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LTRO Rally?

01/26/12 / Timothy McGeeney /

“Never underestimate the ability of the authorities to influence the price of the markets over the short term.” ~Jeremy Grantham of GMO

The markets have had a great start to 2012. Why you ask? One reason could be the January Effect. Where we see the laggards from 2011 rally at the start of the year. There is also the possibility of a shift in asset allocation. We have seen some some funds flow out of bonds and into stocks.

We are starting to see some improvement in liquidity conditions in the Eurozone. Much of this success can be attributed to a program launched by the ECB entitled LTRO. Think of it as a type of stimulus package where the governments of the Eurozone provided cash to financial institutions in exchange for low-quality collateral they have on their balance sheets.

The effects of the LTRO program has been immediate. Some positive developments we have seen are improvements in the Euribor/OIS spread and bank CDS levels in Europe (outside of Portugal and Greece). Trust me these are good signs.

Also, money market funds bought French bank paper with maturities as long as one month, as well as small amounts of Spanish bank paper, according to bankers. The funds also bought longer-dated UK, Dutch and Scandinavian bank paper, up to six-month maturities. These are all signs of increased confidence in the system near-term.

However, it does not solve the long-term solvency issue – we will save that battle for another day. As I alluded to in my opening line, there are times when the government gets involved and it is hard to fight that momentum. Even though the global macro fundamentals stalled last year and Europe looked to be on the precipice of another great recession, the government stepped in with a band-aid and drove the market higher. Such is investing in the times of great government interventions.

One of the best pieces of information was from ADP this morning. In their earnings released they had the following to say, “The momentum is strong across the business…we’re seeing the strength everywhere.” Hopefully this momentum will continue and the markets can get back to standing on their own without the crutch of government.

Ah yes – there was a Federal Reserve meeting today and the news was of continued government manipulation of keeping rates at virtually zero in hopes to stave off a recessionary relapse. I will leave that discussion for another day. Stay tuned! {TJM}

Disclosure
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Meyer Capital Group), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Meyer Capital Group. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Meyer Capital Group is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Meyer Capital Group’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

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