'Fee-Fi-Fo-Fum, I Smell The Blood Of An Englishman': Markets Must Have Their BREXIT Moment

Includes: DIA, IWM, QQQ, SPY
by: Robert Honeywill


What a slap in the face the BREXIT decision was for the markets.

The markets must go into turmoil to prove the market knows best, and that means bringing the Englishman to account.

We have seen these irrational over-reactions before, in recent times at that. Just like after the oil price shock, the markets will recover.

Scotland will remain with England in one undivided island nation. Ireland might also once again become one undivided island nation.

The headlines and an extract from the February 11, 2016 edition of MarketWatch

Dow closes at 2-year low, dogged by global market turmoil"

The Dow Industrials and S&P 500 rang up their fifth losing day in a row Thursday, falling amid a global rout led by tumbling oil prices and losses in financial stocks.

What has happened since that day in February:

The Dow started the 2016 year at 17148.94 and by February 11, 2016 had hit a 2 year low of 15,660.18, down 8.7% on the beginning of the year. By March 11, it had fully recovered to 17213.31, slightly ahead of the start of 2016, and by April 11 it was up 2.3% at 17556.41. By May 15, the Dow was at 17640.17, up 2.8% from the beginning of 2016. Apparently in anticipation of a yes vote for Britain to remain in the EU, the Dow then rose a further 2.2% in the next 8 days, and was at 18011.07 on the eve of the vote. Why the possibility of just maintaining the status quo should cause the Dow to increase by nearly double its year to date growth in the course of 8 days seems to lack logic.

A historic vote:

It is now history the English voted for BREXIT, but not the Scottish and Irish, and the Dow fell ~600 points on the following day, June 24. So where was the Dow at end of June 24? At end of June 24, the Dow was at 17400.75, up ~1.5% on the beginning of the year, which is ~3.0% up on an annualized basis. That is not a bad effort considering the Dow lost ~3.8% between the beginning of 2015 when it was at 17832.99 and the beginning of 2016 when it was at 17148.94.

Here is what I predicted before Tuesday's opening in a comment to an article by Polemic Paine,

Today, Tuesday, the Dow will likely recover yesterday's losses and close above last Friday. The way the market is, these swings could easily have happened without BREXIT and there would be a range of other excuses given by people who do not really have a clue what is going on and why.

By the close on Tuesday June 28, the Dow, as I predicted, was back above the Friday June 24 close, up ~1.5% on the beginning of 2016.

The opportunities when the Dow hit a low of 15660.18 in mid-February are now long gone and forgotten. The passage of time shows an appropriate phrase at that point in time was, "This, too, will pass".

Summary and conclusions:

"This, too, will pass" is equally relevant to this turmoil arising out of BREXIT. That is not to say that the Dow is over or under priced at this point in time for any one or more different reasons. But the influence of BREXIT will quickly wane. It reminds me of many decades ago when I followed exchange rate movements on a daily basis. Each day there would be commentary on why the exchange rates had gone up or down. On one day when the pound sterling fell it was attributed to the Queen sneezing at a function (presumably she was thought to be about to come down with a dreaded disease and die). Ever since then, particularly with the Queen now 90, I have held a rather jaundiced view of reasons given for market disturbances and turmoil.

The English will get on with their lives as an independent sovereign nation, just as they have done for centuries.

In 2015 the UK government paid £13 billion to the EU budget, and EU spending on the UK was £4.5 billion. So the UK's 'net contribution' was estimated at about £8.5 billion (see here). Some part of that reduction in government spending is likely to flow back to Scotland and Northern Ireland. Perhaps a disproportionate part to assuage the anger and blunt the desire to remain in the EU.

Ireland and Scotland were not always joined with England. The Scots would love to regain independence. But they are a shrewd canny lot, I should know from my part Scottish ancestry. The prospect of losing their subsidies from England, together with the possibility the EU will not look favorably on supporting one more mendicant country, will likely cause them, at the end of the day, to vote as they did in their recent independence vote. The Irish are another matter. It would not surprise at all to see one United Ireland as an EU member in the not too distant future. A merger of Northern Ireland with Ireland would possibly provide a back door entry, avoiding the necessity for Northern Ireland to apply for EU membership. In 2014 Ireland contributed €1.425 billion to the EU budget and EU spending in Ireland totaled €1.563 billion (see here).

Both politically and geographically it makes some sense for two undivided island nations to arise out of this BREXIT vote.

As for the EU, I expect it will continue to deal with its many unresolved issues by continuing to "kick the can further down the road". I would be more concerned about the future of the EU than Britain following BREXIT. If I were in the EU now I think I would feel my money was more secure in a UK bank where the government would guarantee deposits to prevent a run on the bank. Compare that to the EU where my deposits might be called upon to allow the TBTF banks to survive.

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.