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Tickers in this Article: GS, IBM, MSFT, DEO, KFT
The perceived risk of another economic crisis leading to a double dip recession is so high that individuals are behaving very irrationally. Just a few days ago, the U.S. Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time, an indication that investors are confident the Fed can stoke inflation. The negative yield is an indication of just how low rates are in this environment. (For related reading, see Treasury Inflation Protected Securities.)

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Even Lower

Investors are apparently willing to take on debt at what appears to be quite puzzling scenarios. For example in the corporate bond market, IBM (NYSE:IBM) recently sold three-year debt notes with an effective yield of 1.14%, despite the fact that IBM shares yield 1.8% and trade for 13 times earnings. Yet it's Goldman Sachs (NYSE:GS) that takes the cake. The company recently sold 50-year bonds yielding 6.125%. The original offering was for $250 million worth of the notes, but Goldman ultimately sold $1.3 billion worth as demand from private investors was stronger than anticipated. While the notes are callable by Goldman after five years, the overwhelming willingness of investors to buy a 50 year note yielding 6% is an indication of mindset of investors today. At maturity, Goldman Sachs will consist of completely different personnel. So without regard to who will be running the iconic investment bank, investors lined up for the 50 year notes.

Cheaper than Bonds
While all this ultra-low debt issuance is going, equities look very attractive in relation to bonds. Take Microsoft (Nasdaq:MSFT) which today yields 2.5% and trades for 10 times forward earnings. The company's prodigious cash flow generation resulted in announced dividend increase. In relation to cash flow yield, shares have never been this cheap and you get nearly 3% in yield. Diageo (NYSE:DEO) the U.K.-based distiller behind brands such as Johnnie Walker scotch and Smirnoff vodka trades for under 14 times forward earnings and yields over 4%.

I think it would be safe to say, that even if the world went into a downward spiral, which I don't see happening, people will be buying their favorite strong drink. Even more basic to society is food and Kraft (NYSE:KFT) the world's second largest food company yields 3.6% and trades for under 14 times forward earnings.

Money Good
Investors, comforted by the implicit "guarantee" of bonds are accepting incredibly low yields with any regard for interest rate risk. Yet blue chip equities with decades of earnings and dividend payouts continue to be ignored despite attractive valuations relative to bonds.

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