Investors Win Big Going Short In French Elections

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Includes: ADRU, DBEU, DBEZ, DEZU, EEA, EPV, EURL, EZU, FEEU, FEP, FEU, FEUZ, FEZ, FIEE, FIEU, GSEU, HEDJ, HEZU, HFEZ, HFXE, HGEU, IEUR, IEV, PTEU, RFEU, SBEU, UPV, VGK
by: Albert Goldson

Summary

Markets will retreat from recent gains after the elections regardless which candidate wins because neither has enough seats in the legislature to support their proposed structural changes and economic reforms.

Le Pen to close 20% polling gap considerably after Wednesday’s debate and send a chill through the marketplace because of her superior and experienced political “street fighting” skills.

In the worst case political scenario, if elected, Le Pen plans to keep France in the EU but with negotiated greater flexibility because the economic benefits far outweigh political ego.

For these reasons, short-selling investors can profit assuming that post-election economic reality for either winner will not offer any upside to the marketplace.

There seems to be too much optimism - perhaps even a hint of "irrational exuberance" - in the overall European market with the strong belief that Emmanuel Macron, currently holding a 20-point advantage over Marine Le Pen, will win the French presidency with less than a week to go. In a bizarre parallel, this scenario is eerily familiar to the NFL Atlanta Falcon's owner and his wife prematurely celebrating on the sidelines in the third quarter of the Super Bowl, with the Falcons holding a 25-point lead over the New England Patriots with just over 20 minutes to go. Le Pen is down by only 20 points with five days to go, far more time than Tom Brady. We all know how karma worked in the former scenario.

The 20-point advantage held by Macron is reasonably solid because the polling is performed online in which voters tend to be more honest with their replies rather than speaking directly with a stranger because of the greater anonymity the internet provides.

Notwithstanding I project that Marine Le Pen will close this gap considerably after Wednesday's debate that will result in a political and economic chill confirming that nothing is guaranteed for the Sunday runoff for the following reasons:

Firstly, Le Pen is attempting to broaden her support in recent speeches by not mentioning her earlier proposal of leaving the EU and/or dropping the euro if she's elected. Both politically and economically, such a move is not in France's favor to initiate a Frexit. Additionally, Le Pen is shrewdly playing both sides of the euro so to speak, because, as a member of the European Parliament, she will not risk becoming a pariah as articulated in The NY Times 28 April 2017 article entitled Far-Right Leaders Loathe European Parliament, but Love Its Paychecks.

With respect to Macron's track record, as esteemed journalist Gideon Rachman wrote in the Financial Times 25 April 2017 entitled Le Pen and the Limits of Nationalism, "Mr. Hollande failed despite appointing a dynamic young economist named Emmanuel Macron. Whatever happened to him?"

Secondly, several potential elements may severely reduce Macron's margin of victory and perhaps the election itself, which include:

  1. The so-called "Republican front" fails to develop to counter Le Pen. This tactic is used when the losing first round parties create a coalition requesting their constituency to vote for a specific first round party winner to soundly defeat an opponent. This worked successfully in 2002 when Jacques Chirac crushed Jean-Marie Le Pen 85% to 15%.
  2. Because of the highly divisive and close voting in the first round split amongst four parties, polls indicate that voters from the losing first round parties may abstain from voting in the second round. This may result in low voter turnout, which may assist Le Pen.
  3. Regardless whether Le Pen gains substantial voters from Luc Melenchon's extremist leftist party that advocate similar political views, the first round combination of extreme left and right combined for almost 50% of the vote.

Thirdly, Marine Le Pen is the daughter of Jean-Marie Le Pen, the unapologetic and brutish ex-paratrooper. Marine has learned enormously from her military father and has developed into an experienced political street fighter who will have the political neophyte Macron for dejeuner in the debate.

Macron has been unable to shed his image as an elitist which hinders his ability to obtain votes from the working class. For example, Macron and his team arrogantly celebrated their first round win by dining at an exclusive Left Bank restaurant. The second faux pas was when he met with selective workers from a factory whose operations may be transferred to Poland because of cheaper labor costs instead of the entire workforce on their in his hometown. While Le Pen engages the "salt of the earth" with passionate emotions, Macron distances himself with cold logic.

Based on my projections, the investor strategy is simple: short broad-based investments and go long on gold. The former will yield far more if Macron wins a close election because the current level of market risk is based on a landslide, not a nail-biter.

Ironically, the presidency seems like the "easiest" step for either candidate to secure. However, two additional tasks must be successfully completed if either one intends to jump-start a French economy legally entrenched by inflexible labor laws & practices and psychologically entrenched in an entitlement mindset. The first is to win enough of the legislative seats in the National Assembly during the June 11 and 18 elections in order to carry out the second step, get sufficient political support from them to vote for their economic reforms, a remote Trifecta for either candidate.

This means that the current marketplace euphoria is short-lived and will begin to retreat in earnest and into negative territory - more slowly for a Macron victory and rather rapidly for a Le Pen victory. For Macron, a presidential win will be nothing more than a Pyrrhic victory. Only a landslide victory by Macron will provide immediate albeit transitory gains for investors who go long.

Disclosure: I am/we are long IAU.

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.