The Big Picture for the Week of July 22, 2012

In case you missed it, Spain had a good old fashioned crash on Friday. The attached chart shows Madrid listings of Telefonica (TEF) and Banco Santander (SAN) along with the benchmark IBEX index. Based on the weightings of the iShares Spain ETF (EWP) TEF and SAN are the two largest companies in the Spanish market. As a quick note, SAN used to be the symbol for client holding Santander de Chile but a few weeks ago the Chilean bank changed its symbol to BSAC. A couple of days later the Spanish bank changed its symbol from STD to SAN. For any clients reading this you have always owned the Chilean bank which now has symbol BSAC you have never owned the Spanish bank.

Some clients may recall that we owned Telefonica a while back. We bought it in January 2006, sold it in August 2008 and collected a couple of dividends along the way. For such a short holding period it worked out well and the logic for selling was similar to other sales back then; how many times are you going to read that things in such and such (in this case Spain) are lousy and are going to be lousy for a long time before you take action?

Since TEF's peak the ADR is down 66% and the chart looks dreadful. The company is profitable, earnings are expected to keep growing but like many telecoms it has a lot of debt. I think it can remain a going concern pretty easily which is not argument for buying the stock. As for Santander the odds of remaining a going concern are much less. At this point it seems unlikely that the bank would be allowed to fail which again is not a reason to buy but as slowly as I believe the financial crisis is playing out in the US I believe it will end up being much slower in Europe.

I know people see it otherwise which is of course reasonable and to be expected but unwinding the totality of the financial crisis in the affected market segments will take years. That BAC and Citi are still single digit stocks all these years later (had Citi not done a 1 for 10 reverse split it would be at $2.58) is a clear signal of this in my opinion.