Is stealing 177% from summer-dazed investors ironic? You betcha!

“…I gotta wear shades.”

Still, the line from Timbuk3’s 1986 hit by that name is particularly apropos – and particularly ironic – in all sorts of ways these days.

Did you catch Luxottica Group (LUX:NYSE)’s wild 15% rally last week? In case the name is unfamiliar to you, Luxottica is the Italian company that owns those stalwarts of the American mall, LensCrafters and Sunglass Hut, and those ultimate summer scene accouterments – Ray-Ban and Oakley sunglasses – so heavily pitched at same.

Profits Down – Shares UP!

Now I should point out that LUX shares have been on a tear for some time now, rising some 57% since setting a six-year low back in March. Clearly the stock had more than a little momentum going into last week.

But even still, the reason buyers gave for this latest spike is worth noting: LUX’s first quarter income fell 23% to €80.4 million (roughly $108 million).

Now in normal times, one might expect news like this to have a slightly different effect. It seems intuitive that investors ought to prefer companies that are, well, actually making money?

Best? Worst? How About “The Weirdest of Times”

But these are not normal times.

We have a new president who is inventing trillions of new dollars and thousands of novel ways to spend those dollars. He is also inventing reams of new regulations and hiring hundreds if not thousands of new bureaucrats to enforce them.

After so much economic destruction, this is now the era of “Hope,” as in: “I hope the stocks I am buying will go up eventually. I have no real economic reason for believing that. I’m just tired of all this bad news and have decided to fly on faith here. Now take all your facts and figures and leave me alone!”

“But first: could you hand me my sunglasses, ‘cause man, it’s bright out there.”

When a Loss Ain’t a Loss

LUX qualifies as an absolute winner under this new “hope-based” regime. You see, the “experts” who watch sunglass companies for a living had slated LUX profits to come in around €66.5 million. So now they are pitching this not as a 23% slide but rather an amazing 21% victory!

I suppose this speaks to the point that all those folks who have been waving around copies of Akerlof and Shiller’s new tome, “Animal Spirits” are trying to make: When the herd is predisposed to buy, it will latch onto the thinnest of excuses to do so.

Corporate profits in the toilet? “We thought (in as much as we think at all) that it would be much worse.” Unemployment just shy of 10%? “Yeah, well, at least the rate of increase is slowing.” Our biggest banks are virtually bankrupt? “Now Washington will forgive the money they – that is to say you, me and most all of our descendents unto the third generation – ‘lent’ them.”

Animal (House) Spirits

Akerlof and Shiller’s (and their disciples in Washington) point is simplistic enough: “Mood is everything, so whatever you do, just don’t bring folks down, and it all will be okay in the end.”

And in the short run, they may even be right. Washington can buy an apparent rally. Heck, it’s been done countless times. Might even last a few months. Maybe it will take years for folks to notice that the inevitable side effects – a falling dollar and rising costs – are stealing real wealth away.

If Washington knows anything, it knows this: “Inflation is always a “later” thing, while recessions are very much a “now thing.”

Summer Lovin’…

So they pump and pump, and stocks like LUX go up, and commodities like cotton and oil go up.

Hmmm: seems like a theme is brewing there. Sunglasses? Cotton towels? Gasoline? I’ve got it: It’s all about summertime fun! And where can you buy all of those things, and some sunscreen to boot? Wal-Mart (WMT:NYSE)’s chart looks like it could pick up some 20% moving into summer. WMT September 50 Calls (WMT IJ) are trading for $325 a contract, and are carrying a delta of 0.57, indicating that they might gain 177% off that rise.

So there’s your tip, my friends. But take it with a grain of salt.

… And Blind Faith

“The future’s so bright, I gotta wear shades” was always somewhat misunderstood. Just as Voltaire didn’t really believe that pre-revolution France was the best of possible places and times, Pat McDonald didn’t really mean for his song to become some kind of fist-pumping anthem for over-enthusiastic college graduates. Rather, he was trying to warn against blind optimism in the face of sobering facts.

So buy the damned rally already. It’s there. It’s real. It’s a “now thing.”

Source: The Future’s So Bright

What’s more, that result gave a majority to the center-right government of Silvio Berlusconi. Berlusconi, a media billionaire, is pro-U.S. and strongly pro-capitalist. While the forces preventing free-market reform in Italy are extremely strong, he should at least be able to make some improvement in Italy’s economic position, with consequent benefit to the local stock market. While sensible investors have in the past avoided Italy, with Berlusconi in office, it might be worth taking another look.

There’s no doubt that Italy has some weaknesses. By European standards, it is fairly corrupt, ranking 41st on Transparency International’s Corruption Perceptions Index, below the other major European countries (but above such investor magnets as China and India).

Italy has a budget deficit of 3% of Gross Domestic Product, with too much government spending at 50% of GDP, and far too much government debt at 105% of GDP. The country had relatively slow economic growth of 1.9% in 2007.

The home to Rome also has a declining population – not in itself a problem, but since its social security system is generous it creates difficulties in funding Italy’s pension system. It has suffered badly in the past few years from expensive government and expensive labor costs, particularly as it is a member of the euro, which has almost doubled in value against the dollar since 2002.

All this would make you think Italy was a basket case, except for one fact: it has enjoyed very considerable economic growth in the decades after World War II and again in the 1990s. It’s a wealthy country, nearly as wealthy as Britain, France and Germany. And it is famous for high-end design in the clothing and home furnishings industries. Some of Italy’s medium-sized family-owned companies are the best run in the world.

From time to time, investment in the right Italian companies has made international investors a lot of money. With expectations low – the Milan 30 index trades only 30% above its level of five years ago, and on a price-earnings ratio of a mere 11 – and with Berlusconi likely improve the outlook for Italian business, this may well be such a time.

There are only a few Italian companies with full American Depositary Receipt (ADR) listings in the United States – most of firms choose to concentrate on the London market for their foreign capital – but at least a couple of these would appear very interesting investments.

A list of the companies easily investable by US individual investors is as follows:

ENI SPA (E): This firm is Italy’s entry in the Big Oil stakes. Because of Italy’s neutral foreign policy posture, it has the advantage of being able to operate in countries like Kazakhstan, Libya and Venezuela where U.S. companies often have difficulty. On a price-earnings ratio of only 8.4% and with a yield of 5.6%, it currently offers excellent value. Strong buy.

Gentium SPA (GENT): A small loss-making drug company, which has lost investors 67% of their money in the last year. Better pass.

Luxottica Group SPA (LUX): A manufacturer of sunglasses with worldwide operations, Luxottica is a quintessential way to buy into Italy’s superlative design skills. On 14.7 times historic earnings, 13.1 times prospective earnings and with a dividend yield of 2.7%, the firm is also reasonably priced. The only caveat would be that a worldwide recession could badly hit sales of even lower-priced luxury goods. Still, we think it’s a buy.

Natuzzi SPA (NTZ): A medium-sized leather furniture manufacturer, Natuzzi is currently booking losses and pays no dividend, so maybe not.

Telecom Italia SPA (TI): Italy’s main fixed line and mobile integrated telephone company, with a P/E ratio of 11.3 and a historic dividend yield of 10%. However, as those ratings would suggest, earnings dropped 19% last year on price cuts and heavy competition and the dividend is now uncovered. There is also talk of a merger with Spain’s Telefonica. Speculative.

iShares MSCI Italy Index (EWI): And finally, you can buy the Italian market as a whole through this exchange-traded fund (ETF), which has a reasonable market capitalization of $340 million, a price-earnings ratio of 11 and a juicy yield of 5.04%. If you’re excited by the possibility of economic improvement that the Berlusconi election victory offers, that is an attractive alternative. Buy.