You have to give Mario Draghi credit. He sure knows how to manage market expectations. This latest move by the ECB has once again been played masterfully.
Draghi showed his Jedi mastery again…</a> </div>
Over the last few weeks leading up to yesterday’s meeting, Draghi leaked enough information about the coming monetary easing to keep the market well bid. But he was careful to not give his whole hand away. By doing so, he was able to avoid the dreaded “sell the news – it’s all baked in” reaction. True mastery. I must admit that this guy knows how to play this game…
I for one was caught off guard. I was not expecting such a bold move out of the ECB. Although I anticipated the move to negative interest rates, I thought that they would barely meet market expectations. Their solution of throwing the kitchen sink of easing at the problem caught me by surprise.
The move towards NIRP (negative interest rate policy) was well telegraphed, but there was always the worry that they would chicken out at the last minute. But the ECB took the plunge, and by lowering their overnight deposit rate to –0.1%, ventured into an area that even the Japanese has so far avoided. It will be very interesting to see what effect that negative interest rates will have on the European economy and markets. No major economy has ever had negative interest rates. If someone tells you they know what this means, ignore them. This is a brave new world of monetarism gone mad. No one knows what is going to happen.
But Draghi & Co. weren’t satisfied with only lowering the interest rate into negative territory, they also introduced a whole slew of other easing measures.
Most importantly was the introduction of a targeted four year 400 billion € LTRO (long term repurchase operation). There are plenty of questions of whether this will work. Force feeding banks cheap credit doesn’t help if no one wants to borrow. But short of actual QE, this is the next best thing.
ECB Balance Sheet</a> </div>
One of my main worries for the European economy was the shrinking ECB balance sheet. This latest move from the ECB should arrest that decline and once again push it back into expansionary mode. It would obviously be a lot better if this expansion was more permanent, but Draghi has recognized this concern and made the TLTRO an especially long 4 years.
The ECB also indicated that they will stop sterilizing the SMP program. To understand what this means, Sober Look has a great explanation. This is yet another form of monetary easing that the ECB has thrown at their deflation problem.
And finally, recognizing the need to keep the market on its toes about further action, Draghi laid out this skilled warning:
“We think (what we’ve done is) a significant package. Are we finished? The answer is no. We aren’t finished here. If need be, within our mandate, we aren’t finished here.”
The ECB has basically eased as aggressively as they could have short of introducing Quantitative Easing.
The market was taken by surprise, and most assets performed as would be expected with risk assets especially well bid. There was a little bit of a Euro rally after the initial sell off, but given the aggressive easing policies, it is probably safe to assume that this was the result of portfolio inflows chasing European assets.
Tepper – just another hedge fund manager making a mess
Yesterday’s rally in the global equity markets really gathered steam when CNBC reported that famed hedge fund manager David Tepper had changed his tune..
I really like David Tepper. I think he is one of the good guys. But in this environment of thousands of hedge funds sitting around in a circle shooting at the target in the middle, the hedge fund managers have become the consensus trade that needs to be faded. Trading alongside CNBC headlines from hedge fund mavens is not only going to generate zero positive alpha, but in fact will be most likely be a losing strategy.
For example, the last time David Tepper made headlines was May 15th when he said:
TEPPER SAYS DON’T TO BE TOO ‘FREAKIN LONG’
TEPPER SAYS ‘TIME TO PRESERVE MONEY’, HAVE CASH
TEPPER SAYS I AM NERVOUS, IT’S NERVOUS TIME
But then yesterday the rally gathered steam when Tepper did an about face and said that his concerns had been alleviated.
S&P 500 trading over the last month</a> </div>
Everyone deserves to change their opinion, and lord knows I get stuff wrong all the time. But I want to emphasize that if you were buying stocks yesterday because Tepper got bullish, you are trading with consensus.
At the beginning of the year as stocks rolled over, all the hedge fund managers got all beared up. As their fears have not been realized, they are scrambling to bring it back in.
I understand that Tepper is changing his opinion based on a change in the investing landscape. The ECB’s actions have the potential of being truly game changing.
However, I would suggest that markets top into good news, not bad.
To me this recent rally has the feel of a buying panic. And anytime you panic in the markets, it usually costs you money.
Yesterday’s ECB actions are indeed very reassuring for the European and global economy. But that does not necessarily mean that stocks are a raging buy.
Being short is scary as the bear camp has become even less populated, but I think you need to be loading up on cheap stock index puts. Avoid the temptation to blindly follow Tepper’s advice. He has already cost you 75 S&P handles. Make up your own mind. But don’t forget to ask yourself who is left to buy. There are precious few bears left. When the bears seem to be clinging on for dear life is often when the markets turn.
The last bear clinging on for dear life</a> </div>