The rain in Spain stays mainly in the plains.

Used for years as a pun or aid to learn English these days it should be tweaked to "The pain in Spain is moving beyond the plains."

I've often written and talked about the cautionary tale unraveling before our very eyes with the crisis in Greece, but what's happening in Spain is a great reminder that government spending isn't the answer. Although President Obama has begun to talk about his administration as fiscally prudent, the fact is he's the classic tax and spend politician that only a week ago was proud of that moniker. Be that as it may, the solution of building more airports, ports, bridges, and tunnels isn't what's hurting the economy even in places like New York/New Jersey where there are days I would love an extra tunnel or bridge. 


In addition to rampant government spending, Spain enjoyed a housing boom that put America's bubble to shame.

Trojans of the South

At one point fully 25% of growth in the euro zone was coming from economic development in Spain including its sizzling housing market. Spain was in its second economic revival, the first happening from 1959 to 1974. The country essentially came in from the dark as electricity demand grew from 3.6 megawatt hours in 1940 to 90.8 megawatt hours in 1976. This second boom was all about spending, not investing, and that's why it was doomed. In 2007 construction was 13.3% of overall employment in Spain while it was 6% in Germany and 8.5% in the UK. The year before building began on 800,000 homes in Spain, more than Germany, France, Italy and the UK combined.

The boom between 1996 and 2007 was like a beacon to the world, when 4.2 million immigrants entered the nation and foreigners were huge buyers of those homes. It was a great time but now it's over although the hangover seems to only be getting worse. In the meantime the thing about sharing a currency is that national wealth can vanish fairly quickly and that's what's happened as money has bolted Spain and other nations to find new homes in Germany, Netherlands, Finland and Austria. Now Spain is asking for that money to come back in the form of bank bailouts. But it's not going to be that easy.

After the bell the ECB stated it wouldn't go along with a scheme to give money to Bankia's parent company after the bank injected it with �19.0 billion of holdings. There is a way to do this and the ECB, which controls the Euro printing press, wants it done the right way with the right commitments and not to breach an EU ban on "monetary financing." But Spain is serious about fighting this tooth and nail, pointing to bailouts of Ireland, Greece and Portugal as precedence. It wants the ECB to restart a government bond-buying program and for the European Stability Mechanism to become a bank bailout fund.

Spain poses a much larger problem than Greece and appears to be spoiling for a serious fight.

"The rain in Spain stays mainly in the plain" was made famous in the musical "My Fair Lady," the story of Henry Higgins, professor of phonetics, to turn a cockney flower girl into a duchess for an evening. The movie comes from the play from George Bernard Shaw's "Pygmalion," which comes from Greek mythology.

Pygmalion was a sculptor whose ivory statue of woman was so beautiful he asked Venus to bring her to life. That wish was granted and he eventually married the woman and had a son. The people of Greece and Spain must break out of rigid lifestyles that are dooming their future and become human which means taking the pain that is in Spain and will spread beyond its borders.

There doesn't have to be mythical intervention or divine help but outside help will make the difference. An offering was made for the help of Venus. An offering will have to be made to the ECB, Germans and others involved in helping peripheral European nations come back to life.

Spain took great pride in carrying Europe and the Euro for a few years when they were the Trojans of the south so look for them to put up a good fight. I think everyone is smart enough to find a solution beyond the Greek drama that never goes away.

Losing Face

It is official, Facebook (FB) is the worst large IPO in the past decade and many are saying it's the worst ever. The stock is down 23% from its IPO in seven trading days, closing down $3.01 or 9.6% yesterday. The stock is trading a gazillion shares a day and yesterday puts began changing hands. A total of 73,000 puts traded with the June 30s garnering the most attention with 12,417 contracts. I still don't think this is the worst IPO in history, yet the worst in my mind doesn't ever get mentioned.

The global stock market was on fire when a hot Internet IPO came public and for me destroyed the myth and exposed what kind of mindless money-grab was going on at the time. The reason few people know or talk about this IPO is because it occurred in Europe. In fact, it was in that stock market hotbed of the Netherlands.
There were many parallels to the Facebook deal including the hype factor, valuation assumptions and immediate disappointment. Yet for all the controversy surrounding Facebook this IPO lost face for everyone involved and sealed the fate of the Internet rally.

The World Falls Apart

World Online was an up and coming Internet portal that aimed to compete with America Online, yet it wasn't even the biggest player in Europe. Nonetheless, when the deal came public there was hysteria.

The IPO

> Largest European IPO
> 21 times oversubscribed
> �12.0 billion valuation was 187 times revenue
> 1.9 million subscribers valued at �6,500 each (Facebook would be valued at �58.5 trillion)

The stock traded as high as �72 in the London Gray market before the offering, opened and rallied to �50 before closing the day at �43. The stock plunged each day after, and a week later the company was valued at just �5.0 billion. The company went public on March 17, 2000, the same day the Dow enjoyed its largest single-session point gain of 499. Having peaked at 11,722 on January 14 the Dow was becoming more volatile and would trade in a range for the rest of the summer but the game was over.

The IPO party for World Online was festive and exciting, but apparently you could hear a pin drop when CEO Nina Brink nonchalantly told someone she had sold all her shares in a private transaction before trading began. The prospectus said she had transferred her stock. At that point I think everyone felt like suckers and even though it didn't make headlines you know institutional investors had their wakeup call (Goldman and ABN were lead underwriters). There were all kinds of investigations and legal maneuvers, but I think Ms. Brink got away with her windfall and now lives in a tax haven.

Comments

it will take a well thought out miracle to save the Euro, with coordinated leadership through out Europe. Doubt that this will happen. the Swiss have all but closed their banks to foreign deposits as they have already had too much capital flight and are worried about the Franc becoming to highly valued so as to decrease exports. Spanish problems are just now coming to the surface, more will come, the municipalities that have been stuck with maintaining the various infrastructure, airports not used and the like is breaking the local governments. Greece will not reform until absolutely forced to, the unions and guilds will not relent in their demands and businesses will still be saddled with uncompetitive labor regulations. with 25% of the labor force employed by the state in Greece, getting rid of the 16%+ that is unnecessary will be difficult. It takes a comprehensive plan and overall cooperation, this will not happen. Unfortunately people have no vision for the future, it is the same in the USA, just looking at the here and now and entitlements. China is also broke, but they will not admit it, their new buildings and infrastructure is substandard and dangerous, any stress will bring them down. The local governments in China have borrowed more money than the total of the Chinese reserve and those loans are bad loans. It will catch up to them also. David Huber on 5/30/2012 10:45:53 AM

Who said "beggars can't be choosers??" z on 5/30/2012 10:46:35 AM

Turn up the socialism!! What, it's not working? Gary Brandin on 5/30/2012 11:15:03 AM

Your articles are always fascinating to read! Spain will receive a bail-out but it's not a longterm economic solution. Grace on 5/30/2012 2:45:46 PM

Being a x German, I know that Germany is worried only about inflation. They may agree to one more bail out because Spain is using it's size to bludgeon the EU into giving their banks a bail out but after that it is finishes, not one more cent to anyone and if they were smart they would not bail out Spain and let them,no, escort them out of the EU with all due pomp and circumstance possible....the sooner the better and that goes for Greece to. Good job last Saturday hosting for Cavuto... Tom Wayne on 5/30/2012 3:06:48 PM

This Spain situation highlights faults in the initial premise. Spain can't even get it's own regions to cooperate internally. The Euro nations are messily trying to eat cake while keeping it in the cakebox. It isn't working out. Balking over national sovereignty compromises make unified Euro action unworkable. Patricia Flynn on 5/30/2012 3:27:22 PM

The most successful trading communities in this world and I need not name them are those that work closely together, neighbour helping neighbour in times of need. The EU may have to learn that sometime in order to get out of this economic mess. Francs M Ssekandi on 5/30/2012 5:49:33 PM

This article includes a list of housing increases, with South Africa on the top and Australia in the middle. I have not heard of trouble in those economies. What makes them different? As for Spanish banks, I see a soft landing being provided by the ECB, but probably with serious consequences for the incompetent management and for the stockholders and bondholders. I believe the ECB leadership now sees the range of possibilities. They realize that they cannot come close to filling every hand trying to grab a free ride. They also realize that they need to keep the economies afloat or all of Europe will suffer tremendously. Therefore a middle ground is needed, and that must include severe financial penalties for the few incompetent bums who garnered huge salaries for years while ruining the banks. There is a lesson for Wallstreet to learn here. Just because a man is sitting at the helm of a company and it is surviving (maybe he even reports that it is thriving), it is not necessarily true that he is competent or that he has doen anything to deserve a huge income. There is a quiet rebellion occurring in America asking for independent boards and board chairmen to replace the buddy system of incompetets that now exists too often, charisma gets a bum to the top of one company and he makes friends to get on the boards of 15 more where he is equally incompetent and will never hold his fellow CEO jerks accountable. Bob G on 5/31/2012 10:20:45 AM

there is big trouble in europe and it will also be the same in usa. takes to many people to support one on usa handouts. we need to help ourselves and raise import fees. virginia hoffman on 5/31/2012 11:34:53 AM

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