Thursday, May 31, 2012

A Positive Surprise Ahead for the Euro?

Longtime followers of my investment views are well aware of my skepticism of the conventional wisdom.  Given that, I can't help being intrigued by the possibility that the Euro and European stocks could actually rise in price.

Media coverage of the European government-debt crisis has been extensive and ongoing for many months.  I can't imagine that even the most casual observer or market participant is not aware of the risks to the currency, European nations, and the global financial system.  That doesn't mean that the risks are not grave.  They are.  But markets move when developments differ from expectations, and expectations are now extremely gloomy for Europe.

Bloomberg News reported the other day that China's sovereign wealth fund stopped buying government bonds in Europe recently, and that other governments have moved away from European government bonds.  Bloomberg even suggested that there is now a shortage of U.S. Dollars as a result of the shift in demand toward U.S. assets.  

It wasn't so long ago that the money-printing policies of Alan Greenspan and his successor, Ben Bernanke, were thought to cause a glut of dollars and result in an inexorable decline in the value of the dollar.  Instead, the U.S. Dollar Index has risen 12% over the past year compared to a basket of foreign currencies.  Go figure.

Along with such bleak news reports about Europe, there is now a record short position in the Euro among speculators in the currency markets.  It seems that everyone is now lined up against the Euro.

Along with my recent suggestion to begin moving out of U.S. Treasury securities and into some leading European stocks, one might even consider the risk/reward of going long the Euro.

Steve Lehman

Euro/dollar:  $1.23

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