Monday, 14 June 2010 12:39

Throw a Little Conspiracy Theory into the Pan-European Sovereign Debt Crisis and an Impending Spanish Bank Collapse and Who Needs TV For Entertainment?


The global equity markets are in meltup mode again. I want to take this opportunity to reiterate that I am still quite bearish on much of the situation in Europe. Let's glance at the credit markets, major banks and the state of sovereign indebtedness in Spain.

image001

As you can see, Spain's 3 yr CDS spreads are the highest they have ever been. They are significantly higher than they were during the entire Lehman fiasco, and they are even higher (or at least comparable) than they were right before the EU/IMF trillion dollar bailout package was announced in conjunction with threatening those who dared to speculate against Spain's fiscal health!

spain bund spread

Aimage002

Looking at the funding requirements Spain will have in the near future, even with the IMG/EU bailout, it looks as if there may be a restructuring in Spain's future.

Of course, all of this stress is bound to manifest itself in Spain's banks. As the market has picked up on this (luckily, after many BoomBustBloggers had positions in) Banco Santander and BBVA have paid the price. Speaking of STD...



13:50

The Octopus Known as Banco Santander: This is a very interesting, if not highly controversial documentary. The European version of the Squid, the Octopus!!!! As my readers know, We Have Warned, and the Fissures Are Widening in the Spanish Banking System.

A quick snapshot of Bancco Santander:

All figures in million euros except per share data
Current Price-to-tangible book value 1.8
Price 10.1
Tangible BVPS 5.7
BVPS 8.7
Tangible equity 47,180
Common equity 71,832
No.of shares 8,229
Total assets 1,110,529
Geographical break-up of custumer loan portfolio
Spain 35%
Other Europa (mainly Portugal) 12%
United Kingdom 33%
Brazil 8%
Other Latin America (Mexico+Chile) 7%
Sovereign 5%
Trading portfolio 135,054 12.2%
Debt securities 49,921
Customer loans 10,076
Equities 9,248
Trading derivatives 59,856
Deposits from credit institutions 5,953
Available-for-sale financial assets 86,620 7.8%
Debt securities 79,289
Equities 7,331
Loan 736,746 66.3%
Deposits at credit institutions 57,641
Customer loans 664,146
Other 14,959

I have made our position on Spain clear through a complete forensic review of the state’s finances for subscribers:

File Icon Spain public finances projections_033010. An excerpt from this subscription document (subscribers, reference page 2) shows the euphoric, yet highly unrealistic optimism upon which Spain has built its fiscal austerity projections.

spain finances excerpt

As suggested in the document, if one refers to the blog post Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!, you will find that not only has Spain apparently fabricated a fairy tale of potential prosperity based upon the projections of the IMF and EC, but the IMF and EC have been nothing but fairy tale projections themselves.

I have been bearish on the Spanish banking system since January of 2009 (reference Reggie Middleton on the New Global Macro – the Forensic Analysis of a Spanish Bank ), and after a trip to the Costa del Sol by way of Málaga during the boom times are shortly thereafter, the reasons should be most obvious.

We now have a rash of new Spanish bank and sovereign research which has returned between 300% and 400% over the last few months.

std opt. research time purchase

Needless to say, as the situation in the EU deteriorates upon the widespread dissemination of the knowledge that BoomBustBloggers have been trading off of for quarters now, I feel the options will spike in value significantly!

04:58

The Sovereign Debt Crisis: The Complete Analysis

Relevant subscription material (subscribe here):
File Icon A Review of the Spanish Banks from a Sovereign Risk Perspective – retail.pdf
File Icon A Review of the Spanish Banks from a Sovereign Risk Perspective – professional

File Icon Banks exposed to Central and Eastern Europe
File IconSpanish Banking Macro Discussion Note

File Icon Spain public finances projections_033010

File Icon UK Public Finances March 2010

Last modified on Monday, 14 June 2010 13:02

10 comments

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  • Comment Link Enola Duncan Wednesday, 23 June 2010 01:40 posted by Enola Duncan

    BP needed to think the future effects of this tragedy.

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  • Comment Link Reggie Middleton Tuesday, 15 June 2010 06:38 posted by Reggie Middleton

    As if on cue, after reading this story, you get Spain's bond auction which brings sub-investment grade rates to a "so-called" investment grade, AAA sovereign entity. From CNBC:http://www.cnbc.com/id/37701163

    "Spain's Treasury raised 5.2 billion euros at its 12- and 18-month T-bill auction on Tuesday, but the substantial premium to the same auction a month earlier raised doubts over the country's credit rating.

    Glowimages | Getty Images

    The 12-month bill paid an average yield of 2.303 percent compared to 1.59 percent in the same auction in May, while the 18-month gave 2.837 percent, up from 1.951 percent.

    "The bid/cover was respectable and they managed to get the bonds away. But this was hardly a success with about 5.2 billion euros sold, at the bottom end of the target," said bond strategist at Monument Securities in London Marc Ostwald.

    "It also begs the question how Moody's can rate Spain triple-A when you have an auction result like this. While Spanish 12-month yield was 2.30 percent, France's equivalent is 0.4 percent and below the ECB's policy rate of 1.0 percent. This must now put pressure on Moody's to downgrade Spain."

    Moody's has kept Spain's debt rating at its highest level, while Fitch last month cut to one notch below top and S&P's has Spanish sovereign debt at two steps below it's highest rating."

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  • Comment Link Reggie Middleton Tuesday, 15 June 2010 00:27 posted by Reggie Middleton

    I've been saying this for some time. The government is spending $1 for every 75 cents worth of economic output, very inefficient and very misleading. From the link above:
    "Among the fascinating aspects of the recent economic "recovery," probably the greatest is the failure of analysts to understand that this growth is none of the private sector's doing.

    Wall Street seems to have no concept at all that every bit of growth we've observed over the past year can be traced to government deficit spending, with zero private sector expansion when those deficits are factored out. As I noted last week, if one removes the impact of deficit spending, "the economy has recovered to the point where the year-over-year growth rate since early 2009 now matches the worst performance of any of the 50 years preceding the recent downturn." In effect, Wall Street's is seeing "legs" where the economy is in fact walking on nothing but crutches.

    Similarly, it is apalling that Ben Bernanke can say with a straight face that many of the "investments" made by the Fed have been repaid "and some have even made a profit," without immediately noting that the two primary sources of these repayments have been, directly or indirectly, the U.S. Treasury, and savers who are receiving near-zero interest on bank deposit instruments.

    If we fail to recognize that the "good news" reported over the past year is due not to a recovery in intrinsic economic activity, but instead to massive government intervention, we risk being blindsided as those synthetic effects gradually erode.

    On that point, it is notable that the Economic Cycle Research Institute (ECRI) reported Friday that its Weekly Leading Index has slumped to the lowest level in 44 weeks, and has now gone to a negative reading. "

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  • Comment Link Paul J. Monday, 14 June 2010 15:19 posted by Paul J.

    I thought you all might find this link very interesting from John Hussman's weekly economic/market newletter: http://www.hussmanfunds.com/wmc/wmc100614.htm.

    I also follow the ECRI WLI index when it comes out every Friday. I have to admit it is a little uncomfortable when the market goes against you in the short term, but I feel that there are too many problems with debt issues in the developed world.

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  • Comment Link shaunsnoll Monday, 14 June 2010 14:59 posted by shaunsnoll

    don't forget in 2007 and 2008 when the credit markets led the equity markets by at least 1-2 weeks many many times too. They led both on the way up and on the way down and proved to be a pretty useful indicator as there were big discrepancies between what currency, equity and bond markets were saying back then. That astute investors (like Reggie) were aware of this and were watching CDS and bond spreads to help time short entrance points. So pay attention to where CDS and bond spreads are trading over a 1 week moving average instead of paying attention to daily equity pricing.

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  • Comment Link shaunsnoll Monday, 14 June 2010 14:52 posted by shaunsnoll

    I wouldn't pay too much attention to short term stock price movement. There are many many factors that can move it that have nothing to do with fundamentals. Keep in mind that if funds are all sitting on record low levels of cash that if the market turns down and they face redemptions or equity out flows they will be forced to sell into a declining market.

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  • Comment Link Reggie Middleton Monday, 14 June 2010 13:58 posted by Reggie Middleton

    I wouldn't rule out market manipulation or short term trading effecting a low volume market. We all know it is not trading on the fundamentals, and we all know what happens after a prolonged period of prices diverging from the fundamentals.

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  • Comment Link Jason Monday, 14 June 2010 13:51 posted by Jason

    I am really confused. With all these widening spreads and today downgrade of Greece bond, stock market is still zooming higher. What am I missing?

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  • Comment Link shaunsnoll Monday, 14 June 2010 12:51 posted by shaunsnoll

    so many of these european countries have their debt held by outsiders, will be quite easy for their politicians to bbq foreign investors to placate domestic interests. You see german vs. spain 10 year yield spreads too?! blowing out big time! TED spread and EURIBOR also blowing out

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