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Research Edge Position: Long Germany via EWG

Unemployed in Spain in Q1 topped the charts at 17.4%, up from 13.9% in Q4. Spain now has twice the amount of people unemployed (4.01 M) as Germany, a country with twice its population. 

The "Spanish Nightmare" in unemployment is more of the same. Spain is transitioning from a decade-long boom to bust as a result of the leverage cycle finding her dark side. In particular, Spain's housing industry, which fueled much of the country's prosperity, is now being turned on its head as prices have depreciate precipitously. As it relates to unemployment, many of the unskilled construction workers that fed the boom are now out on the street, with companies across all industries cutting jobs. The chart below demonstrates just how hard unemployment is hitting young adults. 

Real Estate and building companies as well as the banks that funded their borrowing remain on our watch-list; we're likely to see default on debt rise. It's important to note that one play on Spain, iShares eft EWP, has 35.72% of its weight in Financials and 10.35% in Industrials.

As Spain continues to socialize its recovery its budget deficit will balloon. Any country with this high of an unemployment number we're going to stand clear of on the long side. It's worth noting that in going through Spain's methodology for unemployment data, tabulation metrics are on balance "conservative" (actually counting immigrant and adolescence between 16-18 years of age to a greater degree than in other European countries), helping no doubt to contribute to this double digit figure. We believe Spain will underperform its Western European peers - Germany, in particular.

Matthew Hedrick

The Pain in Spain: Europe Isn't All The Same... - spain1