by Charles Sizemore | February 29, 2012 4:12 pm
The European Central Bank announced on Wednesday that it injected €530 billion into the European banking system in February, slightly more than the €500 billion analysts expected. This second installment of its Long-Term Refinancing Operation (LTRO) is larger than the €489 the ECB lent out in December, and it brings the running total to over €1 trillion.
For readers unfamiliar with LTRO, it’s the ECB’s most aggressive move to stabilize the financial system to date. Fearing another “Lehman Brothers moment” in which the disorderly failure of a major financial institution causes a domino effect of bank runs that risks taking down the entire system, the ECB made virtually unlimited funds available to participating banks for as long as three years at just 1% interest.
If, say, the Greek government defaults on its sovereign debts, LTRO ensures that banks holding Greek debt remain liquid, even if they’re technically insolvent. It is by no means a long-term fix to Europe’s debt problems, but it’s a very effective Band-Aid.
Perhaps the best indication that LTRO is working as planned was the reaction of world stock markets to the announcements — or perhaps I should say lack of reaction. The Dow Jones Industrials and S&P 500 were virtually unchanged Wednesday morning, and European markets declined only slightly. The lack of volatility, either downside or upside, is proof that investors have taken a step back from the edge.
In 2011, investors would have hung on every word of the announcement, and it’s likely the Dow would have moved 400 points. The muted action today proves that, at least for now, Europe is no longer considered an existential threat to the world financial system.
The easing of Europe’s crisis removes an enormous weight that had been keeping a lid on stock prices. Not shockingly, the best performing stocks of 2012 have been those in the most cyclical and volatile sectors.
But lack of crisis should not be confused with economic health. Europe’s economy is still on life support, and the LTRO program raises a few key points:
Still, on balance, it makes sense to be cautiously bullish. I expect European stocks to perform well in 2012, but I recommend investors hedge their bets by buying only the highest-quality dividend payers. As a rule of thumb, I recommend that investors look to companies that have been able to raise their dividends in the past five years. If a company can hike its payout in the environment we’ve just lived through, it can survive anything.
As a one-stop shop, I like the PowerShares International Dividend Achievers ETF (NYSE:PID). It’s loaded with some of the highest-quality dividend payers outside the U.S., with most domiciled in Europe.
Disclosure: PID is held by Sizemore Capital clients.
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