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Brexit happened! How bad will it be?

Posted By Peter Switzer On In Switzer on Saturday | No Comments

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The bookies had Brexit at Black Caviar odds of 7/1 on, which means you had to bet $7 to make $1. However, the polls being close and the undecided being 13% last weekend worried me but the stock market is usually good at predicting big events and so are the bookies. Now we not only have Brexit fallout worries but Donald Trump and our election concerns with Labor at $5.50, meaning you put $1 on and you win $5.50.

Trump is another long shot at $3.50. Given the unreliability of bookies and even polls by Christmas, we could have Donald Trump ruling the US and the world and Bill Shorten as Prime Minister. I have to say I don’t share the hate for Bill Shorten that conservatives do but I don’t think he’s ready for the top job. Also, given what we saw out of Britain overnight and with all the uncertainty it has now added to an already crazy world and global economy, Turnbull and the Coalition could be seen as a safer pair of hands.

But one thing Brexit has taught me is you really have to be careful assuming you understand what the masses see as good for them. Recall what we have been doing in Senates lately and who we’ve put in there. I need only remind you of three words that underline how you can fool the people some of the time: Palmer United Party.

Back to Brexit. With an hour to trade, the Dow Jones index was down just over 611 points but that’s only 3.4%, which isn’t bad. Where the Yanks ended at the closing bell was OK and thankfully they didn’t slide deeply lower into the close. This will be negative for Monday’s trade here but it could’ve been worse – a lot worse! We’ll be waiting for another Wall Street reaction to work out how low we’ll go in the future but I’m not overly optimistic about next week for stocks.

The Poms have made it hard for stocks.

I think we will go lower but at some point a buying opportunity will emerge. This is the least confident I’ve been this year about what happens next. Brexit is an unknown and with all my economics training and market analysis time at the coalface, this is scary stuff because of its pure uncertainty.

A doomsday buddy a few weeks back said we’re looking at a slow train wreck but he never predicted Brexit. All this helps his case. And that’s what really annoys me – these negative pains in the butt ‘experts’ were a good chance to be wrong but the Poms give them a good chance to be right!

In the fullness of time Brexit might work out OK for the UK as its currency has plunged, which helps growth but there could be a crisis of confidence that might create a recession for the world’s 5th biggest economy.

The pound has plunged to a 30-year low but believe it or not, our dollar recovered from a three-cent fall from 76.5 US cents to 73.3 cents to finish at 74.95 cents at the close of US trading. I hate Barclays and the Bank of Scotland being down over 20% at one stage but I did like that our CBA was down only 3.27% to $72.57 on the local stock market yesterday.

So far, the reaction here has been more measured than I thought but I reckon the big test comes early next week. If I was a trader, I would’ve sold out before the vote. Marcel von Pfyffer on my TV show said he was going to cash two weeks ago but he now will be readying himself for a buying spree in the not too distant future. However, timing will be critical.

That said, look at the scary headlines out there that suggest this silly decision by the Poms could rattle financial markets and even the global economic recovery. And it’s this latter issue that bothers me as Brexit, if it doesn’t derail the global economic recovery, will slow it down even further.

Janet Yellen has been bagged for delaying interest rate rises but she looks like a genius holding fire until the Brexit vote. Here are some of the scary headlines that explain how spooked markets could get:

I could search for more but you get the drift, however, I did like this one from well-known US banking analyst Dick Bove from Rafferty Capital Markets, who gave birth to this headline: “Forget Brexit, Dick Bove thinks investors should be buying banks. [1]”

How am I going to play this unexpected development? I won’t panic and I will wait for a buying opportunity but this has put a brake on the path of improvement for the global economy and stocks. I can’t say this is a catalyst for a huge sell off but I can’t be 100% certain I’m right. I’ve held cash for a buying opportunity but I didn’t expect it to come via a Brexit!

What I liked

What I didn’t like

A smart young view on Brexit

I thought I’d share this from a UK youngster who has found that his fellow old bastard Brits have opted to ditch the EU. It came from the Financial Times:

“A quick note on the first three tragedies. Firstly, it was the working classes who voted for us to leave because they were economically disregarded, and it is they who will suffer the most in the short term. They have merely swapped one distant and unreachable elite for another.

Secondly, the younger generation has lost the right to live and work in 27 other countries. We will never know the full extent of the lost opportunities, friendships, marriages and experiences we will be denied. Freedom of movement was taken away by our parents, uncles and grandparents in a parting blow to a generation that was already drowning in the debts of our predecessors.

Thirdly and perhaps most significantly, we now live in a post-factual democracy. When the facts met the myths they were as useless as bullets bouncing off the bodies of aliens in a HG Wells’ novel. When Michael Gove said, ‘The British people are sick of experts,’ he was right. But can anybody tell me the last time a prevailing culture of anti-intellectualism has led to anything other than bigotry?”

Clever stuff.

Top stocks – how they fared

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The week in review

(click the blue text to read more)

What moved the market

The week ahead

Australia

Overseas

Calls of the week

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Source: Siemens

Food for thought

Setting goals is the first step in turning the invisible into the visible – Tony Robbins

Last week’s TV roundup

Stocks shorted

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table also shows how this has changed compared to the week before.

This week, one of the biggest movers was Myer with a 3.16 percentage point increase in the proportion of its shares sold short to 16.26%. Another big mover was Metcash, increasing by 2.20 percentage points to 14.33%.

20160624-largeshortpositions [17]

Source: ASIC

My favourite charts

Strengthening economy

20160624-economy [18]

In CommSec’s early wrap of the financial year, they showed that within a challenging year for policy makers, economic growth has continued to lift and is forecast to grow at a similar pace of around 3% in 2016/17. Go Australia!

Population growth rate on the rise – VIC leads

20160624-population [19]

Is there a baby boom? Australia’s population expanded by 326,100 people over the year to December 2015 to 23,940,300 people. As the chart shows, Victoria had the biggest population growth rate of 1.87% over the past year – their fastest growth in 6 years!

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