'Don't Fight The Fed' is the mantra that is repeated day-in and day-out by so-called investment professionals around the world. In this world of extreme monetary policy and a market hungry for its next fix of fiat liquidity, this may well be the case - though even then, the actions are having less and less effect on both the real economy and market each time they roll the dice. However, it does seem that the ECB's approach to encumbrance as opposed to just unlimited printing is absolutely what should be faded. As we noted earlier, equity and credit markets have turned negative for 2012 now, but without doubt the cleanest and best performing trade of the first half of 2012 (and likely the git that will keep on giving) is the LTRO Stigma. With the spread between banks that took LTRO loans and those that did not now more than triple its early-February tights (and very close to record wides - with little or no excess collateral to revive LTRO3 hopes for those that need it), our recommendation back in early February [4] to initiate this decompression strategy, calling out Draghi as a liar for disingenuous comments on the implicit encumbrance of the ECB's actions, has performed admirably (and we expect it to continue - though taking some profits up here and leaving a runner may well be warranted).
LTRO-facing banks now trade with an average spread of 386bps - the widest since late November - while non-LTRO-facing banks have been affected systemically but only trade just wide of 200bps - mid Jan levels)...
[5]
We also note that being short Spanish bonds has remained an excellent (if not bumpy) trade for the year - another Anti-Draghi we supposed.
Chart: Bloomberg