Friday, July 1, 2016

Weekly Update: Brexit and dead cats...

I guess if you drop a dead cat from a high enough altitude it'll bounce, right? That --- the "dead cat bounce" --- has been the oft-chosen metaphor of those who bet Brexit would've dealt huge pain to the stock market (they could still be right!) and who seek to explain the quick rebound in stock prices. I'm trying to picture a dead cat falling from above in my mind; I don't imagine even the slightest bounce. Actually, I envision a splat! You see, Brexit was billed as the bomb that would destroy global economic life as we know it --- were it to actually detonate. The world --- that is, the financial markets, odds makers and even the politicians who crafted the bomb ---- just knew that they could convince its would-be detonators, who were anything but suicidal, that it would be, well, suicide, should they light the fuse. Apparently the risk was not apparent to those who were itching to pry themselves from under the proverbial thumb of the EU bureaucrats in Brussels. I've fielded a number of emails from my freedom loving friends with links to articles galore that laude the accomplishment of those freedom loving Brits --- the 51.9%, that is. But, in the wake of the great explosion that --- at this very early-in-the-game juncture --- wasn't, it turns out that the 51.9% want to retain the good stuff that comes with EU membership (the "free" trade) and free themselves from the perceived bad stuff (the lack of border control). Well, leave-champ Boris Johnson, merely hours after the Brexit vote, suggested that the borders would remain wide open. Within a few days he removed his name from the running for the next prime minister. Hmm… Beware --- all ye protectionists --- the politician who sings your tune during campaign season! I’m thinking, assuming they go through with it, that the same logic --- humans’ aversion to pain --- that had me thinking Brexit was virtually unthinkable will make it a relatively painless affair for all affected parties. I know that’s dangerously presumptive and flies firmly in the face of the impending doom the perennial doomsayers have promised, but, hey, time will tell (and we’ll revisit it plenty). And I’m not --- as many of my friends are --- in the camp that says Brexit signals some great global populist revolt that’ll make for surprise outcomes in elections the world over. Sorry. In fact, if anything, it, literally overnight, swayed Spaniards into voting the status quo in their election last Sunday.
Spain voted on June 26 with polls suggesting that the populist progressive Podemos party would overtake the traditional Socialist Party, PSOE, as the main left-wing opposition to the center-right Popular Party, or PP. Some thought the electoral math might even favor a progressive government headed by Podemos leader Pablo Iglesias. That didn’t happen. Brexit may have had an impact. Opinion polls seem so routinely wrong in Europe these days that their predictive failures merit little explanation. Perhaps we should just get over these glorified horoscopes. Yet it may be the case that the polls reflected a mood that changed at the last moment. The Brexit referendum was viewed as a disaster in Spain. One of the few things that unites all four major parties (and almost all of the nationalist parties, too) is that staying in the EU, however flawed, is better than leaving.
Emilio Sáenz-Francés, professor of history and international relations at Madrid’s Comillas Pontifical University, believes that while many factors were in play, Brexit may have acted as a cautionary tale for some voters. “It may have had an effect when it came to persuading a certain proportion of voters to return to traditional Spanish voting values and to the more conventional and traditional parties like the PP and the PSOE,” he said. “I think that Brexit has had an awareness-raising effect on Spanish voters and has highlighted the danger of voting purely on the basis of protest.”
Oh, and, in case you’re wondering, I have literally zero affinity for either candidate in the U.S. race! Moving on: You clients out there know that I believe lands outside our borders --- where 96% of the world’s population (and over 50% of its stock market capitalization) lives --- offer up opportunities that a balanced diversified investor should never overlook. I recently overheard a colleague suggest that foreign stocks in general presently offer more attractive valuations than do the U.S.’s, but that they have more problems to deal with. And of course he’s right. And of course he had just explained why foreign stocks presently offer more attractive valuations. Valuations are generally measured by things like price-to-earnings and price-to-book-value ratios. When the price of a company’s stock is historically low relative to what the company is actually earning, or relative to what the company would be worth if it sold all of its parts, it is said to be attractively valued. And, of course, if a company’s stock price is not reflecting what its earnings, or its assets, would normally call for, then something is perceived by the market to be amiss. In other words, if foreign companies, or the economies of their respective domiciles, didn’t have visible challenges to deal with, well, then their stocks would be trading right up there --- valuation wise --- where they typically do. So then, problems equal opportunity! Right? Just ask Warren Buffet… Bottom line, as of the moment, Brexit hasn’t dented my long-term optimism over the non-U.S. portion of our clients’ portfolios. In fact, quite the opposite! Happy Independence Day! Marty P.s. In case you missed it, here’s me getting underneath the headlines to explain why the big post-Brexit rally:

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