Thursday, January 7, 2010

Shorting In the Evening

We've been reading some headlines today about Spain's "resilient housing market".  As we've postulated before, much of the European Union is going to be in serious trouble due (in part) to its ultra-centralized monetary planning structure.

Especially effected are and will be the PIGS (look it up). 

Greece has already experienced a hammer blow with its sovereign debt downgraded.  The stock market there has taken a hit right along with its government debt.

Spain has a good chance of taking a bullet in the near future - especially in regards to its housing market.  Compared to most other European countries, it's just-under-10% decline has been breezy.  However, these numbers are reflective only of closed transactions and NOT reflective of the fact that most banks are still hoarding all the mortgage paper (and therefore properties) on their balance sheets.  Not marking them down, or selling them.  They are pulling the old wait-for-asset-prices-to-rebound so they can get a better price.

Well, since credit is only marginally less day than the Sahara these days, the odds of such a "natural rebound" are slim to none.  Furthermore, many Spanish banks holding this paper are looking like attractive short opportunities - once the cat is out of the bag the declines should be as fast or faster than 2008's.

Here is our short-candidate:

Banco Santander (STD on the NYSE)

Overlooking the fact that its stock symbol is certainly not the most pleasant-though-inducing one on the NYSE, there are some factors pointing to overvaluatoin and fast-waning momentum on the upside.

Here's the chart, first and foremost:

Some other neat facts:

Roughly 1.5x book value on assets that are highly over-inflated (even taking a median home market decline for all of Europe puts the assets of this bank at 15% lower in market prices.) - we suspect their assets to be far less valued than this.

Dividend payout is a whopping 95% of income!   Who needs cash conservation, right?

Current interest coverage -0.66 (yes, negative ), meaning that their cash inflows from operations (not including taxes etc) are not only not enough to cover interest payments, but the must borrow two thirds of their earnings to pay of current creditors.

Not exactly a financially healthy situation.

Given this company's not-too-prudent financial choices of late and the fact they are hoarding bad assets which will only continue to get worse - forcing write-downs - we are happy to plant the Short Sell flag on this Spanish bank.

It's tough to pick a downside target as of now, however the bank is actually in worse shape financially than it was in 2008.  I would say even to move to a semblance of fair book value one could expect a 50% share price loss.  Considering the March low was under $4.00 and this stock's trading over $17.00 right now, we could see a more dramatic move than that.

Either way we are shorting this stock at 50% margin and thus every dollar gained is $1.50 (minus feess).  We'll keep you posted on the trade as it progresses.  We plan on shorting at the open tomorrow unless their is a strong dumb-gap down, which case we will wait for a fill and attempt a short-entry at today's close or just above it.

Cheers, folks!



  1. Where did you get these figures? STD reports positive net interest income. IOW STD is making more in interest than it is paying out in expenses, yes?

    I understand your concern with the quality of assets but not the income.


  2. apologies - the usual place I look at financial overviews did not have the most recent updated financial data.

    They have indeed returned to interest income however a look at their balance sheet for the recent quarter shows the following:

    over 50% decrease of cash on hand and deposit year-over-year

    The have INCREASED loans by over 10% year over year

    They hold $48 Billion in debt securities in their trading portfolio and another $75 Billion on the books (very questionable value)

    and $66 Billion in derivatives (same story)

    Also cash basis is $25 Billion to cover $719 Billion in Loans, while of other "liquid" assets $14 Billion with an identifiable market, for a total of about $40 billion to cover $719 Billion in loans.

    Keep in mind with trading we use technicals to figure out if and when a trend is reversing and fundamentals as technical tools to see where a median value might land and a possible exit point. Since values are dynamic (all financial institutions' NAV is fluctuating daily with every market for the assets they hold as well) it is a rough estimate.

    The key point is to note that psychology towards Spain was extremely positive less than 2 months ago and (shockingly) the PIGS are now in trouble after being darlings of the mainstream financial news. A rapid shift towards negativity and pessimism could move this "safe haven" bank back into the single digits.

  3. P.S. it took some digging but I finally found the right portal for ADR holders to link to the English 3rd quarter overview. Here's the link if interested:

  4. $650 gold and $8 silver coming you say? That was in 2008 before the creation of trillions of dollars of credit and sluch fund "money" for the banksta scum.

    I generally don't take advice from guys who look like they were at a frat party within the last 10 years LOLOLOLOL

  5. "Gold should correct to $1,150 at most and resume its predominant downtrend"..

    The above is a quote from you from January 6, 2010.

    Are you surprised by gold's recent climb to $1,157?

    Are you re-evaluating your prediction of gold's downtrend as imminent?

  6. Derek if you have completely misread the direction of gold, will you admit it? When would you "throw in the towel and admit you blew it"? Don't feel bad, you will have alot of company. There are quite a few well trained analysts who agree with your position. Keep an open mind.

  7. Anonymous:

    If I have completely misread the direction of gold I would certainly admit it. However, since gold just had a bearish monthly bar in December I find it highly unlikely that this correction in the predominant trend has much farther to go. If you look at gold on a weekly bar chart you will see that the correction thus far is an almost ideal pause in the larger trend.

    If gold could sustain a monthly bar close above its previous high AND have lesser quantifiable extensions of positive sentiment (indicating a "wall of worry" scenario, if you will), I would say that the trend is set to resume upward.

    However I find this possibility extremely unlikely (all things ARE possible, though), and the probability of a strong downtrend resuming much higher than a new high in the near term.

    Thanks for the question though - remember, I use technicals and technical indicators in almost every instance of price prediction and technical data is absolutely "open-minded" as it is simply data, numbers quantifying decisions and commitments which mirror sentiment. It is the in the "interpretation" of that data where someone applies their previous biases and thus can draw false conclusions.

    Trust me, I want gold to actually go up more than most as I have been using them for savings purposes for almost a decade now and have accrued a significant holdings. They are my "insurance policy" against being wrong right now. For the past 12 months or so, however, I have been accruing USDs and forgoing my usual purchases so I can lump all of it in to buy physical gold and silver (70/30 weight gold/silver) when the market seems to indicate near-bottom.

    one final note which I don't think I have written up to this point: I do believe that the bottom in gold and silver is going to be fairly sharp and brief, similar to what we experienced last fall, and thus the window of opportunity will not be open for very long. The sentiment trends exhibited recently are extremely similar to the March 2008 top, and it would be fair to say they will probably be similar (if a little more negative) at the bottom of this correction.