The Search for Yield Continues as the Euro Rallies and Bonds Fall

After Herr Draghi emphatically informed the world that they should not short the Euro (AMEX:FXE) the currency promptly sold off headed towards $1.20.  U.S. employment data on Friday, however, uncovered a bout of short-covering as the fear of an imminent meltdown has faded for the time being.  Apparently some people believe that the E.C.B. will act soon because Angela Merkel did not soundly reject the idea of bond buying to alleviate near term liquidity issues for Spain and Italy.  Of course the German supreme court will have its say in September which will decide on the validity of the ESM and the funding mechanism for such activities.

As it stands, however, stocks want to rise.  There is enough liquidity in the system and because U.S. Treasury yields had reached such cartoonishly low levels some money is rotating out of them and into dividend bearing stocks.  Everyone is searching for yield in this financially repressed environment and if that means playing some oversold dividend stocks and ETF’s for a few months leading up to the election in the U.S. then so be it.  U.S. Treasury bond futures (30 year) have fallen nearly 5 points since peaking last week.  Yields have risen from 2.46% on July 25th to 2.72% on Tuesday.

As it stands the S&P (AMEX:SPY) is up 11% on the year so far.  the all-time high is 1550.  The closer we get to that level the more likely we will see a wholesale pull out of stocks.  At that point bonds will be in free-fall and gold (AMEX:GLD) should be over $2000 per ounce as the physical market is in control of the price until it rises enough to bring real sellers into the market.

 

 

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Tom Luongo

About Tom Luongo

Tom Luongo is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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