I Will Pay

Capital Chronicle raises the issue of how much unaccounted-for debt might be floating around Dubai's economy in the form of post-dated cheques - linking to this piece to give an idea of how widespread the practice is. Not surprisingly, considering its strong and persistent Arab heritage, the same could be asked of Spain. In fact, the pagaré (literally, 'I will pay') has its own legal status - different from that of the cheque or the bill of exchange - in this country.

A nice example of the this is the debt that continues to be issued to the public by Nueva Rumasa, which we dealt with last March. In that post, we described them as 'unsecured bonds'*, but in strict legal terms they are pagarés. The desperate-for-yield investor (or true believer, as the case may be), on signing up for this plan is, formally, exchanging 50,000 euros (the minimum so as to keep the emission out of the supervisory reach of the CNMV) for a post-dated cheque, to be cashed one year later, in the amount of 54,000.

So common is the use of these instruments that you can order a book of them at your bank branch. What you receive is indistinguishable from a cheque except that it has, as it legally must, the word pagaré at the top of each leaf.

We have had a couple of encounters or near-misses with these items.

The first was in 2003 in which, following one and a half years of fruitless negotiations with a family of truly cantankerous and ill-willed first cousins over an inheritance (the seriousness with which they can take these battles here is evidenced by the legal title this writer has to two percent of an abandonned house in Tenerife), we finally got their attention by requesting arbitration by the courts. It woke them up and a deal was reached involving the purchase by myself and an aunt of the portion belonging to the contrary lot. The payment was: one certified cheque, the requisite pile of unrecorded cash and a pagaré dated four months later. Note that we were sternly warned by a disinterested and knowledgeable party to make sure the money was in the bank on the day it came due. Failing to do so would not have been a simple case of bouncing a cheque.

The second case (perhaps mentioned in regret as it would have relieved us of the current eternal wait for the rain to stop and olive picking to begin), which never came to fruition because we couldn't agree on a price, involved discussions to sell a property two years ago. The circumstances were that the buyer, whom we knew well, did not want to take on a mortgage - preferring instead to pay in annual instalments - and the writer did not wish to see the transaction make it to the property registry until 2012. The obvious solution was a well written contract, a first payment by cheque, the requisite envelope full of 500's, and five pagarés.

*Rumasa advertises these things on television and the national press. The latest issue, according to the publicity, is in fact secured - by the liquid contents of brandy and wine bodegas which they own. Their claimed value? Something over one billion euros.

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Still Fenced Off

A couple of months ago, we posted a piece remarking on how resilient markets were in the face of what could be interpreted as bad news all round - specifically referring to disappointingly priced (at least to the seller) asset sales by Ferrovial and Caja Madrid. Fast forward eight weeks and we see the same being repeated, although with considerably less conviction on the part of the status quo.

We could easily be talking about the very noisy, but finally nil, Friday reaction to credit events in Dubai (we believe that this is the third year in a row that something has come apart badly on the American Thanksgiving holiday), but Greece is what interests us more.

No surprise to followers of the third chart in our right hand sidebar who would have noticed a marked lack of synchronization between that country and the rest since late September, the yield on the Greek 10-year soared to around 210 bps above the bund on Thursday - returning to levels not seen since last spring. The only others to really react, but not so violently, were Ireland, Italy (which are the only two to register actual increases in actual coupon) and to a lesser extent, Portugal. Obviously, disregarding these first two, the main culprit behind generally widening spreads is the demand for German debt. Possibly a result of safe haven investment in a volatile currency/equities environment, the bund return has shrunk a full 22 bps in two weeks.

Even though it seems that local crises remain thought to be isolated outbreaks, one has to wonder about the action in Greek debt. At the height of the credit panic, when it was thought that both Greece and Ireland were verging on default and spreads widened to just shy of 300 in both cases, the ECB came out and plainly stated that no EMU state would be set adrift. Has anything changed? Are we missing something? Or are buyers of CDS on Greek debt at these levels being a touch hopeful?

David Murphy, possibly urged on by our comments to this post, may have decided to sell protection against a Greek default at 200-plus. If so, he was rewarded with up to 20 points on day one - kiss of death that immediate positive results might be.

As an aside, David also provided about a year ago a nice, succinct explanation as to why CDS spreads are not calculations of probability of default, at least in the case of sovereign debt.

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September Mortgages

One of the other property-related charts (aside from sales) we like to post is that derived from the INE's residential mortgage issuance statistics, which were published this week. Here it is through the end of September.

The number of new mortgages taken out - 62,411 - remains at extremely low levels, with the six-month average at about 50% of cycle highs.

Similar, but worse, is the case for total amount loaned the same average of which sits at 35% of its peak in early 2007.

Those, however, who might be inclined to believe that bad assuredly and irremediably portends worse - and we think that the figures are probably at mid-1990's levels - should note that these pittances are both at 11-month maxima. The triumph of Monotonism.

Just in time, though, to alleviate are near-terminal boredom, internet daily Libertad Digital, with the typical rigour that one would expect from your home town's mala lengua, had a go at the mortgage figures on Wednesday. Basing his argument on the methodologically very dubious 'analysis' presented earlier in Gurusblog, writer Manuel Llamas complains that (translation ours) '...houses sales diminished 17.2% annually in September to a total of 37,621 operations. However, the number of mortgages constituted rose to 62,411, a fall of 4.2% annual and an increase of 18.9% over August, the first monthly increase registered since April, 2008...

Aside from the fact that house sales also rose 10.5% over the month and that there has never been a month of September that did not show an increase in both over August (vacations ending, maybe?) and that both May and June of this year showed increases over their respective prior months, the ratio of new mortgages to purchases (which is another of the numbers we obsessively track) has ranged between 1.4 and 1.75 to 1 since January, 2007. Neither writer seems to understand the basic concept that a residential mortgage is a loan guaranteed by a house. Whether the money is used to buy the home put up as collateral is entirely unimportant.

What are they going to do when, irrelevantly, mortgages go year-on-year positive in October and sales a month later?

This kind of very bad reporting is endemic in the right wing Spanish press. Added to the fact that they universally see the duty of a news organization as being primarily one of discrediting the Zapatero government (a job which the president does quite well on his own, thank you), there are also as many outlets as there are factions within the PP itself attempting to outdo one another in the art of propogating 'news' damaging to the government.

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Limited Service

For the next week and a half the writer will be busy (barring the inclemencies which are sure to arrive) with the olive harvest. In an emergency, he can be found about a kilometre east of point A on the map.




In the meantime, readers might want to think on the following point:

1). What if the gains to had from the control of electricity have finally sunk themselves deep into the realm of Diminishing Marginal Returns?

On a less somber note (especially for those in NYC), our friends at Carter & Cavero Old World Olive Oil have a stand at the Shops at Bryant Park - 42nd between 5th and 6th. They're located in section G. Clicking on their name here will provide a nice overview of what they have on offer.

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Storage

What we like most about FT Alphaville is their writers' ability to regularly haul out really interesting items that would escape the attention of any but specialists in a given field. Last Thursday's piece on petroleum inventory is a case in point.

Beginning with a contrarian take on recent decreases in gasoline stocks in the U.S., the entry moves on to a report on the enormous profitability of Dutch tank farm operator, Vopak (in the process introducing us to a blog by the name of Climateer Investing).

Of course, storage* of any kind is the business to be in during a deflationary recession in which oversupply of everything (including money itself) is the norm - hence the huge operating profits of not only Vopak, but the banking system itself (albeit on a somewhat shaky structure) and the excellent returns from precious metals and the endless demand for bonds, both sovereign and corporate.

Interestingly but not necessarily significantly so, for the electricity generating business the only method of increasing storage is to construct plants that can reliably supply energy on demand. Solar (except to some small degree solar steam generators) and wind, where so much money has gone in recent years, do not qualify in this regard.

*Other arrangements include the farmers' fields one can see from the northbound train into Madrid stuffed to the gills with brand new unsold cars or the huge increase in part-time employment everywhere. This latter is not only a much cheaper storage of labour than paying overtime to an overly pruned workforce but is the very real-world advantage of the German unemployment insurance system (although perhaps not as good as the Spanish method of calling up your nephew and throwing him one of those 50's from that wad you've got stored in the cookie jar when you need some help).

Vopak chart from Yahoo!

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Life's A Beach

The indispensible Kalebeul has directed our attention to an article in La Vanguardia which relates Spanish Attorney-General Cándido Conde-Pumpido's defense against charges that the number of municipal corruption prosecutions is skewed against certain (opposition) parties. Speaking before the nation's congress, he provided a brief statistical analysis of the work performed by his underlings.

We've done a brief rework, with a bit of information that might be useful to readers not familiar with the Spanish political landscape, of Carlos López' derived 'Corruptómetro' - including the amazing record of the now defunct Marbella political party, GIL.* We hope Mr. López doesn't mind our scooping up and editing part of his Google spreadsheet.

Our adaptation is below.



Readers might note that there seems to be some relationship between a high score and proximity to a beach heavily populated with foreigners. Someone with a bit of time on their hands might wish to do the same study, adding provinces or regions to the mix. The current one lets the national parties off the hook in, for example, Andalucía (PSOE) and Valencia (PP), in which local interest parties are not widely represented.

*Marbella city council - run as a private fiefdom by Jesús Gil's self-named party for about 15 years - has, at any given point in time, about 27 councillors serving the polity. A total of 17 make this list.

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Playing Hardball

Today's tidbit from real estate portal, El Idealista, has the president of the Cataluña branch of the Association of Real Estate Professionals, Joan Ollé Bertrán, complaining that the banks and cajas are imposing punitive terms on house buyers intent on purchasing a home from anyone other than the financial institution itself.

Included in this, according to that gentleman, would be higher commissions, higher spread over euribor, the inclusion of a euribor floor below which the interest rate becomes fixed, and so on. As Mr. Ollé puts it (translation ours), '...this practice consists in establishing different conditions of access to a mortgage in function of who is selling the property in question...'.

This should come as no surprise to anyone, should it? It would be very interesting for the banks to have gotten rid of as much of their current stock of debt-for-equity real estate as possible by the time, say in two years, that they are going to have to deal with the continued dysfunction of promotors and builders recently put on life support with loan extensions and modifications.

However, among the potential negative consequences of this policy stands out the effect it is going to have on property valuations as vendors not affiliated with banks, such as private parties, will have to calculate the difference in available terms into their price, in the end placing moderate, but continued, downward pressure on property values in general - particularly in areas with a large overhang of unsold homes.

Another item from the same source earlier this month announced that Tulipp was getting out of the business of organizing Dutch auctions of properties. The reason is that too many vendors were raising their asking prices before entering in these events in which the sale price is bid downward. As the article puts it, a flat ...with an initial price of 300,000 euros. At that moment it was listed in idealista.com at 270,000 euros. Desperate? Or just, plain stupid? We suspect the latter.

The two charts are of the latest data in the home sales series from the INE - to the end of September. The ten-month long range continues intact for both new and used residences. The rolling twelve-month line shows a drop. This reflects last fall's temporary spike in activity. Expect, barring emergencies, both lines to be flat - at about 220,000 and 180,000 units, respectively - by the time November's figures are published in the new year.

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Apples And Peaches

This weekend's really good bit of flame bait from Barry Ritholtz (in which he creates a brand new category of human being - the Ayn Rand Asshole) led, predictably and intentionally to a beautiful round of nonsense in the comments section. One that caught our eye came from Mr. Ritholtz himself as he happily flopped about in the muck that reflexively rushed toward his doorstep.

The top 1% of this country have it pretty damned good — they own multiple homes...

Coincidentally, this goes a long way towards explaining how fruitless the comparison of American and Spanish housing statistics is doomed to be.

The writer of Ibex Salad lives in 6-unit apartment block with no particular outstanding features. A rundown of the real estate assets owned by the strictly middle class residents (although we could perhaps exclude the typically property-rich and cash-poor señorito andaluz presently populating these pages with preposterous propositions) should prove interesting. From the ground floor up:

Apartment 1: Retired middle class couple who live most of the year in Pamplona (in a flat which they own), dividing their travelling between here, Cazorla, and another place they own in a beach town in Alicante;

Apartment 2: Family of four consisting of a high school teacher and a social security doctor and their two children. They own three homes in this town;

Apartment 3: This writer and his wife, a school teacher, who jointly own three homes. (May soon be four if the writer can subtly find a way to ease the recently installed mother in-law's passage to the promised land);

Apartment 4: A single school teacher with residences here and in Granada;

Apartment 5: Two-child couple. He is the manager of a caja de ahorros and she an oficial at a property registry. Their home plus the down payment made on a detached house that may take years to be built;

Apartment 6: School teacher plus recently unemployed husband and a baby. They own the flat and a couple of acres with a dilapidated farmhouse a few miles out of town.

These are not the rich folks referred to in The Big Picture, so how does one go about making comparisons? Directed clearly at Mr. Sánchez' very astute comment in our next-to-last post, here are a few suggestions - at least regarding the impediments facing anyone trying to rationally compare apples and peaches. The following list is neither complete nor organized in any particular way.

1). Because carrying costs, among other factors, make owning more than one residence less appealling to Americans, new construction in the U.S. - except in periods of speculative frenzy - generally reflects demographic changes;

2). Along the same lines, except in the case of first-time buyers or those buying to later rent out to tenants, all purchases end up also registering a sale. That's two transactions on the books;

3). Quite frequently, the sale and subsequent purchase of a home by American families will involve moving up the ladder a bit in terms of price. This is generally known as 'upgrading';

4). The same behaviour in Spain (in which very few places are more than a five hour drive from an ocean beach) would involve buying a holiday apartment. This 'upgrade' creates only one transaction that should be booked against the two that result in the U.S. in the case of purchases that are not a result of outright relocation;

5). There is a marked, if not measured, cultural tendency in Spain to not convert to cash inherited houses, even if they are not to be used. Mere generational change, without the added extra of population growth, creates demand for new housing. With estate planning gifts and actual inheritances producing about 12,000 property transactions a month, rain or shine, the effect should not be underestimated;

6). The existence of open borders in the EU as well as lots of cheap and short flights from northern Europe to any of eight or nine airports along the Mediterranean makes it very hard to calculate exactly how big the home buying market is in Spain;

7). Except in the cases of wealthy parts of Florida, New York or southern California, this is certainly not how it is in the U.S. The American market is defined by the population of the country.

We could go on.

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Hmmmmm...

Courtesy Materias Grises.

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Cherry Picking

Readers whose native language is not English might not know that the expression, 'cherry picking', refers to the practice of using out-of-context and unanalyzed data to prove what is proposed as a hypothesis but is, in reality, a foregone conclusion. The habit is widespread among the chattering class. Here's an example.

An article in the real estate promotion website, El Idealista, again mentions another frequently cited comparison between the United States and Spain. Departing slightly from the usual story that there are an equal number of unsold new homes in this country as in the U.S., this version of it is that (translation ours) '...in recent years, 860,000 new homes have been started in Spain while in countries like the U.S., with nearly seven times the population, work was begun on 1.1 million dwellings'.

The source of this information was a recent speech given by the chairman of the economics and business department of Pompeu Fabra University, José García-Montalvo. Given that this gentleman's webpage motto is: "Without data you are just one more person with an opinion", we are thinking that a bit of statistical background to this glaring disparity might be of use to readers who do not wish to be lumped in with that crowd of noisy uninformed.

Using 2007 through 2nd quarter 2009 Spanish home sales data from the INE and American figures for the same period from the U.S. Census Bureau and the National Association of Realtors and comparing them, for the sake of ease, with CIA World Factbook estimates of current population in both countries, we come up with the following information:

1). Of the 12,776,000 total homes sold in the U.S. since December 2006, 1,448,000 were new;

2). In the same period here, 1,534,000 homes got new owners - 717,000 of these were newly built;

3). Put otherwise, 11% of total sales in the U.S. involve new construction. 47% in Spain;

4). Summing all, both new and second hand, sales over the period in both countries and calculating this as sales per 1,000 residents we find that the United States' figure of 41.59 only slightly outperforms the 37.86 registered in Spain. Much of this difference might be explained by the Census Bureau's rather peculiar methodology, which counts signed sale contracts as actual 'sales', regardless as to whether they are actually consummated. The widespread use of clauses making deals contingent on the buyer's success in selling his or her current residence causes this data to grossly overestimate the number of actual sales in a slow market in which it is difficult to match transactions over the typical 90-day closing period - this not to mention the number of buyers who merely walk away from what is turning into a bad deal as prices drop.*

Did somebody mention something about data and opinions?**

*Add to this the higher birthrate in the U.S., and the consequent lesser proportion of people of home-buying age, this comparison draws even closer in real life. And after all that, there is a very large difference between Spanish population estimates and those of the CIA, this time turning the tide against Spain in this regard.

**We, in fact, were rather surprised to read that Mr. García-Montalvo hauled out this canard. His now disappeared blog, MontalvoLand, was generally a pretty good read.

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Journalism

Readers might have noticed that we, at times, have taken umbrage at the imbecilic content which postures as news and analysis in both the mainstream press and the (usually indistinguishable but for the shiny patina of sanctimoniousness beneath which it operates) blogosphere. Today, for a change of pace, we'll outline a complaint we have about practitioners of the journalistic profession itself.

Yesterday, a reader kindly informed us that this writer's name had recently cropped up in two very widely read English-language publications. We recall the situations perfectly. The first was the result of e-mail and telephone conversations, initiated in May of 2007, by a Barcelona-based American freelancer. The second, fruit of an e-mail received mid-summer this year and in interview conducted in late August. In both cases, not only did we agree to speak (for whatever that might be worth) but we also gladly did a fair amount of groundwork or actual research on their behalf.

Not that we don't feel a little smug and self-satisfied at seeing ourselves referred to and quoted in both the Wall Street Journal and BBC News, but the fact that the first piece was published in April of 2008 and the latter at the beginning of this past October and that in neither case were we informed of their publication - despite assurances in that regard - leaves us with a bit of a sour taste in the mouth.

Readers can find the WSJ piece here, and the BBC's here.

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