Why My Money Went To Spain Today

Jul.26.13 | About: iShares MSCI (EWP)

From an investment standpoint, Spain may resemble the U.S. circa 2009-2010. In that period, the following reporting the Telegraph made about Spain was starting to occur here:

Even more good news for Spain - a trio of Spanish banks have posted big jumps in first-half profits as trading gains and lower writedowns on property assets helped a partial recovery from their torrid time last year.

Bankia, the biggest Spanish bank in state hands, posted a €200 million profit for the first half of 2013.

The bank, bailed out in 2012, made record losses of €19.2 billion last year - the biggest of any bank globally - mostly on soured property deals and was already deep in the red in the first half.

Mid-sized rivals Sabadell and Bankinter also reported rises in profit from a year ago.

Sabadell posted a €123 million net profit for the first half of the 2013, beating analyst expectations after big gains from financial transactions, such as trading operations.

Bankinter's net profit in the first half was 102 million euros, sharply up from the same period a year ago when it was hurt by writedowns on rotten property assets.

In the U.S., there is one ETF that invests in larger Spanish stocks, the iShares MSCI Spain capped ETF (NYSEARCA:EWP). It is heavily weighted toward banks, as well as the Spanish-based Telefonica S.A. (NYSE:TEF). The chart of EWP looks promising (Yahoo Finance), both long-term and on a 5-year basis. First, it has a long-term upward slope (dividends not included):

Chart foriShares MSCI Spain Capped Index

Next, the failure of Spanish stocks to discount good times ahead post-Great Financial Crisis, until recently:

Chart foriShares MSCI Spain Capped Index

The one-year chart shows what I interpret as some nice base-building:

Chart foriShares MSCI Spain Capped Index

Last September, $30 was resistance following a strong rally off the bottom. Then $27 was support. Then $28 (or so) was support, and that level recently held following the negative political and economic news out of Spain and another flare of Portugal's own economic-financial problems. Yet $30 has now been pierced following a steady nearly month-long rally.

Spain is trying to emerge from its own financial crisis. It has not yet done so. In addition, many of us have read that its Prime Minister has been accused of bribery. A bullish interpretation of those points is that perhaps Spain has some characteristics of the U.S. circa 1974, when President Nixon resigned rather than be impeached. Of course, 1974 was the single best year to buy stocks since perhaps 1933, 1942, 1948, or (time will tell) 2009. Blood in the streets and all that.

At least some banks are now reporting unexpected profits, fitting with the U.S. post-financial crisis analogy. No doubt there are some dicey reasons, but there you are. In addition, Spain is insisting that the corner has for now been turned on unemployment. From the same news feed on the Telegraph:

On the back of demand for workers during the tourist season, unemployment fell to 26.26pc in Spain, the eurozone's fourth biggest economy.

There were 225,200 fewer jobless people compared to the figure for the previous quarter when a record 27.16 percent was out of work, according to national statistics office INE.

The total jobless number reached 5,977,500 for the quarter, dipping under the psychological barrier of 6 million.

The figures come just a day after the central bank said the recession-hit country seemed close to a recovery.

INE said:

Quote If we compare the development of unemployment of this quarter to the same quarter during the last five years, it must be underlined that the fall in unemployment is the biggest since 2008.

Not bad, and Open Europe, a skeptical blog, had this to say:

Let's have a look beyond the (rather encouraging) headline figures on Spanish unemployment

  • A similar phenomenon took place last summer. The initial, non-seasonally adjusted figures for June 2012 showed a 0.2% drop in unemployment from May 2012. However, once these figures were seasonally adjusted the result was actually a 0.2% increase. The graph below highlights this well, showing that there is a similar dip in unemployment every year when the summer approaches (data are from the EU's statistics office Eurostat, click to enlarge).

Click to enlarge
  • Part of the decrease in the unemployment rate is also due to a reduction in Spain's active population (those working or actively searching for work) - 76,100 people less over the same period. To fully judge the importance of the figures, it is also worth looking at the level of employment which is not impacted by such a change in activity. The figures for June 2013 showed employment increased by only 149,000, much lower than the overall fall in unemployment...

This is also similar to the reportage as the U.S. bull market was beginning.

The EWP is not a perfect index. Spain doesn't have all that many more people than California does. But numerous write-downs have been taken. Book values have shrunk and may be realistic.

Markit reported this week that the eurozone may have collectively turned the corner out of recession.

Nearly two years ago, as a blogger, I stated that the eurozone mess was sending me to a 'Fortress America' financial strategy. That's beginning to reverse. U.S. stock market valuations strike me as too high in that they do not take into account the fact that the Federal Reserve is injecting about 5-6% of the country's GDP into the economy on an annual basis for now. With GDP up less than that, is Fed action perhaps masking what would otherwise perhaps be an ongoing U.S. recession? (Of course, this is hypothetical, but the Fed is not taking this extreme action for no reason.) U.S. stocks are at records and so are profits. Meanwhile, depressed Europe may be in the opposite situation. Stock prices are well off their pre-GFC highs, yet the recessions there may have ended or be in the process of doing so.

There's mucho risk in purchasing EWP, but bad to horrible news has been discussed seemingly forever. I have a mental stop loss. An upside breakout for the Spanish economy and its stock market would certainly be quite the surprise.

The financial pain for investors in Spain may have stopped raining down. Perhaps in a few years, people will be pointing to another Spanish miracle as its stock market levitates. Stranger things have happened.

Disclosure: I am long EWP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Not an investment advice.