Forget Greece And France: The Next Pain Will Come From Spain

by: Bret Jensen

A lot has been written about the elections in Greece and France over the weekend and their impact on European policies, austerity and the continent's overall direction. While important, investor's focus should squarely be on Spain. The country is rapidly deteriorating and is fast moving to a bailout situation that looks to be coming to a head by the summer. This will have obvious ramifications to the worldwide economy and should cause a huge spike in volatility in our markets. Here are just a few recent snippets from Iberian Peninsula.

  1. The Spanish government is trying to get its banks to raise another $35B euros in capital to bolster their balance sheets from their fast degrading property portfolios. If/Where they can raise this capital is an entirely another matter.
  2. Its recent Bond auction fizzled.
  3. Spanish 10 year bond yields are back up to over 6%.
  4. Spain's bourse is off heavily again today as bank shares slump yet again.
  5. Argentina's move to nationalize the energy producer YPF has negative ramifications not only for majority owner Repsol (OTCQX:REPYF), but also for other Spanish companies with significant assets in the country such as Telefonica (NYSE:TEF) and Banco Santander (STD) among others. This is the last thing the Spanish corporate sector needs to deal with right now.
  6. Spain's unemployment rate ran over 24% in the first quarter and continues to rise.
  7. Spain's housing market is dead as dead can get. At its peak in 2006, Spain was building more houses than Germany, France, Italy and the United Kingdom combined. One out of every 8 jobs in the country was in the construction industry. Spain will be paying for the collapse of this massive bubble for at least a generation.
  8. Youth unemployment (those under 25) is over 50%.

Obviously, I could list another dozen miserable statistics from Spain. I just can't see how the country can reverse the spiral it is in without a bailout or leaving the eurozone and devaluing its currency. I don't believe either scenario is fully priced into the market. I think we are heading for at least a 10% correction so I am keeping a good portion of my portfolio in cash and most of the rest in relatively high yielding/low beta plays like Hercules Technology Growth Capital (NASDAQ:HTGC), Chatham Lodging Trust (NYSE:CLDT), Microsoft (NASDAQ:MSFT) and Walgreens (WAG). I hope to see better entry points by summer.

Disclosure: I am long CLDT, HTGC, MSFT, WAG.