Let's Talking about Brexit with Mike Larson

Forget Grexit. Brexit is Europe’s Latest Threat

Market Roundup Dow 16,620.66 (+228.67) S&P 1,945.50 (+27.72) NASDAQ 4,570.61 (+66.18) 10-YR Yield 1.77% (+0.02) Gold $1,207.30 (-$23.00) Oil $33.36 (+$1.61)

“Grexit” is so 2012. The latest European threat is “Brexit” — the risk that Great Britain will pull out of the European Union. Late Friday, British Prime Minister David Cameron secured a new deal with European politicians. It gives the U.K. some concessions, including the ability to pay fewer benefits to migrants from the EU, which Cameron hoped would quell an anti-EU push from political opponents and some members of his own Conservative party.
But EU-skeptics weren’t satisfied. Then over the weekend, one of the most powerful politicians in Great Britain, London Mayor Boris Johnson, said he wanted out of the EU. A decisive referendum now looms on June 23, one that will determine whether Britain pulls out of the 28-country Union or not.

London Mayor Boris Johnson favors a Brexit.

The market reaction was swift and severe in currencies. The British pound plunged almost 3 cents against the U.S. dollar, its biggest one-day loss since the depths of the credit crisis in October 2009. It’s now trading at its weakest level against the buck in seven years, and it also lost ground against the euro.
The concern is that the British economy will suffer if trade and other economic links with the EU get severed. London could also lose prominence as a financial capital, with jobs and power migrating to other cities in continental Europe over time.
The bigger issue for investors (outside of those looking to profit from moves in the British pound) is that the Brexit crisis is just the latest in a long series of them emanating from Europe. The PIIGS debt crisis. The migrant influx crisis. The European banking sector crisis.

They keep on coming — and European politicians are having a tougher and tougher time coming up with solutions. That tells me Europe is fraying at the edges, a longer-term problem for the European economy and European shares.

“Continue to avoid the large European banks … and keep an eye on this Brexit threat.”

So continue to avoid the large European banks, as I’ve been advocating for a long time, and keep an eye on this Brexit threat.
If polling over the next few months suggests the “Leave the EU” campaign is gaining steam, it will likely lead to more market turmoil at a time when stocks are dealing with plenty of it already.
How about you? Do you think Brexit risk is a big problem for stocks? Or are other factors more important? Will the collapsing pound encourage you to book a flight to London? Or is it not on your radar screen? What about the other European crises — are you worried about what impact they’ll have here in the States? Let me hear about it online.

Our Readers Speak

I hope you had an enjoyable weekend, and I’m glad some of you took time out of your schedule to comment on the outlook for the retail industry.
Reader Bob shared his take on the Amazon.com (AMZN) issue, saying: “I believe a large part it is Amazon. Plus, consumers have been spending money on home improvements, new furniture, and new homes.
“We own a small retail store and many of our top customers in 2014 hardly spent any money in 2015. We still had a good relationship with them and they all were doing what I mentioned above, so their money was going away from clothing and fashion. I also see UPS and FedEx drivers on a daily basis and they tell me their fellow drivers who service residential say it is amazing how many more home deliveries they are making versus several years ago.”
Reader Brian said the biggest problem is paychecks, plain and simple. His comments: “Until the living wage goes up, I’m unsure who the retailers think will buy their products. Real income hasn’t gone up since the ’70s. Almost all expansion since then has been based on credit. There’s only so much credit to go around unless cash starts flying out of helicopters.”
Reader Johan also picked up on that train of thought, saying: “First, labor participation is low, while unemployment is 5%. So it’s 5% of a smaller universe, meaning less income to spend at retail. Second, the population is aging and the ‘echo boom’ is paying down college debt, not buying homes, appliances, and baby clothes like the Boomers did.
“We need more good jobs and people in them to fuel growth. But I don’t see that happening soon.”
Reader David S. pushed back against the idea that Wal-Mart Stores’ (WMT) problems begin and end with Amazon. He said: “I shop at Wal-Mart on a regular basis and what I see being bought there (food, clothing, household supplies of all sorts, car supplies, sports equipment, etc.) by the low-income masses is not what would ordinarily be bought on Amazon. So it’s not obvious to me that there’s that much competition between the two.
“It also seems to me that the prices aren’t much different. And of course, there’s no wait for delivery at Wal-Mart, and they have an on-line purchase option if anyone craves it. In my area (San Francisco Bay), rents have increased dramatically and that might have a greater effect on in-store retail sales than it does for on-line retail.”
Thanks for taking some time out to comment. If I didn’t get to your views, or if you want to add anything further, be sure to use the discussion section below as your outlet.

Other Developments of the Day

The Bank of Japan’s negative interest rate program is helping stimulate the economy … if you consider higher safe sales to be a sign of success! The Wall Street Journal reports that sales of safes are rising as Japanese citizens are choosing to hoard cash, rather than sock their hard-earned yen away in bank accounts or other savings products that pay next to nothing in interest.
Remember those “hidden sellers” who have been hard at work unloading equities? Well, they may have a lot more dumping to do this year, according to the Sovereign Wealth Fund Institute.
The research group just released a report estimating that SWFs will have to sell more than $404 billion worth of shares this year if oil prices remain mired in the $30 to $40 range. That would be almost twice the estimated $213 billion they yanked from global stock markets in 2015.
Those European megabanks keep bringing the bad news. HSBC Holdings PLC (HSBC) just reported a $1.3 billion net loss for the fourth quarter, a huge swing from the year-ago profit of $511 million. The London-based bank with a large foreign presence missed expectations due to rising losses on energy loans and weakness in Asia. It’s in the midst of eliminating 25,000 jobs, exiting several businesses, and otherwise restructuring its vast operations.
In the political arena, Hillary Clinton won the Democratic vote in Nevada while Donald Trump scored a Republican victory in South Carolina over the weekend. Jeb Bush dropped out of the race, while Marco Rubio came in second in a very tight contest.
If you lived in Japan, would you stack your cash in a safe rather than earn next to nothing at a bank? What do you think of the ongoing selling wave from sovereign wealth funds? How about the election results? Any thoughts on how they might impact the markets? Let me hear about it in the comment section below.
Until next time,
Mike Larson