Rain in Spain not as heavy as you think

The nation's downgrade should help quicken a restart of its banking system.

By Jim Cramer Oct 11, 2012 9:07AM

thestreet.com logoWarren Faidley, CorbisIf things were as dire as we hear, Santander (STD) shares would be much lower than $7.32, which is where they stood Thursday morning. That's my takeaway from the tortured path that Spain has been traveling for several years now, including Wednesday night's two-level downgrade at Standard & Poor's for Spanish debt -- from BBB+ to BBB.

 

Since the crisis began, all the so-called smart money in this market has been taking its cue from the bond market. But perhaps because I am more stock-centric, I have found this to be a worthless exercise. If you are a bond analyst, the thinking always goes something like this: Things are really bad in the U.S. if bonds are going down, and they get worse as bonds get downgraded. To me that's like looking out the window and saying: "Wow, it's raining hard. So I guess it will keep raining because, well, it is raining!"

 

It doesn't make you money. It just states the obvious.

 

Stocks, on the other hand, actually try to do a bit of forecasting. They aren't always right, but they have been right as rain in Europe. The only pieces of paper that have had even more predictive value have been the bank preferred shares followed by my Real Money colleague Matt Horween. Those preferreds are especially good as predictors, as they have been here, because they are a terrific gauge of substantive franchise risk and not of interest-rate risk. They tell you more about solvency than do other pieces of paper.

 

Nevertheless, the common stock of banks are what tell you how the bailouts will go -- and the common stock of Banco Santander has been nothing short of magnificent, turning well ahead of the bailout pledge that Spain has gotten.

Of course, the issue has been whether Spain will take the bailout. Santander had been rallying to $8 and change after the agreement on the bailout, but it fell back to $7.38 when it looked as if Spanish authorities were going to string us along.

 

One would have thought the S&P downgrade would have crushed Santander, given that it is a huge repository of Spanish debt.

 

But the stock is barely down. That says to me that the downgrade will hasten the government's intransigence and jar it back to reality.

 

Let's not forget what reality is. Reality is that the government debt is close to 100% of the gross domestic product, dramatically higher than where it was just a few years ago. The reality is that almost every Spanish bank, save for Banco Bilbao Vizcaya Argentaria (BBVA) and Santander, is bankrupt.

 

The reality is that all the other banks have to be crunched, and these two solvent entities need to be given the good loans. Then the banking system will start over.

 

The sooner we get to that, the better.

 

How do you gauge it? Again, the actual real smart money -- not the bond guys but the families that are tied into the government -- would be betting on the plan I just outlined to occur.

 

If that's what's to happen, Santander should bottom within $0.20 to $0.25 from here, then start going back up.

 

The S&P downgrade should move that U-turn along more quickly, not more slowly -- which, alas, is why things are less dire than you think.

 

 

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and has no positions in stocks mentioned.

 

 


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10Comments
Oct 11, 2012 1:10PM
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"Wall Street climbs on lower jobless claims"

Hey, just think how the market would SOAR if they just cut off all unemployment benefits, instead of just the ones that run out!

The jobless claims would drop to ZERO, the market would go through the roof, and Obama would be a hero!!!!!!!!!!!!!!!!​!

Never mind that the economy would still SUCK!!!!!!
Oct 11, 2012 10:25AM
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Basically, Spain is bankrupt!  But  forget about Spain's problems for now -- their government debt in relation to their GDP = approximately 100%; we can't do anything about that.  We (our leaders) first need to get our "own house in order" before bailing out other countries; charity begins at home! Depending on whom you believe, the US Federal Debt in relation to GDP is between 75% to > 100%. Does this mean that the US is teetering on bankruptcy?  Does the government just print more money or, before it's too late, should our political leaders quit their childish bickering, forget about political partisanship, and work together to solve our country's "real" problems? 

Don Moore
Oct 11, 2012 1:26PM
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Simpson n Bowles just today said there shouldn't be any increase in Defense spending or it will 'BUCKLE' the economy. They also said if Congress doesn't act on the Fiscal Cliff soon there will be irreversible damage to the economy.

Can you hear them now..... Mr Romney ????

Oct 11, 2012 3:33PM
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i dont know how this guy is allowed to spew his garbage on this site and CNBC ..he must have something on somebody because he cant pick stocks
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Cramer obviously doesn't understand what a bankrupt bank is.

 

Pretty much all the deposits at the Spainish banks are gone and people are trying to move their remaining money out of Spain and into German banks.

 

But in this day and age of Bernnake merely printing more fake monies to cover real debt I guess Spainish banks being totally bankrupt is normal.

 

Heck Spain may have 25 plus percent unemployment but their banks will get bailed out so there is no worries here folks.

 

move it along folks nothing to see here.

Oct 11, 2012 12:53PM
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Oh joy - the banks are ok !!  Woo hoo ---rejoice all the banks are ok !! 

In the words of the great Gary Rabinovich  "NOBODY CARES" ....
Oct 11, 2012 11:16AM
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or it could hurt my international stocks and bonds.

geezum and we just built a crankshaft factory in spain.

Oct 11, 2012 11:13AM
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race and religion will never be solved in this country....and they are the root causes of our problems

 

Oct 11, 2012 11:18AM
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furthermore..........in capitalism you always have ups and downs ......during ups the fed tightens and during downs the fed prints money............bernanke knows this and acts accordingly....it has nothing to do with who is president

 

if you think the president does have something to do with the markets then you MUST  vote

obama as the market has doubled under his term

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