The Brexit And Its Effect On The Preferred Investor

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Includes: AHT, ARP, CHK, CMRE, DB, DSX, DX, FCH, HES, HPT, ISHCQ, LGCY, NCT, RLH, SHO, SSW
by: Norman Roberts

Summary

Now that the Brexit has become reality, it's time for an update.

Will the Brexit become contagious and spread throughout the EU?

I'm of two minds, one fearful, the other greedy.

Look before you leap. Patience is key.

First, I'd like to invite you to review my recently published article,

Brexit, Viewed Through The Eyes Of The Preferred Investor, which I have provided the link to.

Once again, the political and market pundits, for the most part, got it wrong, which might, or might not have, led to the market exuberance of the past few days. Once again they were proven wrong and we are now faced with the reality of Brexit, which as most of you know, unless you slept late or are in a coma, the affect on the market has been negative, to put it kindly. As I write, the S&P 500 futures are down a horrendous 72 points, that's before our markets open. This appears not to bode well for the average investor as he faces today's opening.

Populist and Eurosceptic parties across Europe moved to capitalise on the UK's decision to vote for Brexit by congratulating Britain on its vote for "freedom" and calling for referendums on EU membership to be held in their own countries.

A poll last month by Ipsos-MORI found that nearly half of voters in eight big European Union countries want to be able to vote on whether to remain members of the bloc, with a third saying they would opt to leave, if given the choice.

But how shall we as preferred investors react to the coming potential blood-bath? I am of two minds, and this article shall explore both.

Rush toward the exit, SELL!

As far as I am concerned the two main motivating forces that move the market are fear and greed. Today, certainly fear will prevail, and potentially in a big way. I'm forced to admit a portion of that fear has infected me as well. However as a preferred investor, that fear is, and has been, moderated by greed. Let's explore my fears and the reasons for them:

  • Although the Brexit vote was advisory, with Cameron resigning it's likely that it will eventually come to pass.
  • The English pound along with virtually all the world's futures have fallen precipitously.
  • My greatest fear is contagion. Already several EU member countries have threatened to follow England out the door. Were this to happen, what might be transitory can possibly turn into a global meltdown. I recall what happened with the Greek crisis in 2011. At the time I was riding high in the market and my portfolio was reaching new highs. Within a virtual nanosecond I experienced an extreme reversal of fortune, which lasted longer than I was comfortable with.
  • Consequently, my conservative fear motivated mind rushes to take control, but as usual, it's tempered by the brash greedy one. I can sell now and limit my losses, then hopefully buy back at lower prices. It makes a lot of sense: Limit my downside, with the promise of future profits when I buy them back.

If I were to sell I would be looking at oil preferreds and some of the weaker shipping companies, and financials, specifically Banks. Here's the list: Hess Corp (NYSE:HES), Atlas Resource Partners (NYSE:ARP), International Shipping (ISHC), Chesapeake Energy (NYSE:CHK), Deutsche Bank (NYSE:DB), Dynex Capital (NYSE:DX), Legacy Reserve (NASDAQ:LGCY), and Diana Shipping (NYSE:DSX).

Go on a shopping spree, BUY!

  • I'm forced to admit this is the skin I'm most comfortable in; however, my fear of the EU contagion give me pause.
  • Oh, I'm going to go on a shopping spree, it's the timing I'm uncertain of.
  • Well certainly not today. The patience I always preach must be rigorously adhered to. Yes I might miss several golden opportunities, but on the other hand, I might make some very costly mistakes.
  • At least for the moment I've decided to review my portfolio and my watch list with the hopes of making opportunistic buys, first to further diversify my basically preferred portfolio, then buy a number of, what I consider less risky preferreds whose initial coupon yields were too low for my taste, yet now at reduced prices might come up to my standards.
  • I will not, I repeat not, at this time buy the preferreds of what I consider weak or highly leveraged companies. There's plenty of time for that when the market settles down and I get a better feeling about the eventual fate of the EU experiment and how it will ultimately affect the global economy.

I'd be looking at the preferreds strong shipping companies that I felt were too expensive and I still wanted; Hotels, if they will ever come back to earth from the heights they're presently at. Here are a few: Red Lion Hotels (NYSE:RLH), Costamare (NYSE:CMRE), Seaspan Corp. (NYSE:SSW), Hospitality Properties (NYSE:HPT), Sunstone Hotel Investments (NYSE:SHO), Ashford Hospitality (NYSE:AHT), Felcor Lodging (NYSE:FCH), and Newcastle Investments (NYSE:NCT).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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