Still Post-Brexit…

Still Post-Brexit…

by Blaine Rollins, 361 Capital

The financial markets remain focused on the 5th largest economy in the world. While we don’t know what the U.K. will look like in the future, the markets are not waiting and are placing their bets. Global government bond yields continue to evaporate as most major countries ended the week with their major benchmarks at all-time low yields. As returns move to even more unacceptable levels, investors are being pushed out into taking on duration and credit risk while others are looking at equity income proxies. Many Utility, Consumer Staples and REIT names continue to make all-time highs while high quality Healthcare names are also getting a push higher. Seeing the opposite are Financial stocks which continue to get hit from falling yields and uncertainty in their Trading and M&A volumes. Precious metals and the miners digging it out of the ground have benefited from an increased likelihood that the Fed will not be raising rates. While through Brexit returns were mostly a push for U.S. investors, anyone holding some counter-trend algorithms likely did well. (Hats off to our very busy team over the last week.) From here we look forward to the earnings reporting season and wonder what Pepsi will tell us about the Brexit impact this week. The U.S. markets might also become more focused on the race for the White House, as both major parties hold their conventions this month. But for now, the U.S. equity markets look healthy. The British and Euro fireworks have stayed away from our shores, while falling risk-free rates have sent the broader U.S. index to new highs in breadth. Now can we keep our summer gains or fall into the worries across the Atlantic?

While the markets have recovered from peak Brexit, there has been little to cheer for if you are an investor in U.K. or Euro Equities…

I have seen some crazy suggestions that the Brexit has been a positive for the British financial markets just because the local FTSE 100 index is higher. Nothing could be farther from the truth. First of all, the FTSE 100 is primarily made up of global mega caps that make 75% of their sales and earnings away from the British Pound. Think global pharma companies like Glaxo, consumer product companies like Unilever and major Oil companies like BP. Sure the FTSE 100 has done well because the Pound has been crushed 10%+ versus the US$ and 9% versus the Euro. If you look at the more local U.K. stocks that rise and fall with the U.K. economy, their midcap index is -5% since Brexit. And if you happen to be a U.S. investor in U.K. small cap companies, you are looking at a 15% slap to your portfolio. Europe equity investors have done no better with the Euro STOXX index -5% in local and -8% in US$ terms.

(prices from Brexit vote through 7/1/16)

Brexit meets illiquid assets inside of liquid trading vehicles…

Why would any investor stay exposed to a publicly traded entity if they knew that its assets were possibly going to be devalued significantly. Even if one had large tax gains, they had better be shorting an equal exposure in other funds to protect against a run on their fund. Well, now the gates are going up so everyone gets to watch these Funds try and sell property in a frozen market.

Standard Life has been forced to stop retail investors selling out of one of the UK’s largest property funds after rapid cash outflows were sparked by fears over falling real estate values in the week after the UK’s vote to leave the EU.

The £2.9bn commercial property fund will need to sell real estate to raise cash before any money can be redeemed. It is the UK’s third largest open-ended property fund for retail investors.

The last property crash in the UK, just as the financial crisis started in 2007, was preceded by a wave of similar gatings by funds struggling to meet investor demands for cash. They led to firesales of property that added to the pressure on an already falling market.

Last week, Standard Life marked down the value of the buildings its funds own by 5 per cent in the wake of the Brexit vote. The UK’s two largest open-ended property funds, run by Henderson and M&G Investments, did the same.

The move by the insurance giant to bar redemptions is one of the most concrete signs of the Brexit shock filtering from the financial markets into Britian’s property sector. The impact could be wide-ranging since property has become one of the most popular choices for retail investors seeking yield in an era of low interest rates.

(Financial Times)


For the foodies…

Those with thousands of employees in the U.K. are not waiting for answers…

M&G, Columbia Threadneedle, Legg Mason, Fidelity International and T Rowe Price have all outlined intentions to either move staff out of the UK capital, increase staff numbers in the EU, or set up fund ranges in neighbouring EU countries in fear of being locked out of European fundraising.

No asset manager has yet announced it will shift its headquarters away from the City but the retreat has prompted the Investment Association, the London-based trade body for UK-based asset managers, to hold a special meeting with its members on Tuesday to tackle the fallout from the vote.

The deep concern is that a British exit — or Brexit — from the EU will threaten the UK’s position as the world’s second-largest asset management centre after the US. Investment companies based in the UK manage £5.5tn of assets and employ 35,000 people. Another 25,000 staff work for related entities.

(Financial Times)


Some deletions to the U.K. non-farm payrolls…

That’s it. The entire Swiss yield curve is now negative…

@jsblokland: #Switzerland’s #yield curve is the ultimate ‘proof’ that negative rates are ‘normal!’

Money not looking for a home in negative yielding bonds will find a home somewhere…

And it looks like some global investors think that U.S. equities are now a better bet than many other places. Here is the broadening out of the S&P 1500 which shows that small and mid-cap stocks are finding new investors even though it is coming at the expense of the largest multinationals (who have that Brexit exposure to the U.K. and the E.U.).


For the week, most every ETF asset class saw gains on the Brexit bounce…

(Prices as of 7/1/16)

While interest rates collapsed during July, the Equity Bond Proxies have surged…

Probably overbought here along with Treasuries, but difficult to paint a picture where you have a complete reversal through year end.

(One-month prices through 7/1/16)

More broadly, all U.S. sectors except Financials are now trading > their 200-day MA. Again shows the breadth of the recent move…

@MktOutperform: S&P Sector ETFs: all positive YTD and above their 200-day moving average except 1: Financials. $XLF

If you think U.S. bank and brokerage stocks have underperformed, look at the ADRs or local prices in Deutsche Bank and Credit Suisse. What is Mario thinking here I wonder?

It is not always that Bonds and Stocks move in the same direction. Bloomberg notes the disconnect which is important to keep in mind…

There’s a big disagreement brewing in global markets.

While risky assets including equities have surged following the U.K. electorate’s historic vote to leave the European Union, government bonds have also rallied; two things that ought to suggest different outlooks for economic growth. Soaring bond prices have sent yields on the perceived safe havens of government debt plumbing fresh lows, even while expectations of looser monetary policy produce a burst of animal spirits in stock markets.



For underfunded global pension plans, they need the blue line to begin rising faster than the orange line is falling…

@TihoBrkan: Stocks vs Bonds: S&P inches away from new record highs, while Long Bond yield is millimetres away from record lows!

Good news for borrowers as Deutsche Bank shows that over half of the 30-year mortgage market is now looking refi-able…

(The Daily Shot)

This chart is from the CBOE sent as a reminder that volatility is trending higher. Just ignore the last time when the one-year crossed the five-year moving average…

@ReformedBroker: 1-year average volatility crosses over 5-year for the first time since 2007. Via @CBOE

(CBOE Options Hub)

The Goldman Sachs Thematic Repo Index looks broken. No doubt way too many stock repurchasing Financials inside of it…


The Big Short 2: Au Canada?

“Supply and demand doesn’t make sense” Cohodes explained, “Income levels are up in the GTA, but they’re not up as high as housing”. He might have a point, housing prices in the GTA over the past 30 years are up 188% and income has only risen around 1%. So why are buyers scrambling to purchase homes they can’t afford?

“The Country is using housing as an economic generator, and it’s going to be an economic killer…housing is shelter, and right now it’s being used for speculative purposes”. With the average Toronto home appreciating $550 per day, buyers have been piling in faster than people can sell their homes, and Cohodes thinks this is “not an organic situation, and it’s dangerous.”

“Don’t buy the supply demand noise. There’s plenty of places to build and live [in Canada]. It was the same story with Phoenix, Las Vegas, and Southern California when housing blew up here”.

“You have a story that people laugh at, a college aged girl buys a $31 million dollar place to live in, she didn’t earn that money herself. She said it was her father’s, when they asked what her father does she said she doesn’t know.” While he didn’t specify the specific story he was referring too, he does appear to be referencing Tianyu Zhou, a “student” at UBC that was able to purchase a $31.1 million mansion in Vancouver’s Point Grey. As a student, Zhou was able to obtain a $9 million dollar mortgage from CIBC.

(Better Dwelling)


You have seen this in years past. If you want to buy an American made car, drive to the Toyota or Honda dealership…

In today’s global economy, there’s no easy way to determine just how American a car is.’s American-Made Index looks at cars on a model-by-model basis, not by manufacturer. It recognizes cars that are assembled here, using a high percentage of domestic parts, and which are bought in large numbers by American consumers.

Five of this year’s eight AMI cars are from foreign-based automakers; the last time a Detroit Three vehicle topped the AMI was in 2014, when the Ford F-150 pickup truck ranked No. 1. (This year’s F-150, like many other vehicles, fell below the AMI’s 75-percent eligibility threshold for domestic-parts content.)



Time for the world’s top athletes to throw out the International Olympic Committee and host their own games…

The Norwegian press reviewed the 7,000 pages of technical and specific demands by the IOC for Oslo to host the 2022 Winter Olympics. I thought that Van Halen and the Who had some interesting touring contract details, but the IOC could easily rival those demands. Smartly, Norway has decided that the 7,000 pages are not worth the cost to its people and its country. Good for them. If Jordan, Gretzky and Serena really wanted a future challenge, they could hijack the IOC. I’m sure that a few advertisers would be happy to help in their effort.

  • They demand to meet the king prior to the opening ceremony. Afterwards, there shall be a cocktail reception. Drinks shall be paid for by the Royal Palace or the local organizing committee.


  • Separate lanes should be created on all roads where IOC members will travel, which are not to be used by regular people or public transportation.


  • A welcome greeting from the local Olympic boss and the hotel manager should be presented in IOC members’ rooms, along with fruit and cakes of the season. (Seasonal fruit in Oslo in February is a challenge…)


  • The hotel bar at their hotel should extend its hours “extra late” and the minibars must stock Coke products.


  • The IOC president shall be welcomed ceremoniously on the runway when he arrives.


  • The IOC members should have separate entrances and exits to and from the airport.


  • During the opening and closing ceremonies a fully stocked bar shall be available. During competition days, wine and beer will do at the stadium lounge.


  • IOC members shall be greeted with a smile when arriving at their hotel.


  • Meeting rooms shall be kept at exactly 20 degrees Celsius at all times.


  • The hot food offered in the lounges at venues should be replaced at regular intervals, as IOC members might “risk” having to eat several meals at the same lounge during the Olympics.



And Lastly…

To get your daily dose of Blaine, follow @361Capital on Twitter for aftermarket tweets and more. Also, start following our recently launched 361 Capital Blog for timely insights from other members of our Investment team.

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