Tags: Italy | Europe | US | outperform

Europe is Beginning to Outperform the US

Friday, 12 Oct 2012 07:59 AM

By David Skarica

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One of my mentors, Jim Dines, is fond of saying, “A trend in motion will continue until it actually ends.” He calls it Ditrend, which is one of his Dinesisms. This is true and is much like how a surfer rides waves to the shore (a great analogy for me cause I happen to live near a beach that is famous for its surfing).

However, at some point the surf goes out or the trend changes. Then you must go to the philosophies of George Soros and John Templeton of reflexivity and maximum pessimism, meaning that at some point markets will be overshot to the down side. They will become too cheap and discount all of the bad news. Then the market will turn and be reflexive and move in the opposite direction. As bottoms are full of fear and panic, for those jumping on the short bandwagon to play a collapse (which has already happened), the reversal tends to be ferocious.

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We are seeing this in Europe. Since the financial crisis in 2008, the Standard & Poor’s 500 and the Dow Jones Industrial Average have outperformed most European markets. In 2008, it took about 50 shares of the iShares MSCI Italy Index (EWI) exchange-traded fund (ETF) to purchase one unit of the S&P 500. By this summer it took over 130 shares of the EWI to purchase one unit. This means the S&P had outperformed the EWI by 60 percent! Since Jan. 1, 2008, the S&P is down just over 2 percent and the EWI is down nearly 56 percent.

However, this had lead to much better valuations in Italy. The Italian market trades at seven times earnings compared with near 14 times earnings for the S&P 500. And despite overreaction this past summer, the debt crisis in Italy is no worse than the debt crisis in the United States is. The only problem Italy had was it could not print money to buy its bonds.

However, the recent European Central Bank decision is doing just this. Therefore, I expect that long-term rates are going to stabilize in Italy, as will the Italian economy in the next year. With Italian shares pricing in worst-case scenarios, I expect them to outperform. It now takes 115 shares of the EWI to purchase one unit of the S&P 500, meaning this outperformance has already begun. I expect it to continue.

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There is no reason with austerity and modernizing of the Italian economy that the Italian market cannot vastly outperform the American market in the coming years. I think that the summer of 2008 was a reflex point and the Italian market and much of Europe will now begin to outperform. The surf has shifted, and, as good speculators, we should shift with it.

About the Author: David Skarica David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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