A Mortgage Conundrum

As usual for this time of the month, the INE has released mortgage issuance figures for Spain. The month of August saw a continued moping along near the lows for total residential mortgages, something similar (but a bit more lively) for the total amounts loaned and no apparent end in sight - despite the slightly lower amount for August with respect to July - to the uptrend in the average amount doled out.

An item of considerably more interest comes from a series we only sporadically track and report merely to make the point that mortgage issuance is not necessarily a proxy for home sales. Or perhaps we should change that to was.

Updating our chart of the ratio of the number of new residential mortgages constituted to residential sales for the first time since last winter, we came up with the surprise on the left.

A figure which had generally tracked along at between 1.5 and 1.6 mortgages per home sale then falling in the aftermath of Bear Sterns and (especially) Lehman Brothers before recuperating strongly to 1.75 as the 2008-2009 credit freeze-related backlog of loans got cleared, has suddenly fallen to 1.14. Home buying accounted for nearly all of mortgage lending in August - this without making a noticeable dent in volumes or amounts.

Are Spain's banks and cajas now accepting lesser collateral (cars, motor boats, teenaged children) as guarantee for non-real estate loans? Not too likely given the chronic stupor of the Spanish economy.

Are they refusing to lend for anything that does not move, either directly or indirectly, a repossessed home off their books?

Suggestions in the comments box.

Our more astute readers might have noticed a certain dearth of posts recently. Other Matters have intervened. Specifically, and far from off topic, a cousin suddenly flopped the care and feeding of a couple of thousand olive trees on our lap. She had had the property up for sale and when her fantasy of pocketing 600,000 euros (100 million pesetas - the Law of the Many Zeros) was met with the reality of one offer of 390, she decided to harvest instead. To explain our absence, none of the autumn maintenance had been done.

What the buyer was willing to part with priced the parcel at about the year 2000, by the way.

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Ibex Salad regularly updated features...

• Eurozone Yields & Spreads
• Pending & Recent Spain Bond Issues
• Extra Lettuce - Spain Economic Charts

Bond Jitters?

In contrast to yesterday's successful auction of 6.4 billion euros of 12- and 18-month paper, the Spanish treasury's surprise announcement of the addition of an off-the-run with a 2032 maturity (no target amount) to tomorrow's scheduled 3-4 billion 15-year issue seems to have spooked the bond vigilantes.

After having traded to yield slightly below 4 percent for much of last week, the 10-year surged to 4.09 this morning before settling (at this moment) back 5 points.

Screenshot from Bloomberg.

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Ibex Salad regularly updated features...

• Eurozone Yields & Spreads
• Pending & Recent Spain Bond Issues
• Extra Lettuce - Spain Economic Charts

August Home Sales

Not referring to the 25 percent year-on-year increase in volumes, sales of new homes reached a minor milestone in August. They were the highest since October of 2008 - the last month to reflect transactions made before the collapse of Lehman Brothers. Most commentators are saying that these sales reflect June closings pulled forward in advance of the July 1st increase in the applicable sales tax. Probably true, this will become evident in September - a month which normally sees more new deeds come out of the property registries than August.

As an interesting side note, it was brought to our attention that the International Monetary Fund is the first to abandon the Spanish housing universal constant of 1 million unsold new homes. An assessment published in July (pdf, p.12) places this number at 700,000.






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• Pending & Recent Spain Bond Issues
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And our Next Entrant is...

First Ibex 35 component to make its way down the path beaten flat by Ferrovial appears to be the constructor and infrastructure operator, OHL. Press reports this morning have the company studying the possiblity of hiving off its Mexican division - OHL Concesiones. Valued, apparently at 1.6 billion euros, a mooted IPO of about one half would provide 800 million to the noble cause of debt reduction.

Odd, isn't it, that accounting fiction of loading up an asset next to a liability?

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Miguel the Monotonist

The BIS has published an English translation of the governor of the Bank of Spain's recent presentation to the country's Parliamentary Budget Committee. In it, Miguel Angel Fernández Ordóñez nicely lays out the monotonist argument that underlies much of what appears in Ibex Salad whilst throwing a jug of cold water on the dreams that his audience of politicians may have that their livelihoods might not be in jeopardy as elections roll through the nation over the next year and a half.

Generally speaking, we are admirers of Fernández Ordóñez. Shown in the picture above (perhaps shot whilst listening to yet another defense of the solvency of CCM spewing from the mouth of Juan Pedro Hernández Moltó), this tough guy has shown the two qualities necessary to extract concessions from a weaker, but politically protected, counterparty in this country - intransigence and patience. Others - thinking specifically of the trade unions, the local warlords who manage the nation's cajas de ahorros and President Zapatero himself - will probably think otherwise.

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If it has a Positive Sign, Can it be Spain?

A reader of our recent piece on Spain's international investment position seems to be confused about what we were portraying. It is not a proxy for foreign debt.

1). The Spanish reader issues a $300, 4 percent bond with a two year maturity to an English investor on October 8, 2008. Book $300 of foreign debt against the country;

2). The proceeds are used to buy three shares of a $100, 4 percent dividend paying American company . Book $300 of foreign assets. Net position for the investor (and the economy, except as perceived by markets in moments of credit stress) is zero;

3). Come redemption date for the bond, the reader sells one share for $300 (AAPL, if it were to pay a dividend) repays the hundred and retains the remaining two-thirds. Spanish foreign debt lowers by $300. Net investment position $200 higher than it was at the beginning.

In the case of Ferrovial (with a high degree of indebtedness to foreign lenders), part of the money borrowed was spent to develop the asset that is the 407 ETR. They've now cashed in part of that investment and will (most likely) be using the proceeds to pay down mostly foreign-held debt. That the operation was profitable means that they will likely be paying off more than was specifically assigned to that project.

That foreign assets are currently greater than they were at the beginning of the crisis, whilst liabilities remain less, is a partial testimony to good investment decisions. And with FT Alphaville seeming to confirm that the market for business assets is currently thriving, we might expect to see more of this in the future.

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All in the Family

Recently, we attempted to add some perspective to the generally trumpeted real effective exchange rate explanation of Spain's mediocre export performance. We found it lacking and proposed that English language proficiency - as a measure of the degree to which cultures consider the rest of the world worthy of their attention - fit a bit better with the actual facts. Courtesy of INE's report on Spanish industry, released today, we've found another candidate.

The graph screen-grabbed and annotated by ourselves shows the share, relative to the EU-27 total, of both industrial production (light blue) and number of companies (dark) for a selection of countries. We're not going to dig further, but the reader may rest assured that dividing one by the other and plotting that against exports per GDP will produce a well-aligned and informative scatter chart.

Then again, the evident preponderance of small, probably family run, businesses in certain countries may be just another example of a regressive 'homieness' inate to some parts of the world.

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Return Trip

Explanatory note - October 14, 2010: Readers, before beginning this piece, should note that the writer has used the house of mirrors provided by standard accounting practice to come up with a graph that is correct in magnitude but upside down with respect to the truth. Spain's investment position vis a vis the rest of the world was negative 953 billion euros at the end of Q2. The motive behind the writer's publication of this blatant falsehood was a continuation of his knee-jerk reaction to the ease with which a writer from Libertad Digital managed to plant a patently false piece on the Spanish economy at FT Alphaville - later using them as the source for the information in a 'news item' at their own publication. We apologize for having let our irritation at the same old same old get the better of us. Subsequent commentary that foreign infrastucture assets owned by Spanish corporations are now being priced appeallingly by the market remain, however, intact.

The reader who gave, in the comments section, every indication of having been lying in wait for his golden opportunity should keep in mind the old adage - If it's too good to be true, it probably isn't.

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Seeing that the 635 million euro proceeds of Ferrovial's recent sale of 10 percent of a Toronto tollroad known as the 407 ETR will soon show up on the national accounts... maybe a look at the Spanish economy's financial asset position with respect to the rest of the world would be in order.

Evidently, the reports from earlier in the decade that the country's multi-nationals were reinvesting most of their profits in the ultramar were true. Net is approximately equal to Spain's GDP.

Since the offer was made by the people that manage Canada's national pension plan - valuing the asset at about 40 percent above market - Ferrovial's stock has soared by nearly one-third. They still own 40-some percent of the road.

In related news, the earlier mentioned Sacyr Vallehermoso should, in theory, benefit similarly from Repsol's Brazilian joint venture with Sinopec. Also up comparably.

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Not Fade Away

Most ex-presidents and former prime ministers devote their lives to making a positive difference in the world, or at least fade away into obscurity. Here are five former leaders who have done neither.

This quote leads off an article in Foreign Policy Magazine on certain no longer serving political leaders who continue to insist in occupying the limelight. The five covered are:

Gerhard Schröder - Germany;

José María Aznar - Spain;

Olesegun Obasanjo - Nigeria;

Joseph Estrada - Philipines;

Thaksin Shinawatra - Thailand.

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Disenfranchised

Thanks to a 2007 study by David Blanchflower, which came to the conclusion that...

...the probability of being a union member follows an inverted U-shaped pattern in age, maximizing in Canada, the United States and the United Kingdom in the mid- to late 40s. This inverted U-shaped pattern is repeated in a further 31 countries, the unweighted average of the age maximum of all 34 countries being 48. The only countries where I did not find evidence that density had an inverted U-shape in age are the Philippines, Cyprus, Latvia and Brazil.

...we don't see any good reason not to use his age and union membership data for that first group of countries as a proxy for the same in Spain.

Any questions as to why last Wednesday's general strike in Spain turned out to be less than a roaring success should be answered by looking at the chart above. Most of their membership has not been affected by the recession. Truly outstanding is the 50-54 age group - which has seen no net job losses since 2006. To state this another way, as of the second quarter of this year, nominal employment among this group was at an all time-high.

Examined from another angle, 82 percent of all jobs lost since the peak of the boom were charged to workers under 35 years old. We assure the reader that this group makes up about only one-third of the labour force.

No one is looking out for them.










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• Pending & Recent Spain Bond Issues
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The Devil in the Details

Spain is perhaps the most perplexing of the recent housing bubbles. During the long boom, the Iberian peninsula was littered with speculative building projects. Construction peaked at a massive 18 per cent of GDP. The ratio of Spanish house prices to disposable income climbed from 3.8 times in the late 1990s to 7.7 times by 2007. Yet despite the severity of the financial crisis, which has driven unemployment to more than 20 per cent, the residential real estate market has proved remarkably resilient.

Edward Chancellor, FT.com, October 3, 2010.

Farbeit from this writer, olive grower observing from deep within the entrails of the Cro-magnonic Spanish province of Jaén that he is, to pretend to criticize the analysis of a member of the asset allocation team of one of the world's most prestigious investment managers, but perhaps someone with a bit more visibility might inform Edward Chancellor that he is mistaken in his calculation.

1). It is the total cost of home ownership that has to be measured against income, not merely the purchase price. Increase by 50 percent, minimally, US housing prices to arrive at a figure comparable to Spain, for example;

2). The 20 percent unemployment rate is as near irrelevant to the matter as is possible. Of the jobless in Spain, 83 percent of the increase in their numbers since the end of the boom are comprised of workers who were never in the housing market. The temporarily employed were never eligible for mortgages. The two-thirds who were, and are, have seen their numbers shrink by 3 percent over the same period.

On the plus side, however, Mr. Chancellor's editorial is the first (to our knowledge) to admit in a widely read English language source to the possibility that Spanish home prices did not collapse. The journey of a thousand mile begins with a single step.

Hat tip to Paul Kedrosky whom we have inevitably intended to illuminate (only employing a small amount of exagerration in the process) via his comments section.

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Seeking Alpha

In which FT Alphaville finds itself unwittingly pressed into service by the Spanish right wing, their escape and an interesting lesson to be derived from the incident.

Not to be defeated by the lack of market fireworks attendant upon the Moody's downgrade of Spain's sovereign debt, FT Alphaville yesterday took matters into its own hands and published the salient portions of a 'deeply anonymous' report received by themselves and various other information media. By salient we mean that the writer of the piece claims - and claims to prove - that the collapse in Spanish GDP during the crisis amounted to 17.3 percent, and not the published 3.1 points.

Over the course of the day, the incredibly lively and erudite (perhaps not including those posted by this writer as 'capra.iberica') comments section not only laid bare the inadequacies of the analysis, but also made a credible stab at identifying the source of the nonsense. The general opinion was that it was shat out from the laptop of one Juan Carlos Barba, earstwhile contributor to that noise manufacturer with a deserved reputation for never letting facts interfere with a critique of the PSOE - Libertad Digital* (American readers might consider Beck or Limbaugh as analagous). We think, on the basis of the very unusual typeface used in the graphs, this theory might have some merit.

Precipitated, we imagine, by the publication by the above mentioned Spanish rag of an article - co-penned coincidentally by the same Mr. Barba - claiming that the source was in fact Alphaville (with all that might imply concerning its credibility), the English publication erased the original text and replaced it with this. The important quote is:

'...we'd even started to question the (political) motives of the anonymous source.'

Aside from the obvious humour of Alphaville's having taken the bait hook, line and sinker, the really interesting observation comes via the comments (which remain intact in the rewritten piece and are worth a read). That a wide variety of people felt it relevant to unmask the falsehoods in the argument tells us that the curious notion that one ought to proceed from the evidence to the conclusion - and not vice-versa - may be gaining some currency. It's been a long three years.

The original FT piece has been preserved here and the entire document can be had here

*A good idea of what Libertad Digital is all about is provided by the closing paragraph of the same piece 'inspired' by Alphaville...

...Spain entered technical bankruptcy last May 7th...

To date, the publication has not removed the link that now disinherits them.

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Ibex Salad regularly updated features...

• Eurozone Yields & Spreads
• Pending & Recent Spain Bond Issues
• Extra Lettuce - Spain Economic Charts