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Markets: Why everything seems to be going up, except for the dollar

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LA Times

The rising tide lifts all boats.

In Wall Street’s case, a tide of money keeps lifting stocks, bonds and commodities this year, even though strength in all three markets at once would seem to defy logic.

On Friday, for example, crude oil futures in New York hit a new 31-month high, up $1.07 to $113.93 a barrel as the dollar continued to slide, driving more investors into hard assets as a hedge against eroding purchasing power.

Remember how worried the stock market was in February about rising crude, when the price shot up to $98 a barrel as Libya’s civil war erupted? Now oil is 16% higher, yet equities keep scaling new heights.

The Dow Jones industrial average (charted at left) rallied 47.23 points, or 0.4%, to 12,810.54 on Friday, a new three-year high. The Dow rose 2.4% for the week and 4% for all of April, extending its year-to-date gain to 10.6%.

Some broader market gauges, including the Russell 2,000 small-stock index, hit all-time highs this week, erasing the last of their bear-market losses.

Have you checked your 401(k) lately? It should be a pleasant surprise.

Stock market bulls say investors are responding to strong corporate earnings reports and to expectations that the economy will pick up speed after a surprisingly weak first quarter.

But the Treasury bond market seems to be making a different bet on the economy: Yields have fallen for the last three weeks, the opposite of what you’d expect if bond investors believed that the expansion was accelerating.

Bond buyers pushed the yield on the 10-year T-note (charted at right) down to 3.29% on Friday from 3.32% on Thursday and 3.39% a week ago.

Granted, the Federal Reserve’s ongoing purchases of Treasuries help underpin demand. But the Fed couldn’t keep the 10-year T-note from surging briefly to 3.74% early in February as economic optimism was rising.

Meanwhile, gold and silver keep screaming higher. Gold hit yet another nominal record high Friday, up $25.20 to $1,556 an ounce, the 11th increase in 12 sessions. Silver jumped $1.06 to $48.58 an ounce, a new 31-year high.

The metals, like many other commodities, are benefiting from the sinking dollar, which hit a new 32-month low against other major currencies on Friday as measured by the DXY index.

But many gold and silver fans say the price action also reflects fear that the Fed’s easy-money policy will inevitably lead to much higher inflation.

If that’s true, nobody will be more shocked than investors who are buying Treasury bonds at current relatively low yields.

Easy money may well be the only good explanation for the oddly coincident rallies in stocks, bonds and commodities this year: There’s plenty of liquidity out there and the Fed is virtually encouraging speculators to take on more risk.

But all three markets can’t be right. If the economy’s pace improves that could be good for stocks and commodities, but not for most bonds. If the economy weakens, bonds should do well, but stocks could struggle. A weaker dollar could continue to bolster commodities, but at some point it should undermine foreign demand for U.S. bonds in particular.

Somebody’s got to be wrong about what’s next.

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Written by appraisalmanagementnews

May 2, 2011 at 3:22 pm

Posted in Economy

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