Reality check after the UK’s EU referendum

Summary: I’m reducing my shorts and gold holdings slightly, when the Swedish market opens tomorrow, for the first time since the Brexit


“The UK will remain in the EU and the slow and steady march toward doom can resume”

Oooops! That’s what I wrote, just a few days ago, before heading to Istanbul for some Swedish midsummer celebrations.

So, I was wrong. Now what?

Right now I’m undecided between the negative Catalyst view and the positive Stimulus view (i.e., that the Brexit will trigger immense stimulus efforts and catapult stocks higher)


FYI: I’m 115% short stock indices, 25% long gold (and silver), and 15% gross long single stocks (some deep value, some hope(less) stocks. Considering the gains I’ll probably make when the Swedish stock market opens tomorrow, Monday (it was closed on Friday due to midsummer so we have yet to see the effects of Brexit here), I will cover some of my shorts tomorrow. I think I will sell some gold as well.

My main reason for taking some short term profit on gold and index shorts is to make room for selling again, if there is a bounce on talk of Bregret, and or hints of massive stimulus efforts to counter the effects of an exit.

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What’s more important than the Brexit, is that stocks are ridiculously expensive in relation to corporate revenues and the general economy (GDP). Sooner or later that situation will be corrected – and most likely more than corrected since extreme overshooting tends to be followed by a similarly exaggerated move on the downside.

Still. last week’s referendum result might very well trigger a new euro crisis, where not least Greece, Portugal, Spain and Italy once again question why they should stay in the union and honor their euro debts.

No matter, stocks are expensive and that will be corrected. After an unusually long and strong move upward, stocks are very sensitive to a change in risk tolerance. Just about anything could cause the long overdue correction, and there are many “anythings” hiding in plain sight: debts, valuations, interest rates, jobs, currencies, malinvestment, ponzi schemes, etc.

Hence, I’m convinced we are headed lower. Sigificantly lower. And rather sooner than later.

However, talks of Bregret and/or stimulus efforts could easily cause a temporary bounce of several per cent after the initial downturn. And the inverse of that is likely for gold.

In February I reduced my short positions by around 20% (in units, meaning the remaining exposure was about the same as before). Tomorrow (Monday June 27) I might do 10-20% as well as sell a similar share of my gold holdings.

Thus, I’m not becoming “bullish”, and I haven’t given up my scenario of a severe downturn in 2016-2017. However, I always want to make some room in my portfolio and take profits when I can and not when I have to. If the market keeps falling, I’ll keep covering my shorts but at a slow pace of one per cent a week or so. And when it bounces I will add to my shorts on strong days. In time and if the market falls over time I will slowly work myself toward a net neutral portfolio and then start going long, almost as slowly.

 

What does the Brexit really mean?

What will happen now? I don’t really know, but I expect nothing much will happen fundamentally.

New trade agreements are many years away, large scale layoffs that weren’t already planned anyway too. Actually, the most immediate and tangible result could be stronger exports thanks to a weaker GBP.

 

Conclusions and summary

I still can’t decide between Catalyst or Stimulus, but I think the inevitable downturn and a slow turnaround in sentiment had already begun. Fear of contagion and complete chaos is a relevant possibility, and if the S&P 500 index once again falls below its 200d MAV most of the last remains of optimism and risk appetite will disappear.

Consequently, no amount of stimulus, bar Zimbabwe style money printing, would have more than a brief and passing positive effect on stocks and bonds.

Gold should do well in both scenarios though.

All in all, I think a Brexit is a vote for freedom and a vote against the technocrats in Brussels. I think the UK citizens made a good choice, albeit in large parts for all the wrong reasons (including xenophobia).

For me all it does is change my short term trading pattern slightly due to my anticipation of increased volatility in the aftermath.

Big picture, I’m sticking to 80-90% of my shorts and gold holdings, meaning I will still be around 100% short stock indices and long 20% gold (both in terms of portfolio NAV). Hence, I’m not really turning into a bull (yet).

My four pillars of investing remain: Short stock indices, Long gold, Long cheap or promising/enticing small caps, slowly accumulate dogs, strong balance sheets, high dividend yields.

Hopefully this was my last article on Brexit, so if you are interested in my other favorite themes of personal development, health, wealth and happiness, please subscribe and share this article with your friends.

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9 Comments

  1. What instrument do you use for shorting index? Regular bear certificates (XACT BEAR for example) or something else? Since you are quite long-term in your short positions, certificates might not be the best option, but perhaps they do the job good enough?

  2. Sprez, just finished reading your October 2015 article “how to trade a bear for dummies”. I know you don’t like timing, but that is my passion so I must comment. I have put in the 1000-10,000 hours of study to become a very good trader.

    The financial crisis of 08-09 never really ended. The major institutions are just as leveraged, interconnected and fragile as they were then. Each time there is a shock to Europe or Asia, scared money comes flying to the US. In my opinion, this is why US markets have remained near all-time highs despite the horrible fundamentals that have been in place for 8 years.

    My personal way of trading this is to wait for the major correction, then go long. I may buy some index puts to play the downside, but I have no desire to put my ass on the line against “aunt” Janet’s unlimited printer. As a person retired in his mid 50’s, the potential gain isn’t worth the draw downs we are seeing. I can just continue to enjoy life on my dividends and interest, waiting for the juicy bargains when ever they occur.

    Something tells me you are too smart to really be 150% short. You may be that short for a small trading account. But I’ll bet the bulk of your net worth is in something safe, that you can rely on for the rest of your retirement. If I’m wrong about that, I hope you have stops in place. Either way, best of luck.

    • Thanks. No, I’m only 100-115% net short in my trading account. Apart from that I have a place to live (no mortgage) and unlisted investments

  3. What was the annualised return of your fund from 2000-2010 out of interest?

    • It’s in the my e-book. I think it’s more instructive to look at the chart or to gauge the annualized return from inception in October 1999. Alternatively use the Hedge Fund Of The Decade period of January 2000 to December 2009.
      Anyway, the annualized return since inception was 21.5% I think. But check the book.

  4. Hey Sprezz, thanks for your truly exceptional blog – wish I’d discovered your work sooner. Couple of questions if you have a second…

    What are your latest thoughts on the gold price following the post-Brexit rally to $1,300, and the strengthening of the US$? (I’m UK based).
    Also, how are you thinking about which global equity market makes most sense to short?

    • 1. keeping my gold, central bankers will print more than ever
      2. I don’t

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