If things were as dire as we hear, Santander (STD) shares would be much lower than $7.32, which is where they stand this morning. That's my takeaway from the tortured path that Spain's traveling for several years now, including last 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 the bonds are going down, and they get worse as the 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 fell back to $7.38 when it looked as if the 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.