“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
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