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Want to know how to increase your capital during Europe's tightening cycle?

Everyone knows that Europe’s tightening cycle began last December. The market guesses that Euro rates will rise to 3.25% or so; my hunch is closer to 4.5%.

Because of rising rates, European two year bonds have taken a beating.

But our just-released Economic Clock ® for Europe suggests that there is still a very strong excess demand for goods. That is reflected in what Central Bank President Trichet keeps saying: the economy is in danger of over-heating. The flipside is that the profits outlook remains robust, as you would expect when there is an excess demand for goods. Indeed, since the tightening cycle began, the market has risen by 7% - for good reason.

As long as this excess demand of goods is still steaming ahead - keep buying the market. It is only when the market feels that higher rates will start to bite - to kill off this excess demand for goods - that the profits outlook dims and thus the market falls.

This is what happened in America on 10th May, when punters finally accepted the reality of much more aggressive rate hikes. And profits concerns are growing in America – witness last Friday’s profits warning issued by 3M, LaBranche and O2Micro: higher rates will create an excess supply of goods in America next year. But in Europe, the tightening cycle is just beginning, implying that its excess demand for goods has yet to be tamed even remotely.

Money-making implications:

* stay in short term cash deposits to ride the rate up-cycle;
* avoid long-dated bonds,
* buy European stocks

Source: How to Play the Current European Tightening Cycle