Win some, lose some

Hot on the heels of our having mentioned something about the security of the Santander dividend, the number two Spanish bank BBVA has announced that they will be funding the next portion of their 44 cent, 7 percent payout via a dilution equal to 1.78 percent. The stock up 5 percent on the day of the announcement.

One outfit that has decided to not compete in that league is Loterías y Apuestas del Estado. The government yesterday decided to cancel the much-awaited IPO of the Spanish state-owned lottery company - what would have been the second largest public offering of the year in the world, according to Victor Mallet. General market conditions accompanied by a veiled threat on the part of the soon-to-be-governing Partido Popular to rectify what they claim is a bad decision combined to generate investor interest that indicated that receipts from the operation would fall 40 percent short of Elena Salgado's expectations.

Probably a missed opportunity. How often does one come across a cash cow like this paying out 95 percent of profits - and distributing them on what was reported to be a monthly basis?

As an aside, Rodrigo Rato's decision to forge ahead with the Bankia IPO last July, despite the predictably less than stellar results, now looks prescient.

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Tourism alive and well.

The Spanish tourism sector is having a banner year. Aided, we imagine, by societal tensions in various countries on the south shore of the Mediterranean, the INE reports that the number of nights stayed over August in hotels by foreigners was 16 percent higher than 2007. The actual number of guests greater by 14 percent. Domestic tourism, probably assisted by the severe recession taking place in the country as vacationers stay close to home, is also at record levels by both counts. The months prior over 2011 are also at maxima for all categories.

The effect on Spain's balance of trade and current account is notable. The Banco de España reports that, through June, the trade surplus in services through June is 28 percent greater than for the corresponding period in 2010. It's worth noting though that the trade deficit in goods was also reduced by 8 percent over the first half of the year on higher levels of both exports and imports. The current account deficit has been reduced by a further 11 percent over the period.

Readers should note that the graph states the reference year as 2001. It's January 2006 in real life. We might fix it when we get a moment.

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That Santander Dividend

We know that we were caught touting the Santander dividend on a couple of occasions last year when the stock was yielding 8 percent. But do we feel the same now that the eurozone banks turmoil has raised that figure to around 11 points? Less than the reader might imagine.

The accompanying chart shows the ratio of the number of new mortgages constituted to houses sold since 2007. That they are approaching equality indicates inexactly to what degree Spanish banks are compensating for an unfriendly credit environment by neglecting what is their real business in this world - that of making loans* - in order to shore up their reserves. Simple logic would have it that the profitability that fuels the dividend will be affected, and the 60 cent disbursement will be under siege.

*Ibex Salad's readership includes people from both within and without the finance industry. Out of respect for the latter, without wishing to talk down to the former, we'll repeat that mortgages are loans, to be used for any purpose, guaranteed by a property. Nothing more, nothing less. That the number of residential mortgages being issued is approaching the number of house sales contracted makes it clear that Spanish banks are almost exclusively lending to clear embargoed homes off their books. Purely the picking of poisons.

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Another camp evacuated

As Barry Ritholtz kindly points out with regard to the margin adjustment that took a touch of lustre off the metal that will carry us to the promised land:

As of this Monday, the minimum cash deposit for trading gold futures will be $11,475 per 100-ounce contract — at $1700 per ounce, that is a $170,000 position. The leverage is nearly 15 to 1... At 15-1, a less than 7% move against you wipes out your capital entirely.

Much as the comment-section simians at the Millionth Monkey might have gone completely bananas, does anyone else note a slight disconnect between the 'safe haven' theory of the price of gold and the level of indebtedness used to get that mattress stuffed with it?

The chart shows occupation levels at various thought-to-be-welcoming economic refugee camps compared to the day before the Swiss National Bank started pitching the vagrants out. They are gold, the bund (that proxy for the new deutschmark), the Swiss franc and the US dollar. The shaded area depicts the disaster zone from whence they have fled. It's the Eurostoxx Banking Index.

Ourselves shuddering to think what would come out if he really tied one on, John Hempton thinks it's about to all fall apart in Euroland. But we're more tempted by the possibility that the Bund Camp is next on the list.

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July Spain Home Sales Statistics

Readers might note the new Spain home sales charts on the left. Improvements (is that the right word?) include incorporating everything from the monthly shot in the yearly sum graph and the inclusion of the mysteriously opaque, yet utterly crucial, category of 'otros'

In English 'others', it refers to transfers of any kind of property - rural, lots or homes - that do not fit into the official list comprising purchase, donation, inheritance and payment-in-kind. The types of transactions that the INE has chosen to not differentiate between include the unification of, mostly country, properties, the horizontal division of apartment blocks undertaken by their promoters prior to the sale of the resultant individual units, repossessions and - dations in payment - the much discussed practice of Spanish banks and cajas to voluntarily take back underwater properties in lieu of balance owing rather rather than through the legal process of forelosure. The advantages of this strategy for the lender were that it is cheaper and quicker and, most importantly, it prevented lots of non-performing loans from being recorded as such on their books. The benefits, however, accruing to the follower of the Spanish real estate market are best categorized as 'negative'.

Simply put, in the act of a bank's accepting a finished home as payment for a debt owed the eventual resale by the creditor of a never occupied house or apartment gets itemized in the second-hand sale registry - and nobody can know even approximately at what rate the economy is absorbing that exorbitantly large stock of new dwellings. The 12-month rolling sum chart, though, can give us an idea of how interesting that number might be.

Sketched in an unavoidable lurid purple, a simple glance reveals that it has declined less than any of the other series pictured. Back in 2007, much of the 500-odd thousand transactions registered would arise from the horizontal division of finished projects, later to be marked as new home sales. But, as time goes by that kind of activity declines, according to the Ministerio de Fomento, at about double the rate of 'other'. Readers should accept as fact that much of the latter's resilience is a result of the daciones en pago that are being recorded in that column and, although perfectly up to the task, are eliminated as candidates for removal from the new home inventory.

We have no opinion as to how high or low that number might be.

The home sales charts continue to show a fairly depressing, and depressed, tendency. Between the very tight credit conditions forcing banks to maintain reserves by not doing their job of granting loans (new residential mortgages were equal to home sales in July, meaning that banks were lending next to nothing not house purchase related even with a collateral guarantee), the possibility that the banks and cajas may have sold most of the desirable places in their catalogues, a general air of anxiety as to the direction of the economy and the uncertainty concerning what the tax treatment of house purchases will be following November's general election, people are wisely 'postponing their decision', as they say.

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Wrong, wrong, wrong

Our eurozone equity market-conducted bank stress test continues to separate the wheat from the chaff (or perhaps better the chaff from the pieces of grit, insects and dried bird shit that also get picked up in the harvester).

Banco Santander has 60 billion euros of exposure to Spanish government debt on about 1 trillion euros of assets. Unicredit has a 49 billion exposure to Italy and Greece on assets of around 1 trillion. Why has the latter's equity underperformed the former by nearly double in this summer's sovereign exposure rout while the bond market continues to assess both as approximately equally risky.

One of these markets has it wrong.

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Sometimes you win, others not

Last week's fool-headed Ibex Salad prediction that the SNB intervention might have served as a warning to eurozone bond investors has proved itself, umm, wildly optimistic. Total intervention by the ECB last week was around 14 billion euros - and this week is starting off on the same foot.

On the other hand, our July criticism of Edward Hugh's really ignorant remarks on the Spanish inflation rate is turning out to be correct. As we said at that point:

Mr. Hugh chooses to bring the matter up a mere 5 days before the first anniversary of the tax increase - the day on which the effects on the inflation rate will fall off the statistical record and it will return to a eurozone standard in the mid 2's.

The chart is screen grabbed from today's INE press release.

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Trichet takes off the gloves

Hard on the heels of the Swiss National Bank's inhumane gassing of the hordes of economic refugees that had, despite prior warnings, continued to land upon the shores of that once peaceful republic, we now have ECB president Jean-Claude Trichet taking aim at a question posed by one of the lowest common denominator retards that compose the content of the noise-o-sphere. His response to a question that seems to have gone along the lines of...

'What is your answer to German people and economists who want the return of the DM?'

... lasts the entirety of 5 minutes and 56 seconds of Reuters video. Salient points are that the ECB's mandate has always and only been price stability - which they delivered - and that the three countries that were denied a requested pass on the Stability and Growth Pact in 2005 were Italy, France and who else but Germany.

We can now imagine, for example, Elena Salgado being faced with a barrage of questions from some idiot economic illiterate recently promoted from the Swansea police beat...

Idiot Illiterate: Ms. Salgado, at what point do you feel that Spain's debt burden would become unbearable and a bailout inevitable?

ES: Thank you for your question. I, like yourself, do not suffer from perfect clairvoyance. But it seems to me that if the current level of debt costs the Spanish government 2.2 percent of annual GDP to service (compared to 2.4 for Germany, 2.6 for France, 3.2 for the UK and 4.8 for Italy) that we probably have a fair bit of margin at our disposal.

II (insisting): But the current level of interest rates must be of some concern?

ES: Well yes, obviously. Our main preoccupation right now is that our current cost at issuance is only 20 basis points below the average cost of our outstanding debt. Just like any sensible person (like yourself), we also batten down the hatches when the bank lowers our credit card rate.

This writer, always the optimist, has taken the very muted response to the SNB's intervention in FX markets as a sign that belief in that inane economics construct that has it that price is always and only the best allocator of resources - and its obvious corollary that markets are a regulatory no-fly zone - has all but become extinct.

Next up would be the notion that the press, as it currently conducts itself, is the optimal arbiter of information content. With any luck, the days of having to treat each and every cretinous query and the subsequent stupidity that is its spawn with the same kid gloves are numbered.

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Swiss bail out Merkel

An interesting bit, commenting on the effect of the SNB's announcement that it will defend to the death the 1.20 euro/SWF exchange, from International Financing Review...

Chapeau! The Swiss National Bank had today proven what many had either suspected or known but nobody has dared to talk about, namely that the days when central banks couldn’t challenge hedge funds are over...

...Had all this happened a few years back, the SNB would now be standing there with a bloody nose and some hedgie would have made his annual P&L in a morning. But it is clear that the appetite to take on a central bank is no longer there.

Altogether, we have been watching the power of hedge funds gradually diminish over the past couple of years and what we see today is in some ways the invitation to the funeral.

Notable, and likely related, were today's eurozone bond markets. Italian and Spanish yields came down 18 to 25 points right across the curve, with the Spain 10-year actually briefly tagging 4.99. We won't find out until next week, but we're willing to publicly guess that this effect didn't prove very costly to the ECB. Anybody holding short positions on EZ debt won't be hanging around waiting to find out exactly how all those rate fixing euros will find their way to the periphery.

For reference, the first four weeks of intervention produced 22, 14, 6 and 13 billion euros in secondary market purchases.

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