from the piece, thanks - is accompanied by the text, 'Spain's external debt is extremely high in relative and absolute terms. It is among the highest in the world - the fifth largest - and is even higher when looked at per capita, only behind Ireland'.

Consulting the CIA World Factbook, from which it appears that these numbers were derived, we find the following:



Ireland is correctly identified as leading the parade. Spain, however, is in 9th place - nestled between Germany and Sweden on this count.

Variant Perception is a subscription service, by the way. That is to say that one is actually asked to pay for the information contained.

*This piece has been changed from its original form. The explanation can be found here.

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A Difference Of Opinion

Felix Salmon thinks that Banco Santander's recently announced buyback of 16.5 billion euros of covered bonds is '...more like an act of desperation than one of strength.'

Countering this view would be a recent Bloomberg report noting that banks (including the thought to be very sensible Bank of Nova Scotia) were once again extending ample credit to purchasers of commercial loans and mortgage bonds. Clearly, the reference is to securities in the American market, but we can't think of any way in which that changes the obvious conclusion - that asset-backed paper is no longer collateral non grata at the corner pawn broker. If the lenders are assessing the situation correctly (and there's no guarantee that that is the case), Emilio Botín would be a fool to let hedge funds jump the queue for his own notes.

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And Now, The Good News

To break the monotony of us bitching about the dearth of suitable reading material, our readers might be interested to know that olive oil producer prices have recuperated approximately all of the losses they sustained during the great undoing of pretty well everything we hold true and dear. As to whether this trend lasts or not (note the blow-off top in the last couple of weeks) or whether this has any relevance beyond itself, it is hard to say. But considering olive oil remains a discretionary buy in most parts of the world and the coming crop looks to be satisfactorily large, perhaps a ray of hope is emanating from the province of Jaén.

In its own right, the price chart on the left (click to make it big) presents a beautiful example of one of the possible results of unequal access to information between competing groups - in this case, millers and bottlers. As late as early 2008, the general consensus among producers was, on the basis of there being a smaller crop than previously anticipated, that prices were headed considerably higher. The very concentrated bottling industry, on the other hand, gave every indication (at least in hindsight) of having being perfectly aware that demand was souring enough to make crop size irrelevant. The end result was fairly low harvest-time volumes and flat prices. This might have been taken note of by the atomized co-operatives that dominate the milling business except that, since the royal screwing they gave the buyers during the drought of 2006, the latter group had suddenly started mixing up their buying schedules so as not to reveal their intentions. The winter volume spikes typical prior to 2006 have since become, at best, muted.

The end result of this new way of playing the game was that the co-ops, convinced of the bull case as they were, refused to believe that the bid was anything more than a ploy whilst the purchasers had little need to budge from it. By late summer of 2008, and with still little olive oil sold, it was evident that the carryover between crop years was to be immense. Pressured to empty storage to accomodate the new production, prices dropped from around 2.30 to near 1.80 euros per kilo from August to December. Then, with all the expenses associated with the harvest and still little demand running headlong into the credit crunch and generalized panic, prices (which had recuperated about 10 cents) tanked to about 1.65 between late February and early May. One can see that volumes in this period outpaced those in winter.

We certainly like last week's 2.45 quote for extra virgin, but we have our doubts as to whether it will hold. The 100,000 tonnes that the EU recently permitted producers to temporarily remove from the market, and to off-site storage, may be of concern to bottlers going into the crop year change. But olive oil is a perishable that will have to be sold and the strategy may prove to be a failed attempt to string the problem out, bank-like, over a longer time frame.

As an aside, the writer was interviewed yesterday about this topic by a crew from the BBC. Apparently, the fruits of this will appear on BBC World, the website and on radio via the World Service on September 4th or 5th.

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Run For Cover

The relative quiet over the summer regarding the imminent demise of Spain as an economic entity has ended. That can only mean that Edward Hugh is back from holidays. The last paragraph of his recent entry, 'Has Spanish Unemployment Really Been Falling Recently?':

So the fact of the matter is, that the latest good data we have for Spain are the June unemployment data (supplied to Eurostat based on the EPA) which showed 4.186 million out of work, and an unemployment rate of 18.1%. And unemployment is rising every month, and that is the sorry and woeful tale of Spanish unemployment at the moment. That and my forecast that, if nothing is done to stop the runaway contraction, unemployment could be up and hitting the 30% mark come December 2010. 25% before Easter 2010 is now a done deal as far as I am concerned, and we will probably break the 20% psychological threshold in October or November of this year.

We respectfully suggest that Mr. Hugh is misguided in his analysis, if not actually addicted to the benzedrene of crisis histrionics, and will propose a contrasting scenario in which Spanish unemployment figures stabilize as growth remains negative.

In previous IBEX Salad posts, we (knowing perfectly well how the game is played - underlining the difference between being 'based' and actually 'living' in a place - but in search of some at least tangential hard-ish evidence) questioned the legitimacy of these statistics on the basis of a comparison of debtor default and unemployment rates in Spain and the U.S., a quick and incredulous study of unemployment numbers for Málaga province and a report on the possibility that the underground economy in Spain was actually growing over the course of the crisis.

Now we are going to ask the reader to explain to us how the only two European countries with unemployment rates comparable to Spain's, Latvia and Estonia, will have required that their economies shrink by upwards of 10% in 2009 to attain rates in the high teens, whilst Spain will accomplish the same UR figures with a 'mere' 3.2% diminution of economic activity. That's alot of slack that has to explained somewhere.

The answer comes from the real world of Spanish labour politics in which the government (lacking the balls to ever tell anyone that Spain is not paradise) has always been the willing mark of last resort - the plankton at the end of the food chain feeding everybody who can lay claim to having a pulse. This may be changing due to the serious pressures on the social security system and their attendant effects on the country's budgetary deficit.

1). For the first time ever, planted rumours (as effective as putting up a radar warning at the entrance to a town) are circulating prominently amongst olive growers that the Ministry of Labour will be out in force this coming harvest making sure that members of the cuadrillas are all registered with Social Security. This writer's (and everyone else's) experience has been that you cannot put a crew of locals together if you insist that they sign up with SS - because they are all using the harvest to top up their unemployment insurance;

2). Evidence that the Ministry is conducting very frequent spot inspections of tourist establishments on the Costa del Sol. The urgency of the matter is suggested by the fact that these are taking place both day and night. Spanish functionaries working nights? Strange times indeed;

3). The bizarre scene witnessed by the writer in an unappetizing bar in a dusty, nondescript and totally lacking in appeal town in northern Granada province, in which a Ministry official showed up, accompanied by two civil guards, to check the papers of everyone in the kitchen. Hauled out by his ear from the washroom was the boyfriend of the owner's daughter.

We think that the process by which further economic distress, which we consider nearly inevitable, might not be reflected in similarly worsening unemployment figures is fairly evident - the employers of the cheats will get strapped with really impressive fines if they continue to pay en negro and thus avoid compulsory SS contributions. And if the possibility of 10% national budget deficit in 2009 does not provide the motive to abolish this national pastime, nothing ever will.

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Good Things Come To Those Who Wait

It has yet to be made official, but all signs point to BBVA making off with insolvent Texas-based Guaranty Financial. The first image is a screenshot of a Google map search for "Compass Bank Texas", already owned by the Spanish bank. The second shows a similar search for Guaranty Bank branches in the state.

BBVA's internal estimate of cost savings from this concentration is in the range of $95,000,000.

The rewards of patience.













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Thanks For The Tip

Making the rounds a bit amongst the blog shamans this week is the headline (not the actual contents, God forbid) of an article from Expansión. Below is a paragraph-by-paragraph précis/translation.

Headline: One in five mortgages has a high risk of default.

Paragraph 1: Banks set themselves up to receive the next wave of defaults which will come from families as summer employment and government stimulus measures come to an end.

P2: It is expected that the unemployment rate will resume its upward trajectory, undermining the solvency of households in the process. Despite this, the banking industry believes it has improved its systems for handling defaults and will be able to confront this without seeing its default ratios soar.

P3: There are 670 billion euros of property-related loans outstanding in Spain. The default rate is currently 2.88%. The latest rate of increase in this figure is 0.9% - compared to the 8.1% of a year ago. Problems are expected from loans with the highest LTV and those whose service requires the highest percentage of family incomes.

P4: The LTV should not exceed 80%. The prudent limit for payment-to-income (depending on the method of calculation) is 35 to 40%.

P5: It is difficult to come by reliable data with which to calculate the curent state of affairs. The Banco de España reports that the percentage of transactions involving an LTV of greater than 80% has fallen from 17.6%, in 2006, to 11% in 2008.

P6: Prior to 2006, it is difficult to find reliable figures. A study by Genworth Financial (ed: a provider of mortgage insurance) notes that LTV's had increased from 1995 to 2005 along with the increase in the price of housing with respect to incomes.

P7: Mortgages with an LTV of greater than 80% constituted 12.2% of the market in 1996, and 26.4% in 2005. As of the second quarter of 2009, the average percentage of income required to service Spanish mortgages stood at 38.6%, without considering tax treatment.

P8: These loans may also be backed by guarantees other than the property itself.

P9: This figure has dropped from the 46% registered in 2006-2008, owing to the drop in prices and interest rates.

P10: The payment-to-income ratio was between 33 and 37% in the 1990's. On average, 9% of mortgages granted between 1995 and 2005 required more than 50% of family income to service.

P11: The figures emitted by individual lending institutions show that high risk loans, despite the increases registered, do not weigh heavily on their books. In the case of Santander*, at the end of 2008, 8% of mortgages showed an LTV of between 80 and 90%, and 7% of greater than 90%. LTVs of greater than 80 comprise 11% of La Caixa's book, 6% of Bankinter's and 5% of Banco Pastor's.

P12: These figures represent the reality at the time the loans were issued and the situation will have changed over time due to factors such as: the amount of debt paid down, the price of housing and the increase in the unemployment rate. Further, on occasion (today almost always) these loans may be guaranteed by co-signers or insurance policies.

More astute readers will immediately note that it is, in fact, difficult to draw any conclusions from the mish-mash of data presented. But, that there is not one single mention of the headline's conclusion in the body of the text (let alone anything to prove that '20%' of mortages are 'high risk' - definition of this forthcoming, we suppose) should command the reader's attention - particularly if that person proposes to be an interface between an ignorant and fearful public and ugly reality. Bloggers, by any other name.

*People of the punting persuasion will, on the other hand, find a bit of information value in the article's treatment of Banco Santander. The reporter has very delicately split this bank's exposure to high LTV mortgages into deciles, as opposed to the crude and disprespectful quintiles doled out to the other examples. Our trusty calculator reveals that a peaches-to-peaches comparison awards Sr. Botín's bank a 15% exposure to plus-80 LTV loans.

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How Big Is Big?

Yves Smith, in a morning piece entitled, 'Is This the Start of the Big One?'* with reference to a proposed and pending stock market crash, raises the not entirely related (Ambrose lives) issue of possible market manipulation at the daily close on American exchanges.

The hand-rolled black line in the chart compares the tendencies of the SPX and the DAX (which shuts down at 11:30 AM New York time) to finish the day closer to their maxima, or vice versa - a point which should be of some interest in this regard. Positive numbers favour the SPX 'ramp' thesis.

A quick look shows the month of July 'confirming' this, and March the opposite. In general terms, the whole effort has the look of simple mean reversion. On the other hand, a real statistician might want to take a look at the matter.

*Consciously passing on all sorts of fun stuff we could generate from Ms. Smith's choice of words, one has to wonder exactly - all of us having lived through the aftermath of the demise of Lehman Brothers - what kind of event would have to take place for her to classify it as satisfactorily 'big'.

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Publish Or Perish

No point to make, but...

The Instituto Nacional de Estadística has released its monthly report on numbers of property transactions in Spain, this for the month of June. We've pulled it apart a bit.

Straight sales are down about 55% from when the series begins in January, 2007. Exchanges not involving cash payments, referred to as trades, show a similar trajectory - although more volatile because of the small sample size.

Interesting are the categories of 'Gifts' and 'Other'. The former, often part of estate planning, shows a general upward trajectory over the last year. The latter, which mainly consists of the splitting of finished construction projects into their constituent apartments or houses prior to their sale, shows a considerable levelling out over the recent period.

Pardon the spelling error in the last chart. But we're not going to go back and fix it.

Fun While It Lasted

To put an end to a matter that had expertly inserted a right prickly burr in the writer's ass, we note that Tyler Durden has very suddenly toned his discourse right down. Note the measured tone of this piece, published to start off a new week and a new life at 9 AM Monday. The same restrained tenor reigns through today. May we suggest that among the reasons for this change in editorial policy might stand out:

1). Zero Hedge's apparent recent public expulsion from the Naked Capitalism fold with the words: ...he tends to hyperventilate, which discredits him even when he has a legitimate target. And he does not seem to know the limits of his knowledge, and will also take on (sic) issue where he does not know enough to discern what is significant and what is mere noise.*;

2). Zero Hedge's comments section having been finally and irrevocably usurped by Tila Tequila rejects.

All in all, a vast improvement. End of rant.

*Does this mean that Ms. Smith will never more link to Ambrose Evans-Pritchard? We can only hope.

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How To Be Popular

This blog does not attract alot of comments. Among the obvious conclusions to be derived from this fact is that:

1). What appears on its pages does not merit being thus dignified;

and/or

2). That, in the interests of personal tranquility, eye contact with the writer is to be avoided at all costs.

We would like to propose the third hypothesis that web publications (of the variety that purport to be providing analysis of current events) that engender widespread public participation are those that:

1). Posit the existence of an evil force in day-to-day life;

2). Identify clearly what the source of that evil is;

and then

3). Allow the indignant unwashed to verbally tar and feather the culprits through the comments section.

This worked for IBEX Salad in the case of our recent entries concerning that Beelzebub of the bicycle, Lance Armstrong. But, appealling as might have been the attention received, we have reverted to our former policy of seeing actors as misinformed, self-serving, inadequate for the task to which they find themselves asssigned, or just plain bloody stupid.

On a more practical level, readers who might be wondering how to effectively sort through the immense amounts of bumph that appears in the blog-o-sphere, the following analogy might help.

If, whilst walking through a farmer's field on fine summer day, one sees a swarm of flies hovering in the air some twenty metres to the left, what is beneath them (and out of one's line of sight) is more apt to be a fresh, steaming turd or a recently deceased animal than a bar of gold.

This is to be kept in mind when coming across a blog entry from the Millionth Monkey on the Fed-Treasury-Wall Street that has elicited no less than 180 comments in the 16 hours since publication.

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More Walking Backwards

We made reference a couple of months ago to the notable under-representation of young people in a mid-May Madrid labour demonstration - this despite the fact that they are the most prejudiced by current events.

So what to make of this group of 'Tea Party Patriots' giving the what-for to some politician in Utica, New York...



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It's Nice, But Is It Science?

Being currently in the thrall of the family chaos attendant upon the repeated prolonging of the life of a person dead but for his pulse, perhaps the writer is not the most objective of observers. Nonetheless, he finds it a good moment to express his doubts concerning the utility of the notion that the best large outcome is a product of the sum of all good small results - this being the backbone of the defense of the idea of scientific progress in general and, more specifically, that of the triumph of modern medicine (not to mention the impetus for the widespread availability of consumer credit).

To make the point more clear, we ask the reader to translate the possible newspaper headline 'Seven Saved From Festive Fire' into the less probable but more realistic 'Fearless Firefighters Delay Ten Deaths'. Don't want to hear about it? Nor do we, but the matter interferes with our own ponderings concerning the future much like a chicken bone stuck in our throat might with the continued enjoyment of a fine meal - especially if we had thought that we had been served beef.

Among the consequences of assuming that the successful delaying on a massive scale of the worst possible destiny for individuals (or the 'saving' of their lives, if readers really must have it their way) is an unequivocally desirable outcome, one would be foolish not to note that the total number of deaths has risen in lock step, but for an arithmetically lengthening time lag, with the increase in population attendant upon that same success. The only reasonable conclusion to be reached is that scientific medicine has been the cause of the demise of horrifyingly and incomprehensibly large numbers of human beings and is, no matter how one measures it, an evil of proportions not previously imaginable.

Currently, by the way, there are about 6.7 billion of us lined up for this treatment. Readers willing to provide a scientific argument that this number indicates that science itself has been able to optimize, in a sense that does more than self-servingly equate more with better, macro-eventualities (the sociopathic 'it's preferable for me' not being acceptable) should do so in the comments section. Barring evidence to the contrary, this writer is forced to believe that animism*, mythology, legend, superstition and their accompanying tourist-pleasing rituals provided far more effective solutions.

*Click here for an interesting example of therapeutic animism on the website of a manufacturer of very high tech cancer treatment machinery.

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More Post-game Strategies

One of the behavioural oddities (which we failed to mention in the last entry) that one can observe amongst the destitute leaving the building following the tenth race is that of cursing those who got one into this unenviable position in the first place - this a version of damning the whore with whom one fell in love, not to mention her various offspring.

A big winner as the financial blog bubble inflated to grotesque proportions, having successfully parlayed the tremendous popularity of the The Big Picture into a talking head tenureship on a number of business media and a book deal, was one Barry Ritholtz. This week his blog (in an entry written by TBP's editor, Chris Whalen) has tellingly, and possibly predictably given the late hour, published a piece by well-regarded Chicago structured finance person Janet Tavakoli which trashes the reputations of much-quoted super-pundits Meredith Whitney and Nassim Nicholas Taleb.

No problem with this here. We have long thought that this crew was giving off more heat than light. But Mr. Ritholtz suddenly disowning two gas dispensers the opinions of whom he once frequently used to defend the bouyancy of his own balloon?

God, it's tough out there.

Readers should feel free to click on the links for prior IBEX Salad commentaries on Whitney and Taleb.

Having just received an e-mail from one of the parties named in this piece, we have made a couple of changes - centred around the fact that it was the blog's editor, and not owner, that contributed the item. We think that the thesis still holds water, despite this oversight.

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