IBEX 35 Ends October 2012 at 7,831 Points with Risk Premium at 417

IBEX 35 Closed October 2012 at 7,831 Points: Up 1.74% in a Year of -8.44%

On October 31, 2012, on the eve of the All Saints' Day holiday, the IBEX 35 closed almost flat, with a 0.11% rise leaving the selective index at 7,831 points. The monthly balance was slightly positive: +1.74%. The yearly balance was devastating: -8.44%. The risk premium eased to 417.7 basis points, and the yield on the Spanish ten-year bond barely moved from 5.64%. No one celebrated. That detail, the immobile bond, defines the market sentiment that autumn better than any headline: a tense calm of someone sensing that the root of the problem remains untouched.

Those who trinc the market closely experienced the paradox with humor and resignation. The dominant strategy was liquidity: keep gunpowder dry and wait. Wait for what? The collapse. Or, in the jargon of the time, the guanazo. One more month.

IBEX Levels: 7,600 Holds and 8,166 is the Breakout

Throughout the month, conversations revolved around a handful of figures. The selective index moved within a channel between 7,996 and 7,924 points, with a second range between 7,866 and 7,794. Below, the psychological level of 7,600 appeared, which held up "very well" at the end of the month. The bullish breakout was set at 8,166. For the S&P 500, the main channel ranged from 1,418 to 1,430 points, with a bearish support at 1,410 and a relevant medium-term level at 1,403. The German DAX had its own line at 7,202-7,210.

The obsession with supports and resistances had its logic. In a market driven by macroeconomic headlines and political decisions, technical analysis served as a lifeline. Some analyses maintained that there was "something" in the 7,770 zone and also at 7,830, and there were those who took for granted that operators capable of deciding where indices rebound exist. The discussion was less about prices and more about trust: who would make the first move.

The Oliver Wyman Test and Distrust Towards Banks

The month's agitator had a name: the banking stress test published weeks earlier by Oliver Wyman, which determined entity by entity how much capital was lacking. A significant portion of the analysis considered it a sham, designed to reach a predetermined outcome rather than measure it. The criticism was strong: the exercise revealed "much more real estate exposure than it appeared" and, above all, that it had not been provisioned as in other entities. The conclusion was uncomfortable: the bank that seemed healthiest might be so because it had dedicated fewer resources to covering its losses.

Some added an accounting nuance. An external auditor from one of the major entities explained, as reported, that issuing a reservation on the valuation of public debt in a report required justification with evidence; citing a press article was not enough. And behind Spanish debt was the backing of the ECB. As long as that held, the system would endure. If someone defaulted, the castle would crumble.

ADP Revision: From 162,000 Jobs to 88,000

The most discussed macroeconomic event was the revision of the ADP employment report: its September figure dropped from 162,000 to 88,000 jobs created. Almost half. The reaction was disbelief: "What credibility does an agency have that provides data with 50% deviations?" It was recalled that ADP had partnered with Moody's precisely to improve its reliability, and the result was such a revision. The implicit conclusion: American statistics could not be taken seriously.

On the same day, US unemployment claims came in at 388,000, versus the expected 365,000, and continuing claims at 3.25 million. The interpretation was twofold: some spoke of a real cooling; others, directly, of manipulation. "They make up this data to support the stock market until the fraud is discovered," argued one of the messages. That such statements circulated without more proof than suspicion speaks volumes about the climate of the time.

Banco Popular and the Extraordinary Board Meeting for Capital Increase

The extraordinary board meeting of Banco Popular to consider a capital increase peine the floodgates. The argument was simple: if a single bank not flagged by Oliver Wyman decided to increase capital, it would break the logic of the test, and others would be at a disadvantage, with available resources while the supposed adverse scenario arrived. The prevailing advice was firm: do not invest in Banco Popular, even if it seemed cheap and was "doing its homework better than anyone." "There are more days than fish," it was added.

Distrust was sectoral, not selective. It was predicted that Spanish banks would be hit, to varying degrees, across the board. Banking was the epicenter of the problem, and no one dared to vouch for any specific entity. Not for those flagged, nor for those the test had cleared.


Housing: 2000 Prices and the End of Tax Deductions

The other major front was the real estate market. One entity admitted that apartment prices would fall to their 2000 levels, a correction that wiped out a decade of appreciation in one fell swoop. Hovering over this scenario was the news that one of the world's major investors was betting on creating the largest real estate company in the US. For some, it was a sign that real estate had hit bottom; for others, yet another self-serving prophecy.

In Spain, the fiscal calendar added pressure. In 2013, the VAT on housing was set to jump from 4% to 10%, and the deduction for purchasing a primary residence would end. The calculation circulating was stark: if the buyer has to factor in these changes, the real price of the transaction increases by almost 20%, and the seller will have to adjust that margin. No one saw "bargains" yet, but rather undervalued dumps in good areas, waiting for prices to drop a bit more.

The Curiosity: Maniac Mansion Amidst Stock Market Panic

There was a moment, mid-month, when the conversation shifted to 1980s video games. One participant confessed to manually configuring config.sys and autoexec.bat and learning through humem.sys; another recalled the Flight Simulator that came on a 5.25-inch disk and booted automatically; a third championed the Amiga and Konami cartridges. Amidst a bleeding market, nostalgic traders debated whether Day of the Tentacle was the best graphic adventure in history. The panic, at least, had an escape valve.

Where Analysis Gets Stuck

With the holiday weekend approaching and the month closed, the perennial unanswered question was: did the levels hold due to real strength or sheer inertia? The IBEX rose 1.74% in October, yes, but it lost 8.44% for the year, and the bond remained stuck at 5.64% with no clear explanation. The risk premium, which had monopolized the news a year earlier, had become an uncomfortable topic barely discussed. The next test was scheduled for November 2nd.