Juicy 6% Bond Yields? (Italy Travel Journal, Part Two)

The Duomo Cathedral in Prato, Italy. The bas-relief sculpture around the pulpit is by Donatello. The artist, not the ninja turtle.

The good news, I’ve got a hot tip on some awesome sovereign bonds now yielding more than 6 percent a year (6.63% on a ten-year bond, to be precise).

The bad news, they’re issued by the latest failed government (in a long series of failed governments),  led by a slicked-back former media tycoon who can’t keep his lecherous hands off pretty young gals. Oh, and he’s as corrupt as the day is long.

If you’re moderately risk averse and looking for a place to stash retirement cash, then perhaps these bonds are not for you.

First Iceland, then Ireland, now Greece, tomorrow Italy and its other PIGgish pals, Portugal and Spain.

I hope most people realize than when the notion of Italy’s collapse is bandied about, it’s really a tale of two Italy’s, or several Italy’s.  Most of the economic juice is concentrated in the North, rich with industry and agriculture, and which includes regions like Lombardy, Piedmon and Veneto.

Lombardy alone, with one-sixth of the population, is said to account for a quarter of Italy’s GDP.  Its per-capita GDP figures are nearly double some of the poorer southern regions like Sicily.

There are stark differences in language, dialects, dress, regional cuisine, and of course, the Mafia. Corruption in southern Italy is rife, with various branches of the Mafia based in Naples with the Camorra (Tony Soprano’s roots are in nearby Avellino), in Calabria with the ‘ndrangheta, and Sicily with the regular Mafia.

A “Geographical Expression”

It could be that Italy goes from being a bonafide member in good standing of the European Union, to once again being a mere “geographical expression”.  That is what Count Metternich, a prominent European statesman in the early 1800′s, called Italy.  The meaning was that unlike other major countries such as France or England, the Italian peninsula was not a nation, but simply a group of principalities, city states and petty kingdoms.

I wrote a post a while back on the region of Trentino Alto Adige.  Most of its German-speaking inhabitants might gladly step back in time and rejoin the Austro-Hungarian Empire.

But Trentinos are not alone in their aspirations. The other Northern States also have several active secessionist movements, the largest of which is the rightist Lega Padana, or Northern League.  Tinged as they are with some North-vs-South prejudice, they are nonetheless very popular.

I mean, one look at the the photo at right might justify the popularity of separatist movements. If all the dialects that are still spoken in Italy are a sole indication, here’s a country where dissolution might not be that far fetched.

All the different languages/dialects spoken in Italy

The Italian economy is reportedly too big to fail, and too big to save. It’s the third largest in Europe by official measures, and I suspect by unofficial measures, if we count the under-the-table “a nero” black market, probably the second after Germany’s.

Should Italy’s credit crisis deepen, perhaps a break-up could occur, with the north going its own way…. Or Italy might go back to a “heavier”,  revalued version of the old lira.  Whatever happens, it seems unlike that the other states in the EU could scrape together enough cash to paper over the Italian Government’s ills.

In any event, here’s a couple of snippets and notes from my September trip to Milan and Bergamo in Norther Italy (Part 1 is here).  I’d add pictures, but I can’t get to them just about know. They’re locked in a crashed hard drive, for now.

The Piazza Lifestyle

Sitting on a park bench in a nice little square, watching young families with bambinos running around the little central park, made for a mental comparison of Italian and American public living.

Sure, Europeans in general and Italians specifically live in tiny little rabbit-hutch apartments, and that’s why they want to spend all that time outdoors. Eating gelatos, sipping cappuccinos in little sidewalk cafes, visiting with neighbors.

Most houses don’t even have garages, and they  have to park their cars in the street.

Americans live in great big hermetically sealed cocoons houses, with all the entertainment they need at their fingertips, backyard outdoor kitchens, and rarely if ever talk to their neighbors.  And Americans also park their cars in the street, because the garage is full of junk stuff.

Defensive Eating

Given that we were flying back on Delta, I took some precautions against inedible airline food. In the Milan Linate departure lounge, we provisioned ourselves with a couple of nice, crusty ciabatta roll stuffed with prosciutto and pecorino cheese. When dinner was served on the plane (tasteless chicken or stringy beef), I broke out the large sandwich.

It smelled wonderful, a bready coldcutty aroma. I think others smelled it, too, as I saw a couple of heads snap around and stare. It was almost comical, imagining cartoon tendrils of aroma wafting about and grabbing people by the nose. They stared as I ate. I glared back with a proprietary look, and almost growled. Mine!

Good meal planning makes for happy stomach.

Hating on French Airports

Specifically, Charles De Gaulle airport in Paris.  For our ongoing connection to the US-bound flight, we had to step out of the terminal, out at street level. There’s something a little disquieting about stepping out of the secure terminal area, and back into the uncertainties of long lines in the check-in side.  Especially on the way home.

Oh, and the in-terminal restaurants sucked, which is a strange thing to say for French restaurants.  Little tasteless portions, and bloody expensive.

The bathrooms? Repellent.

The clerks at the ridiculously expensive “duty-free” stores? Stereotypically rude.

Closed Churches

I wanted to find a Church. Although I’m a non-practicing Catholic, I do wanted to light a couple of candles to my grandparents.  Light a candle, donate a little money, and say a couple prayers.  Sounds simple enough.

As with many things in Italy, not so simple.  Driving around and around on the free day we had on Sunday, the only open church we found was one where there was an ongoing service. We decided to wait till after lunch. This was Italy after all.  That turned out to be the last open church we’d see all day.

Church after church after chapel, doors were locked. Some had a sign that said  closed until next service, but closed they were.

I asked one my local colleagues why that would be, and he said one reason (maybe a big reason) is  it’s because theft is so rampant, churches are forced to close their doors. Some even have wrought iron fences around the colonnaded entrance. Reason given is that transients tend to gather in the recessed entrances, leaving trash and graffiti behind.

Catholicism is on the wane in Italy, with church attendance steadily declining. I can think of at least one reason: people can’t get into church, they’re all closed.

Oil and Gas

So what’s an investor in Italy to do?  Don’t know what small retail investors in Italy would do, but for me, I’d treat Italian T-Bills about the same as raving zombie, and give them a wide berth.  Or whack them in the head with a bat.

ENI, the former state-owned oil company, on the other hand is quite interesting. At over six percent, its dividend yield is right in line with the bonds, and in my own opinion, much less risky.  Let’s see some more numbers:

Market Cap: $79 Billion
Dividend Yield:  6.38%
Earnings per Share: $4.66
Price to Book ratio: 1.00
Recent Share Price:  $43.96
52wk high/low : $32.44 / $53.80
Price to Earnings Ratio: 9.43
Beta: 1.07
Return on average assets: 5.46%
Return on Assets: 13.67%

We had an opportunity to visit some engineering contractors that work exclusively for ENI at their Sannazzaro refinery, one of the largest in Italy in terms of production.  AT least in the operation of this refinery, ENI employs a variable cost model for its engineering personnel. All the RFP, specs, project estimates and management are carried out by suboncontractors.  Good and bad to that. Good that you can be flexible on costs, only hiring engineering talent by the drink, not so good in that much institutional and tribal knowledge is lost.

In the course of looking at ENI’s numbers for this post, I digressed and started looking at TOTAL S.A. as well.  Total is the giant French counterpart to ENI, a former state-owned company now also gone semi-private. I’m going to put down some more thoughts on paper for the next post. Also, since my crash I have yet re-installed a spreadsheet program (and I don’t care for Google spreadsheets).

Stay tuned for the next episode on ENI and Total, in the next couple weeks.  What do you think, are large European oil companies a good bet?  They tread in markets where US majors are forbidden to tread.

Readers, what do you think of a possible break-up in Italy? Is it probable? No one thought the Soviet Empire would ever fail, but fail it did.

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Tags: dividends, politics, travel