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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.


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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