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Friday, April 25, 2008

Bulltards Grow Complacent: VIX Drops

Yesterday’s New Home Sales data should have DESTROYED the argument that there won’t be a recession or that it will be short and shallow. I know, I know, equities didn’t seem to mind. Wait for it. Looks like the Bulltards really want to tag 1400 on the S&P 500. Volatility (VIX) has fallen to COMPLACENCY levels (in this credit crisis environment).

VIX and More:
Implied Volatility Suggests Risk in Financials at Six Month Low

The US dollar has perked up some on continued weak economic developments out of Europe. Consequently some of the fast money pulled out of commodities such as Gold and Oil.

The $120 area would appear to be 'arbitrary' resistance do to its status as a 'round number'. This makes for an interesting short opportunity around these levels.

Commodity price strength will ANNIHILATE the already MORTALLY wounded U.S. economy...

March New Homes sales show that things are getting worse FASTER. Sales volume has all but collapsed. Prices are starting to collapse. Combined this has resulted in a new record 11 months of sales inventory.

This means more foreclosures, more write downs and more big fat losses for both consumers and the entire financial complex.

New-Home Sales in the U.S. Plunge More Than Forecast (Update2): “Purchases of new homes in the U.S. plunged more than forecast in March to the lowest level in almost 17 years as stricter loan rules and falling prices caused buyers to hold off.

Sales dropped 8.5 percent to an annual pace of 526,000, the fewest since October 1991, from a 575,000 rate the prior month, the Commerce Department said today in Washington. The median sales price slumped 13.3 percent from the same time last year, the most in almost four decades.”

Calculated Risk:
More on March New Homes Sales
March New Homes Sales, Lowest Since 1991
Architecture Billings Index Falls to Record Low Level

Paper Economy:
New Homes Sales: March 2008

More cracks appearing…

Spanish Unemployment Rate Jumps the Most in 15 Years (Update2): “The unemployment rate in Spain, once an engine of European job creation, jumped the most in 15 years in the first quarter to a three-year high as the building market contracted.

The jobless rate rose to 9.6 percent from 8.6 percent in the fourth quarter, the Madrid-based National Statistics Office said on its Web site. The last time the rate increased that much was in the first quarter of 1993, when Spain most recently slipped into recession. The number of unemployed rose 13 percent, or 246,000, to 2.1 million people, the report said.

The global credit shortage is exacerbating the contraction in the Spanish real estate market following the construction boom that saw almost five million homes built in the past decade. Home sales fell by more than a quarter in the year to January as banks withheld credit from potential buyers.”

With a jobless rate of 9.6%, Spain won’t be able to maintain BUBBLE home prices. The crash in real estate prices that is still to follow will cripple the Spanish economy for many years. Those that don’t walk away from their mortgage debts will spend the rest of their lives paying down the debt. This will obviously adversely affect consumption spending. Those that do walk away will be free to start over, but the losses will then be immediately transferred to the banks. Crippled banks will then tighten credit conditions, squeezing the economy further still.

“Spain's economic growth will slow to 2.4 percent this year compared with 3.8 percent in 2007, the Bank of Spain said this month. The International Monetary Fund says the growth rate will be 1.8 percent, less than half of last year's pace.”

Already growth and growth estimates are dropping rapidly.

“Europe's fifth-biggest economy created more than half of all new jobs in the euro region in the five years through 2006 as record low interest rates and surging construction fueled a virtuous circle of consumption and hiring. Now that process has gone into reverse as banks shut off funding to homebuyers and a glut of properties is depressing home prices. Mortgage lending fell 28 percent in the year to January.”

Spain created more than half of all the jobs created in the Euro regions over the last five years. BUT, the vast majority of these jobs were in the real estate and construction industries. Poof! They will be gone just as quickly as they came. Instant recession.

“Around 800,000 homes built in the past four years remain unsold, according to Bloomberg calculations based on data from the Housing Ministry and Sociedad de Tasacion SA, a real estate valuation company. Cesar Oteiza, director of operations at property web site, says there may also be as many as 300,000 second-hand homes for sale.”

The number of unsold homes, relative to the population of Spain, is at astronomical levels. There now really are ghost towns in Spain…

“This is brutal. That this can happen while the economy is still growing around 2.5 percent is really worrying.” -Jose Luis Martinez, a strategist at Citigroup Inc. in Madrid.

“Spain's getting hit from all sides. This is still the early stages, and unemployment is picking up pretty quickly already.” -Dominic Bryant, an economist at BNP Paribas SA in London

Related Posts:
Slow Motion Housing Crash: UK, Spain
More Ghost Towns
Ghost Towns? In Spain?
UK: Definitely The Next Important Victim


Charles Butler said...

Hello Ben,

Not to disagree fundamentally, but rather to provide a touch of colour and variety to the utter, grey uniformity of English language press reports on the Spanish economy, a couple of things might be kept in mind.

1). The only people who actually read those things are worried British Costa del Sol property owners. True, the property market is currently dead, but expect negative reporting to exhibit reversion to mean characteristics with respect to the selling of a sun-drenched utopia that was the norm eight years ago. 'If it bleeds, it leads.'

2). Functioning as a shock absorber for the unemployment rate are the estimated 700,000 illegal immigrants in Spain. Almost all male and working construction, that are now finding their way back home, or at least to more benign environments.

3). The 'unemployment rate' must be taken with a certain amount of salt. It would best be described, especially in places like Andalucía, as the 'rate of claiming of unemployment benefits'. A fundamental, unwritten policy of the regional government here (and I assume in many other regions) is to not look too closely at the claimants. With the underground economy being worth an estimated 25% of the real, even in good times, the implication is that the loss in buying power cannot strictly be calculated by subtracting unemployment benefits received from the wage that generated them.

4). For historical and cultural reasons, property is thought by very many Spaniards to be the only reasonable place to invest surplus cash. Two years ago, there were 17 million private residences owned by a population of 40 million. This is an attitude one would be foolish to expect to change.

5). As for surplus cash, there are 112 billion euros in 500 euro notes known to be circulating (stored in mattresses, actually). The sum total of undeclared wealth will be considerably higher. Most of this, because of certain quirks both legal and cultural, eventually will go to buying property. My strongly held opinion is that bid for real estate will appear at far higher price levels than in the United States or Canada, say.

Being a holder of a Spanish birth certificate (but having been born and raised in Muddy York), I can say with certainty that, at all levels, that which meets the eye in this country is the least interesting or relevant.

Best regards.

Ben Bittrolff said...


Very interesting comment.

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