Thursday, June 28, 2007

Spanish economic woes

By Nico Isaac

On June 13, one of Spain’s most prestigious honors -- the Prince of Asturias Art Award -- was presented to legendary singer/songwriter Bob Dylan.

If the Spanish boot of Spanish leather fits.

And boy does it ever. From the realm of folk music to that of
finance, The Times They Are A Changin’ for the main engine of Spain’s economic growth: Real Estate. Just in case you’ve had no direction home for the last year, this brief recap should put the moss back on your stone: In the 12 months ending March 2007, home prices rose by a national average of 7.2%. “House
affordability is at its lowest level ever” (AP ), with household debt running at 133% disposable income and a whopping 96% of all outstanding mortgages comprised of “adjustable” or “floating” rates. (This is against the background of eight
interest rate increases by the European Central Bank in the last 19 months)


On April 24 (informally known as “Black Tuesday”), Madrid’s main stock index, the IBEX 35, plunged 3% following a string of incidents indicating that the “Spanish housing market had had it.”

The first knot: Scandal at one of the country’s largest real estate developers -- Astroc -- lowers the company’s share price by two-thirds. Stock at Spain’s biggest real estate company, Metrovacesa SA is down by one-third in 2007.

The second knot: Construction starts in 2006 ran at 800,000 new homes, more than the total number of homes constructed in Italy, France, and Germany combined, FOUR times the UK number, and nearly one-half of U.S. starts, an economy that is seven times bigger than Spain. (Gulf News )

The third knot: This April, Spain’s best-performing fund manager Francisco Parames received a hand-written note from the third richest man in the world himself, Warren Buffet, seeking advice on how to safely invest in the region’s economic boom.

Parames' reply: You Can’t.

“The Spanish economy,” wrote Parames, “is going to go through some very rough times as the real estate crash [spreads] and credit bubble bursts.”Around the same time, the Bank of Spain issued a public warning pronouncing “unsustainable growth in real estate prices AND a housing market that is 30% overvalued.”

Despite the barrage of bad news, however, the mainstream majority is still tangled up in BULL-ue regarding the long-term prospects of Spain’s housing sector and overall economy.

“The country’s economy is still going strong and talks of a sudden downward correction are overstated,” begins a recent Forbes. Case in point: “Black Tuesday” included, Madrid’s IBEX 35 has soared 35% in the last 12 months to an all-time record high, a performance that has outstripped almost all other major European bourses.

If something were intrinsically wrong, explains one expertician,
“the trouble would show up in the stock market to reveal increasing pessimism about the Spanish housing market.”


Unless of course, one sector tarried behind the other…

Bottom line is: there is an integral stage of every mania in which warnings from the professionals go unheeded by the public. That time may be at hand in Spain.

For that very reason, Elliott Wave International’s European Short term Update has expanded its coverage of the major bourses to include Madrid’s IBEX 35, presenting labeled price charts of the index along with unique insight into the near-term trend changes in store for prices.


Spain is out on a limb. If they can pull it out of the fire, perhaps the U.S. economy and housing markets can as well. I won’t hold my breath however. Spain is in trouble, that’s a fact. With the selling off of their reserves and the dumping of their gold they seem to openly admit they’re in deep doo-doo.

Their housing market is certainly in worse shape than the U.S. market, why they haven’t melted down before now is a mystery. It will be interesting to watch Spain’s progress toward the abyss as they are probably cutting a trail that a number of other countries are about to tread down, with unfortunately, the U.S. included among that number I’m sure.
Vern

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