The €uropean


  Italian stocks below the 1943 and 1960 tops

If you believe that Wall Street is cheap because the Dow Jones Industrial Average touched the mid-1990s levels, what about Italy, whose stock market is below the 1943 top, when Benito Mussolini planned to conquer the world along with his fellow-friend Adolf Hitler? (Click the chart to enlarge).


The chart in page depicts how deep and how devastating the bear market is in real terms. It is based on data provided by Mediobanca from 1928 to 2006 and on TheEuropeanSide's estimates afterward. The chart is "total return", namely it is inflation adjusted and includes dividends.

As you can see, the March selling climax pushed the Italian stock market well below the top of 1943 - when Italy was on the verge of the II World War disaster - and well below the top of 1960 – after a decade of roaring years when Italy emerged as a good industrial power. According to our calculations, the March bottom was 20-30% below the tops of 1943 and 1960.

Another long-term historical series is provided by the Comit index, which goes back to 1972, when it was set equal to 100. Inflation adjusted, the index was worth 50 at the bottom of March, with a huge and disappointing long-term loss. If you add dividends, the index was instead worth about 140, with an annual performance of just less than 1% per year. Of course, if you include realistic transactional costs and capital gains, the performance veers once again into a deep negative territory.

Equally important is the role of interest rates and dividend yields. At the March bottom, the value of the Italian stock market (dividends included) was roughly at the same point where it was in 1986. But at the time, interest rates exerted much greater competition to stocks.

 One-year government obligations yielded at the time 13.9%, well in excess of the dividend yield, which was 2.4%. Now the pendulum has swung to the other extreme: one-year government obligations yield 1.4%, while dividend yields are much greater. Until a few days ago, Bloomberg consensus estimates indicated a 2009 dividend yield of some 9%, which is as misleading as anything coming out of the analyst community during the last few years, but cut it in half and the dividend yield remains substantial and competitive.

Talking to the few investors who more or less survived in good shape to the stock bear market carnage, some are starting to accumulate, according to what TheEuropeanSide knows. The idea is not to look for the bottom, but to build up a long-term position over the next few months. The wildest dream? That during the summer, traditionally a weak season for stocks, the market suffers a new selling climax, providing a lifetime opportunity to buy.