Editor’s note: This article was first published in September 2012. The market commentary reflects that moment: the IBEX 35 near 9,000 points, a Spanish risk premium below 400 basis points, the ECB’s message on the euro, talk of a Spanish bailout, and 2012 share price targets for Telefónica and Santander.
A technical analysis pointing to the excellent performance of the IBEX 35, with everything suggesting it could head towards 9,000 points; a risk premium that dropped below 400 points; a message from the ECB backing the irreversibility of the euro; and the Fed’s plan to stimulate the US economy. All of this has sparked euphoria in the markets, to the point that current prices no longer reflect the economic reality.
Be patient, because you’ll be able to buy Telefónica shares below €9 and Santander below €4.50 again. Looking at how the markets are behaving, at first glance it might seem as if we were coming out of the crisis, but the truth is that we are heading into a deeper, more severe recession. I never imagined that the possibility of a bailout could push the markets up, because a bailout with imposed austerity measures and without the slightest hope of economic growth will, sooner rather than later, be reflected in the market.
Debt isn’t solved with more debt: if we apply the main problem our politicians point to (we take in less than we spend) to a household budget, it would be like a family struggling to pay its mortgage, personal loans and everyday bills being given a loan so it can keep paying those expenses. But in return, their electricity and water bills go up, the wife won’t be able to work and the husband will earn a lower salary. More debt to pay off the original debt, with less purchasing power, would be the perfect recipe for prolonging this family’s agony.
Reforms, adjustments and cuts
In the past, when a company in the IBEX 35 or any other index in the world laid off thousands of people, alarm bells went off, because it was a sign that something wasn’t going well at the company. Now IBEX companies usually receive the market’s blessing, with share price rises, when investors learn that they’re cutting operating costs thanks to layoffs or EREs (collective redundancy procedures). In other words, companies are getting out of the red not by selling more, but by having fewer staff. That kind of growth isn’t healthy, and sooner or later it takes its toll.
Cuts to civil servants’ salaries, pensions frozen for now, lower wages, cheaper dismissals and the loss of purchasing power will shrink consumption again, and this will end up affecting every single IBEX company.
Example: Ana works in a tyre shop and her salary has just been cut; her husband is also earning less, so they now buy less at the shop where Luis works. Faced with falling sales, that shop is forced to cut staff and lower its workers’ wages, so Luis can no longer afford to change his tyres at Ana’s shop.
This is the vicious circle the economy is entering, and Spanish companies have yet to see the worst. In fact, there are no expectations of job creation for 2013, among other reasons because, apart from adjustments and cuts, there isn’t a single measure to encourage employment.
Right now, the risk of investing in the stock market isn’t worth the profit you could make.
For those who have invested in the stock market and managed to take advantage of this rebound, it’s time to enjoy the gains. For newcomers who hear how well the markets are doing, be careful: getting in now, there’s a huge chance of losses from getting caught at the top.
European stock markets, and the IBEX in particular, watch US employment and growth figures very closely. A poor set of figures there can hurt our index, so when we release our own, the drop could turn into a free fall.
Stock markets move, among other things, on the constant flow of data. No positive figures are expected, so the moves, regardless of whether we reach 9,000 points, will be downwards, with tremendous force and speed, unless someone pulls a rabbit out of a hat.
I know it’s not a very optimistic message, but you don’t need to be a fortune teller to know that unemployment in our country will keep rising. And as long as there are no jobs, they can cut, adjust and squeeze all they like, because every cut, every VAT increase and every tax increase is one more blow to the profitability of Spanish companies themselves. People sometimes forget that the main consumer is the middle class, and that class is close to dropping a rung.
Featured image: Luis García, CC BY-SA 3.0, via Wikimedia Commons.
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