Brexit Blah Blah Blah

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Includes: CAPX, DHVW, EPS, FTA, IVE, IVV, IVW, LLSP, RPG, RPV, RSP, RWL, RYARX, SDS, SFLA, SH, SPLX, SPUU, SPVU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SPYG, SPYV, SSO, UPRO, VFINX, VOO, VOOG, VOOV
by: Greg Silberman, CFA

Summary

No doubt your inbox has been hit with a plethora of emails with that title.

I’m sure they are good and insightful.

This note seeks to take a slightly different tact as we explore a hypothetical client conversation.

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Q: Were you surprised by the outcome of Brexit?

A: We had been saying for months that the market structure was looking weak. We noted on several occasions that the market was failing to make new all-time highs, instead making a series of lower highs, which is bearish.

In other words, the trend was DOWN and the trend is your friend. More directly, we could not forecast the news trigger but we did expect it.

Q: How was my portfolio positioned for such an event?

A: For months, we have been building and holding a higher cash position than usual. Depending on the client, cash can be anywhere between 10%-30%.

US Dollar Cash effectively 'gained' 3.6% in equity buying power on Friday the 24th. And in terms of purchasing power in UK Pounds a ~10% gain.

Other parts of your portfolio also helped namely Private Real Estate and Private Credit, which were essentially stable and/or gained in value depending on the particular security.

Relatively speaking, we are well positioned to protect capital in a volatile market.

Q: Where to from here?

This headline from The Telegraph in the UK is revealing:

"Voters in France, Italy and the Netherlands are demanding their own votes on European Union membership and the euro, as the continent faces a "contagion" of referendums"

In other words, Brexit may be the beginning of an unraveling of the European Union - the start of a trend rather than the end. Of course, we don't know for sure.

We can't quantify this risk but it certainly is not Zero. Hence, uncertainty is likely to prevail for some time and that will create market volatility.

Q: What is the effect on the US?

From our reading, most market notes will deal with the impact of trade flows so we won't rehash that except to say Brexit will likely be short-term negative and long-term positive for both the UK and the US in terms of trade flows.

The more immediate impact is likely to be on the 'imminent' US elections. If we extrapolate the English voter's frustrations back home, then who is the candidate best suited to address the concerns of the masses?

  1. Xenophobia - our lifestyle is endangered by an influx of refugees of different religions.
  2. The elite 1% have grown rich on central bank money printing but the lower class is worse off since the global financial crisis and the middle class is hurting too.
  3. The establishment is no longer working for me - I don't want to be governed by faceless bureaucrats who merely line their own pockets - there needs to be a change and SOON.

On balance, we feel this plays more favorably into the hands of Donald Trump!

Q: Oh Boy!

Yip!

Was that a question?

The polls would suggest Donald Trump is losing ground to Hillary round about now. To which we will say: The Polls are Wrong!

How do we know that?

Well the polls were so glaringly wrong in the UK! Why can the same thing not be happening here?

Q: Anything else? Final observations?

As always, we think the side show is more important than the main event (which is already history).

  1. We are watching Russia and Putin like a hawk! He has been posturing around the Baltics militarily. Were he to make a move, Europe would be seen as weak and ineffective as they are stuck with dealing with their own issues. That would be bad for markets.
  2. With two polarizing Presidential candidates in the US, a lot of voters are scrambling for something, anything in between. Keep your eye on the Libertarian Party and its leader Gary Johnson. Libertarians are fiscally conservative and socially liberal. Sounds to me exactly like what the US voters are looking for - less government and more fiscal responsibility. The Libertarian party is now winning double-digit popularity in some states. While not likely to be a real option for Presidency, they may hold the all-important fulcrum point on who will ultimately be victorious.
  3. Oh yes, the markets - they will continue to be volatile which means both steep drops and neck bending rises… but on balance, we will move lower until some of these issues are resolved. We are watching the Dow Transports closely because it has been the index, which has led the other major indexes lower the entire year. Indications are for a retest of the January 2016 lows.

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POSTSCRIPT: The rapid rebound from the Brexit sell-off does not negate our original premise that the market's trend is down! And therefore, the real buy signal still lies ahead of us at lower values.

As for what will trigger the next sell-off, our answer is the same as before, we have no idea but the market trend is down and the trend is your friend!

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. I have no business relationship with any company whose stock is mentioned in this article.