Last night the United Kingdom voted to leave the European Union in what was called the Brexit, which was a total shock to global investors. As a result many markets imploded on the news:
Germany = -6.82%
France = -8.04%
Greece = -13.42%
Japan = -7.92%
I have been warning that this might happen for sometime now, here on Seeking Alpha, as my Research showed that the markets were very overvalued. In a previous article I explained in detail how the price to sales ratio of the S&P 500 Index was at an all time high and that one major negative catalyst would set off a domino effect.
Here is that chart again:
Well with the Brexit we did not just get a negative catalyst, but got what is called a Black Swan Event. For those of you who don't know what that means here is a good definition. As a result I believe that we just entered a period of correction that will eventually lead to a bear market. That bear market could last quite sometime and will be sort of be like Chinese water torture as there are 100's of dominos out there set up and ready to fall and that the UK Vote was just the first one. Anyone who has played dominos knows once the first domino falls, the rest soon follow and the speed of the fall usually increases along the way.
Some of these dominos are:
1) Management has no incentive to buy back shares as granted options will expire worthless, so why borrow and take on debt? So no more backstop for stocks.
2) Every earnings report released this coming quarter will start off with the CEO saying "Because of the Brexit we are lowering our guidance."
3) There may be many more referendums from other EU countries that may also wish to exit the European Union.
4) As more and more investors start losing more and more money in the stock market, each will curtail spending and since consumer confidence is 70% of our economy, both the economy and retail will suffer.
5) With confidence gone, people will not look to invest in homes or even remodel, so homebuilders like D.R. Horton (NYSE:DHI) and home improvement stocks like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) should suffer.
6) Interest rates will keep falling as more and more countries head toward negative interest rates and the results will not be pretty as you can read about here.
7) Financials like Banks and Insurance companies will lose money as their profits get reduced due to negative interest rates
8) People will stop buying new cars and will spend more time at home in order to save money.
9) Margin Calls should start coming in fast and furious and with over $500 billion in margin debt out there, tons of investors will be getting margin calls soon.
Going forward this all starts with stocks being extremely overvalued and that we just needed one major negative catalyst to bring the markets down and we got that last night in the Brexit. Obviously with the process for the UK to exit the EU possibly taking over two years of negotiating to actually happen, this will be a constant weight on the markets in Europe and on US Multinationals that do business there. I have been in 75% cash for sometime now and believe that those who are in a high percentage of cash right now will be shooting fish in a barrel when this all gets played out. The world is interconnected in so many ways these days, so there is really no place one can hide except for cash as "Cash is King" right now.
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.