By Don Quijones, of Spain, UK, and Mexico, and an editor at Wolf Street. Originally published at Wolf Street
A lot of people have lost a lot of money in the recent financial market convulsions, but there’s still plenty of money to be made by betting against the companies, as the world’s largest hedge fund, Bridgewater Associates, showed this week. It bet heavily against four of Spain’s biggest corporate hitters. The fund took up short positions worth €1.2 billion, or 0.5% of total shares at Banco Santander, BBVA, Telefónica and Iberdrola.
The gamble has already reaped dividends. Shares of Iberdrola, Spain’s biggest utilities company, Telefonica, Spain’s struggling telecoms giant, and Santander, Spain’s biggest bank ended the week around 5% lower, while BBVA tumbled 4%. Bridgewater placed its best against the two large Spanish banks last week, just as they presented annual results that largely disappointed the market. Since then, both banks have lost close to 10% of their market cap.
These short bets are part of the firm’s $13.1 billion in shorts against 44 European companies, according to EU regulatory filings, reported by Bloomberg. Among the notable short positions, in addition to the Spanish banks, are Total, Airbus, BNP Paribas, ING, Intesa Sanpaolo, Eni, Sanofi, and Axa.
At the beginning of the week, Ray Dalio, founder of Bridgewater Associates, made light of the recent rout in global stock markets saying in a blog post on LinkedIn that “this is classic late-cycle behavior,” adding: “These big declines are just minor corrections in the scope of things . . . There is a lot of cash on the side to buy on the break, and what comes next will be most important.”
Investors will nonetheless be wondering why the world’s biggest hedge fund is shorting Spain’s two biggest banks, whose shares had been on an 18-month roll. Until last week that is. As we warned in December, 2018 could prove to be a stressful year for Spanish banks, for three reasons:
Painful new rules. The introduction in January of a new accounting rule, known as IFRS 9, will force banks in Europe to provision for souring loans much sooner than at present. One direct result will be that banks will have to hold more capital on their books, and that will have a detrimental impact on their profits. BBVA calculated that as a result Spanish banks will have to increase their provisions by 21% — around €5.2 billion — to comply with the new requirements. This amount may be manageable for the industry as a whole, though some lenders, in particular the smaller banks, will suffer more stress than others.
Potential indigestion from Popular take-over. The decline and fall last year of Spain’s sixth biggest bank, Banco Popular, served as a reminder (a painful one for the bank’s 300,000 shareholders) that Spain’s banking system is far from fixed, despite the tens of billions of euros thrown at it. Now, the attention shifts to just how well Santander will be able to digest the collapsed bank it bought for €1
Exposure to high-risk markets. As the IMF warned in a report last year, BBVA’s largest international exposures by financial assets are concentrated in the UK, the US, Brazil, Mexico, Turkey and Chile. At least four of those six markets — Brazil, Mexico, Turkey and the UK — are likely to face headwinds in 2018. In the US, Santander’s subsidiary, Santander Consumer USA, is dangerously exposed to the subprime auto-loan sector, which is already taking a toll on global profits. So great is both banks’ exposure to Latin America’s two largest economies — Mexico (which accounted for 40% of BBVA’s global profits) and Brazil (which provides 26% of Santander’s) — that if things deteriorate in either or both of these key emerging markets, the spillover effects will be felt almost immediately in Spain’s banking system.
There could also be another reason for Bridgewater’s bet: the continued systemic weakness of the Eurozone’s periphery.
After all, Spain is not the only Eurozone economy that Dalio has massively shorted. In the last three months his fund has tripled its short bets against Italy, the Eurozone’s third largest economy and arguably weakest link, to €2.45 billion, up from €900 million in October. A total of 18 firms have been targeted including Italy’s main utility, Enel, the national oil and gas company Eni and the pan-European insurer Generali. Like Telefonica and Iberdrola, Enel and Eni are among the largest beneficiaries of the ECB’s massive corporate bond purchase program which could come to an end as early as September this year. The firm’s funding costs could rise sharply thereafter.
Most of Dalio’s short bets in Italy are targeting its still fragile financial sector. His biggest short is against Italy’s second largest bank by assets, Intesa Sanpaolo, which is widely viewed as Italy’s most stable bank. In fact, it was the only bank in the country that was big enough and in sound enough health to absorb the two ailing mid-size Veneto based banks Banca Popolare di Vicenza and Veneto Banca in June 2017.
The bank will win the battle, CEO Carlo Messina confidently predicted in a Bloomberg Television interview on Thursday. The bank has seen its shares slump 4% over the last three days but they are still 45% higher than they were this time last year.
“When [Dalio and I] had a conversation in October, he was short Intesa Sanpaolo and Italy,” Messina, who leads Italy’s biggest bank by market value, said in the interview. “I told him he could lose money on our position and in the end I think he lost money. Again, increasing the position, I think he’s losing money again.”
Whoever wins this financial duel, the stakes are high. Even for a firm the size of Bridgewater Associates, with an estimated €122 billion of assets under management, short positions of €13 billion concentrated in the Eurozone represent a lot of risk. For the Eurozone, the financial stability of its third and fourth largest economies, both of which are still very fragile, well, that’s priceless.
“Not another Carillion,” said the UK government to soothe frazzled nerves, as an entire industry is teetering. Read… Crash of Outsourcing Giant with 70,000 Employees Globally Sparks New Panic
Should I feel happy about those millionaires investing in Bridgewater that become richer just by betting against those more or less overvalued companies?
Long Capsula Mundi*
Excerpts from Ray Dalio’s LinkedIn post this morning:
C’mon Ray. Recession is a forbidden topic for political leaders — as unwelcome as bringing up death at a wedding.
So it falls to us macro dilettantes to observe that administering a life-threatening dose of fiscal methamphetamine to an already hyperventilating US economy is, paradoxically, an ideal recipe for pushing it over the edge into recession by 2020.
Hoping for macroeconomic perspective from the borrow-militarize-inflate-and-spend Republican party is as vain a pursuit as Diogenes’ search for an honest man. From their school lectures, all that Repubs recall of Diogenes is that he went to the Oracle at Delphi to ask for its advice and was told that he should “deface the currency.”
Trump’s portrait on the thousand-dollar bill! :-)
–. It bet heavily against four of Spain’s biggest corporate hitters. The fund took up short positions worth €1.2 billion, or 0.5% of total shares at Banco Santander, BBVA, Telefónica and Iberdrola.
we don’t know his entire portfolio. and ray has no incentive to give out free financial advice
he could’ve hedged himself by going heavily long continental banks-stocks by usd1.2 billion or more. if so, it isn’t as massive of a short as the story suggests. [can’t say about that spanish news article linked in the article]
Short sellers usually have a strong incentive to give out free financial advice!
Given the global scope of their operations, some of the short positions mentioned can be characterized as international industry sector plays in banking and utilities, not just EU periphery. Still, interesting theme, even though we don’t really know what his “hedge(s)” are. Seems to me that another consideration might be when Draghi’s term in office at the ECB ends… October 2019? If I were in Dalio’s position, don’t know that I would care to do battle against the Draghi ECB. These are “Systemically Important Financial Institutions”, there’s that Italian mood music playing in the background, and you can take the man out of Goldman, but you can’t take Goldman out of the man.
Aah, short sellers, the vultures of the financial world. I suppose we need them to dispose of the bloated, rotten carcasses. Trouble is, sometimes they take down or wound viable companies too and damage a lot of innocent victims, so to quote the late Douglas Adams, perhaps they should be the “first with their backs to the wall when the revolution comes” . The voice of bitter experience.
Then again, there might be a lot of competition if said revolution comes… Are there enough walls?