1 July 2016


June 26, 2016

Britain stunned Wall Street as a majority of British citizens voted Thursday to leave the European Union (E.U.), and put Britain back on a path to greater economic prosperity and a much stronger nation in the long run — in my opinion.. For all the millions Wall Street pays their so-called experts to make accurate forecasts — they failed miserably, as almost all were predicting Britain would remain in the European Union. Based on that flawed outlook, stocks had rallied all week up until the votes began to be cast on Thursday. Once it became clear that a majority of Brits voted to leave the E.U., stock markets across the globe tanked, oil lost nearly 5 percent on a stronger U.S. dollar, while gold — not surprisingly — surged higher.

Global Markets Post Brexit Vote On Friday

— Japan’s NIKKEI lost 1,286 points, or -7.92 percent;

— London’s FTSE closed down 199.4, or -3.15 percent; 

— Germany’s DAX lost 699.87 points, or -6.82 percent;

— French CAC lost 359.17 points, or -8.04; and 

— Italy’s stock market closed lower by 2,242 points, or -12.48 percent.

Here at home, the DOW fell 610 points, or -3.39 percent, to 17,400; while the S&P 500 closed lower by 76 points, or -3.6 percent, to 2,037; and, the NASDAQ lost 202 points, or -4.12 percent, to close at 4,708. For the year, the DOW is essentially flat at +0.14 percent, while the S&P 500 moved back into negative territory for the year at -0.32 percent; and the NASDAQ is down nearly 6 percent year-to-date.

“The keys to whether the U.S. economy is affected significantly, will be whether equities tumble enough to have a major impact on business and consumer confidence; and, whether banks are so affected that they pull back on lending,” according to Jim O’Sullivan, Chief U.S. Economist at High Frequency Economics.

Spain goes to the polls this weekend — in a second attempt in the past year to elect a government; and, the results of their election will be known before Wall Street opens on Monday morning. If those favoring a split from the E.U., prevail, or gain steam, that will likely accelerate equity selling Monday.

I personally the U.K. and Europe will be better off in the long run; as the un-elected bureaucrats in Brussels have done nothing but stifle innovation, impose odious regulation, and interfere in the domestic affairs — especially immigration — of their member states.

Having said all that, my guess is we’ll get more selling of stocks tomorrow — Monday morning.

Barron’s On How To Play The Markets — Post Brexit

So, the big question heading into Monday morning is — what happens next? The most likely answer is — we’re probably going lower. The path to least resistance is now to the downside. As Art Cashin, Head of UBS Floor Operations told CNBC on Friday, “markets rarely bottom on a Friday. Investors and traders,’ he added, “brood over the weekend, and usually come in Monday morning ready to sell.”

What to do? Gold and cash are king right now. I upped my position in GDX on Friday, which is a gold miners ETF. I personally would not be surprised to see our market down another 500 points on Monday; and, perhaps another ten percent to the downside is certainly within the realm of the possible — if not probable.

Remember, you are not likely to be lucky enough to time the bottom. If you want to go bargain hunting — do not do it all at once. Leverage in over a period of days or weeks, buying on the heavy down days, and either standing pat, or re-position on the up days. Since we are heading into the second half of the year, we are traditionally entering a period where technology does well.

Tiernan Ray, writes in this weekend’s Barron’s that “It’s easy to see which top tech names should be on everyone’s list. Cloud computing is seemingly destined to make two of its biggest providers,Amazon.com (ticker: AMZN), and Alphabet (GOOGL), more and more powerful. Their shares,” Mr. Ray notes, down 3 percent, and 4 percent respectively on Friday, should gain for years as cloud computing becomes the dominant form of information technology. Alphabet may have the greater upside, with its stock off 12 percent this year, worse than the NASDAQ’s year-to-date decline of 6 percent.”

Mr. Ray wrote that his colleague at Barron’s likes Microsoft (MSFT), who “is a beneficiary of the cloud, with its Azure unit, widely viewed as the number 2 behind Amazon.” Microsoft also recently acquired LinkedIn, to give it a presence in the social media space. Mr. Ray notes that “Microsoft stock is down 10 percent this year, and shares are not expensive at 17 times projected earnings for the next twelve months.” “Another quality name, FaceBook (FB), should continue to benefit from the shift in ad dollars from TV, radio, and print — to online.”

A more speculative play would be “fitness device maker, Fitbit (FTT), which is off 57 percent this year, as some analysts are “wary whether each new version of its step trackers and smartphones can survive fierce competition from Apple (APPL), Garmin (GRMN), and Samsung Electronics among others. Mr. Ray adds that “several companies have been hit by a slowdown in larger-enterprise buying. One is Zebra Technologies (ZBRA) – down 54 percent in the past twelve months. The company makes thermal printers that spit out package labels used by FedEx (FDX), and others. Zebra also owns one of the premier makers of handheld scanners used to read those labels.

Bottom Line: Be careful. I believe we’re likely in for more selling this week. Going into Friday, 70 percent of my portfolio was in cash. I put 20 percent of my cash to work on Friday, adding to GDX, starting a position in Credit Suisse AG (Nassau Branch), (ticker: TVIX), Barclays PLC (BCS) – which closed down 20.5% on Friday, COVT, CLRB, and IMNP. 

If I had to guess how things might go Monday morning, I would guess we’ll open down, as I expect Asia and Europe to be down. If that happens, I don’t think there will be much buying until mid-morning on Tuesday. But,. we probably have a ways to go yet on the selling side. I have about 50 percent of the portfolio in cash, and will be very selective and judicious going forward. The more prudent time to buy — all things being equal — is in the final hour of trading (3 p.m. -4 p.m.) because it is put up, or shut time for traders to make their bets heading into Tuesday. If we get accelerated selling into the close, that usually portends more selling the next morning. 

Finally, the Fed is done raising rates for the remainder of this year in my view. The stronger dollar alone is enough to deter the Fed, since U.S. multinational companies will be less competitive. Britain is probably headed for a recession, and there is likely to be slower growth in Europe — at least in the short run. But, the anti-competitive, high regulatory framework coming out of the E.U. has been devastating economically — stifling innovation and entrepreneurship, and fostering an anti-competitive business environment. Britain did all of Europe a favor last week. V/R, RCP

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