Take 5 and come back tomorrow

First of all, let’s be clear. The following is not investment research/advice. And, as such, it involves no investment recommendations. These are my thoughts on Spanish equity issues, which I find relevant. I share them freely (and not just as regards price). As always, I am only trying to help. Please read the rest of the “discomplainer (*)” at the end of the article.

Market environment: Wait and see - (Asia-Pacific markets declined with futures for Europe flat and those for the US down) – Asia-Pacific markets declined, following US equities, as investors lowered risk ahead of the economic data to be published this week. Futures for Europe are flat and those for the US down.

Response to the crisis: A rising tide lifts all boats - (All administration debt rises to €1.52tn in February, ahead of the reintroduction of fiscal limits in the EU (Expansion Sat p24) – As I have recently remarked, the Government’s reaction to practically all recent crises has been to boost spending, and finance part of the extra expenditure via increased debt. Should application of the EU fiscal rules be reintroduced as they existed previously this would require a significant austerity drive to bring deficits/debt down to the required level. However, given that this is a problem shared by most EU countries, strict application of the rules looks unlikely. A rising tide (of debt) raises all boats.

Accounting: Earnings Before Bad Stuff - (The Stock Exchange Commission (CNMV) calls on listed companies to not make abusive use of “alternative earnings measures” such as EBITDA and explain them clearly to investors (Expansion Sat p6) – A proliferation of “alternative earnings measures” is usually not a good sign. While not reaching the excesses seen in the dot.com days (as exemplified by the tongue in cheek invention of EBBS or “earnings before bad stuff”, otherwise known as revenues), there has been recent heavy use of “adjusted” earnings, with the “adjustments” depending on the picture sought. This coupled with a decline in coverage by analysts (who in an ideal scenario could “normalise” the “adjusted” figures) does not help in allowing investors to have a firm base from which to value stocks.

Utilities: When bets go wrong - (The chaos in pricing does away with one in ten electricity supply companies (Expansion p5) – The failure of many electricity supply companies is due to the mismatch between short-term wholesale market prices and those at which they are committed to supply to customers. It may be difficult to match (via long term contracts with generators or derivates) the terms demanded by customers, but in some cases the negative mismatch may be simply a bet on the direction of prices that went wrong. Unfortunately, many of the independent suppliers do not have the balance sheet strength to ride out the bad bets.

Banks: Paying for stickiness - (Banks focus the deposit remuneration war on the maximum balance to be remunerated (Expansion Sat p15) – Limiting the remuneration of deposits to a certain amount makes sense from the point of view of the banks, whose overall return on assets has not risen as quickly as central bank/interbank rates. Additionally, it is a way of attracting “sticky” small deposits. What it does not do is limit the risk that large depositors will move their funds to short-term government bonds or money market funds.

*The above information has been read/understood/summarised/evaluated/copied as well as I could to provide a guide to Spanish equities, given available timing/intellectual constraints, and I accept no liability for misreading and/or mistranslating the original copy as set out in my previous article (which I urge you to check, as I am only trying to point you in the right direction, I hope). As for what you may decide to do, after reading the above, please contact your legally approved provider of investment advice on Spanish equities.