‘Harbour Waves’ in the Horizon VII

BarroMetrics Views: ‘Harbour Waves’ in the Horizon VII

Depending on what polls you look at, either:

  • The ‘remain’ camp is marginally ahead.
  • The ‘leave’ camp is marginally ahead.
  • Both camps are equal.

With all of these numbers, the ‘undecided’ have not been included. So, clearly, they hold the key. Which brings me the bookies odds………

Bookies frame markets firstly according to their evaluation of the chances of the candidates and then alter the odds according to the weight of money.

The odds started around 50-50. Now the odds are:

  1. Remain 1-4 (on) (75% chance of winning)
  2. Leave even money (50% chance of winning).

Given the pools, the ‘remain’ camp offer less than value; the ‘leave’ camp is just value. In Buffet’s words, there is ‘no moat’ – at least as far as the probs are concerned.

So why am I keen to take a position ahead of the results? Because of the potential return if ‘leave’ wins.  Assuming for the moment that the bookies’ assessments of the probs of camps’ winning are correct, the potential return is what makes the difference.

The ‘remain’ camp returns have been seen a strong move since June 16. Cable, for example, at time of writing, has moved up 8% (811 pips) in 6 trading days (about a week). Putting that range into perspective, the current ATR is (300). So we have seen a greater than weekly ATR move ahead of the referendum result.

If we look at calendar periods, the current weekly range is 411 pips, about 37% greater than normal.

With that in mind, let’s remember that our expectancy return is based not only on the probs of winning, but also on the possible return. So my assessment is:

  • Remain: Prob of success x Expected Return = X
  • Leave: Prob of success x Expected Return = Y.

Over a 5-day horizon after the referendum, I expect to see: if the ‘leave’ wins, a 20% drop in the Cable; and if the ‘remain’ camp wins, a 5% increase (given the move up we have already seen).

Of course, my estimates could be totally off or could be very accurate. But, this is a challenge we face with all trades.

The one thing I would emphasise: if you do initiate a trade before the referendum, keep your position size small. The size will be compensated by the increased volatility.

‘Harbour Waves’ in the Horizon VI

BarroMetrics Views: ‘Harbour Waves’ in the Horizon VI

A quickie blog today.

Here are two references to Brexit:

The leave camp has slipped from a 50-50 to 51-49 (up to June 21). This reading is in line with my expectations. I expect the ‘leave’ camp to recover lost ground today.

  • This one outlines what the results ‘ought’ to be, on a district by district result, if the ‘leave/remain’ camp are to win. Interesting and useful.

http://www.bloomberg.com/news/articles/2016-06-20/eu-referendum-how-britain-s-brexit-vote-count-will-unfold

The site will allow you to assess the probabilities of either camp winning as the results come in.

We are lucky in Asia; the first critical result is due on June 24 at 7:30 a.m. instead of the ungodly hour of 12:30 a.m.

The problem with getting on a trade (as the info comes in) will be the wide bid-offer spread. So, you’ll probably have to take the trade ahead of the results. If you do, you’d best keep the size way below normal to account for the probable increased volatility on June 24.

‘Harbour Waves’ in the Horizon V

BarroMetrics View: ‘Harbour Waves’ in the Horizon V

Chris asked: ‘Can you explain why the GBP will fall if the Brexit vote wins?’

Some economists suggest that an exit will cause the UK economy to falter initially and then recover. Others feel that the drain of an exit will take longer to recover.

I have attached two views as examples.

One thing is certain, legally, because of the treaty obligations, there will be a substantial unwinding period as laws will have to be amended and rescinded.

For me, the reason why the GBPUSD will fall is because no one is sure what Brexit will mean to the UK economy. And, since traders & investors abhor uncertainties they cannot rate, exit of positions is their usual response. To this, add the fact that most funds are long cable, and you have two good reasons for the decline.

My reasoning follows the same logic for my taking of small long Cable position at the open of yesterday. I felt there would be a switch back to the ‘remain’ camp as a knee-jerk reaction to Jo Cox’s murder.

If the referendum were to be held today, I’d be less confident of a ‘leave’ vote. But, the referendum is being held in 2-days. By then the Cox effects should have dissipated – if ‘remain’ wins, my ‘historical’ thesis would be proven wrong.

We’ll see. As of now, my small short Cable trade to be taken June 23 is still on track.

06-20 Global Counsel Impact Brexit

06-20 Woodford impact Brexit

‘Harbour Waves’ in the Horizon IV

BarroMetrics View: ‘Harbour Waves’ in the Horizon IV

The price action of the US stock indices suggests that a Brexit will send them into a tailspin.

So far this blog, I am going to look into my tea leaves and give you my two-cents.

The polls are some guide, but they have all been within the margin of error. So their absolute numbers are less useful. I rather view their levels as more an indication of momentum. As such, given the closeness of the polls, the last polls before the referendum will be a much better guide.

I am tracking the polls in Excel. I have attached a copy in case you are interested.

There is one aspect that has not publically been canvassed: the history of the UK.

Much has been made of how wrong the polls were in the Scottish referendum: the polls said the leave camp were set for victory, but lost In that referendum, I took a set against the referendum results. The reason: the lessons of history.

The UK has had a history of internal strife that has never resulted in a split. I took a set against the polls because I could see no reason why the Scottish referendum should prove any different.

History on Brexit has other lessons. The Brits have been fighting the French and Germans (at times allies with one against the other) for centuries. Brexit is essentially the same battle. I can’t see the Brits choosing to remain given the closeness of the polls.

Assuming the polls remain within the margin of error, on June 23, I’ll be taking a short cable position on small size (25% of my normal size). The reason for the size is I expect that if I am wrong about the result, I’ll probably see a 300-pip against me as soon as the result is known.

On the other hand, especially if the polls shows the remain camp in ascendance before the referendum. A Brexit is likely to see an over 600-pip decline. The reason for the reaction would be the hedge funds exiting their long cable positions. It’s unlikely the retail punter would be in the game – though some may seek to join the party if the polls continue to shift to remain camp.

Brexit Polls Tab 2016-06-18

 

 

Evidence of a Top?

BarroMetrics Views: Evidence of a Top?

I have espoused the opinion that a top in the US stock marker will occur no earlier than late 3rd quarter 2016 to end 1st quarter 2017.  I have also suggested that the investor faith in the FED has to be undermined before the bear can be given full effect

Yet……

Figure 1 shows the S&P following last night’s FOMC (and Figure 2 shows the DJIA).

Based on what you see, you’d have thought that the FED  had disappointed the market expectations. Instead, it delivered everything the stock market could have hoped for and perhaps a little more.

  1. Rates remained on hold.
  2. The accompanying statement was more dovish than expected:
  • The amount of rate hike for 2016 went into reverse.
  • The US growth projections were revised down.
  • In her press conference, Yellen omitted the comment that the FED would be looking to raise rates in the coming months.

So, the question must be asked, is the belief in the FED, coming to the rescue of a bear market, diminishing?

My view is no. I think it’s more a question of the Brexit decision weighing on the market.  We’ll have a better handle once the Brexit referendum is known.

06-16 NVD

FIGURE 1 S&P

06-16 NVD DJIA

FIGURE 2 DJIA

 

 

 

‘Harbour Waves’ in the Horizon III

BarroMetrics Views: ‘Harbour Waves’ in the Horizon III

QE managed to create a floor under US stock indices since its inception in 2007. In the process, it widened the income gulf to the point that has almost extinguished the US middle class.

Despite the FED’s avowed intention to stop QE, it has effectively continued it by keeping interest near zero, and by topping up maturing bonds. In other words, QE has stopped growing, but it is being maintained.  There also seems to be a belief permeating the US stocks that if it throws a sufficiently large tantrum, the FED will reverse its policy.

Perhaps that explains the belief permeating US stock players that if they throw a sufficiently large tantrum, the FED will reverse its policy.

That’s the context for Brexit.

In my view, the adverse economic effects of Britain leaving the EU cannot be contained by the FED – no matter how much money it creates. Brexit will be one ‘unexpected events’ Pete Steidlmayer spoke off – an event that changes the fundamental structure of the market.

If this proves correct, then my view of a bear market beginning in the last quarter 2016/furst quarter 2017 will be proven wrong. The bear market will happen earlier.

How likely a Brexit?

Polls rate it a 50-50 chance (with the ‘leave it camp’ a nose in front). Financial pundits (like Bloomberg) point to the difference in one-month and one-year volatility and take the view:

  • Because the one-year is not showing a massive increase, the markets believe Britain will remain. And,
  • Where markets and polls diverge, we ought to rely on the market judgement.

The pundits do have history on their side. But, this time, they’ll probably be proven wrong. We’ll see.

 

‘Harbour Waves’ in the Horizon II

BarroMetrics Views: ‘Harbour Waves‘ in the Horizon II

If I am as certain as I can be about the FOMC decision, the reverse is true for the result of the Brexit referendum.

Most polls have the ‘leave camp’ slightly ahead (see, for example, ‘Brexit poll tracker‘). However, the ‘undecided’ appear t hold the final say, and we won’t know their decision until polling day (June 23).

One poll, however, by The Express, had the leave camp 19-points in front (‘Leave camp take a 19-point lead as Britons flock to Brexit’)

In endeavouring to assess the consequences of a UK exit, it’s worth determining what we know from what we don’t know:

WE KNOW:

  • The pools are too close to call – all, save one, are within the margin of error.
  • That being the case, the ‘undecided’ votes will determine the result.
  • The bookies have the odds for ‘staying in’ at the lowest levels since the referendum was announced. In short, so far as the bookies are concerned, both the weight of money and probability favour the exit camp.
  • If the ‘leave’camp wins, we’ll see unusual market volatility, especially in the GBPUSD.

WE DON’T KNOW:

  • The ramifications of a Brexit for the UK and the world.
  • The path of the GBP after the initial knee-jerk decline.
  • The path of the US indices after the initial knee-jerk decline.
  • Whether a Brexit will be the Black Swan that shakes the market belief in an omnipotent FED and what that means for US stocks and the world.

It’s this last point I’ll consider tomorrow.

‘Harbour Waves’ in the Horizon

BarroMetrics Views: ‘Harbour Waves‘ in the Horizon

The death toll at Orlando is expected to rise above the confirmed fifty. Condolences to all those who suffered loss. It’s sorrowful enough to suffer a loved one’s death but to lose someone through such a violent act…..words escape me.

Back in the financial world, we are facing two events that could move mountains: FOMC and Brexit.

Of the two, FOMC is easier to determine: there will be no rate rise in June. What is less easy to determine will be the nature of the accompanying text and press conference.

My view is the FED will seek to lay the foundation for a rate rise in July or September (no meeting in August). If the language does not strongly hit at a July rise, that should lay the foundation for a rally in stocks and a move South for the USD.

So the question is: how likely is it that July will see a rise?

The answer to that question will depend on the results of the Brexit referendum on June 23.  I expect the FED to foreshadow a rate rise in July provided ‘the market upheavals (due to the referendum results) are contained’.

And this brings me to Brexit and its impact on the markets – tomorrow……

Blood in the Streets II

BarroMetrics Views: Blood in the Streets II

So if Trump is not presidential material, what about Clinton?

No joy there, I am afraid.

For me, the most damning trait is here the ability to lie so well. I find it difficult to tell what is truth and what is falsehood at the time of her utterance. It’s only after the fact when the evidence is clear that the lie becomes evident.

But, even more important, is the fact she is a vengeful person, especially against her perceived adversaries. Imagine if she had control of DOJ??!!

The problem is we just can’t trust Clinton:

  • There is her turning USD 1000.00 to 100,000 in ten months (see https://en.wikipedia.org/wiki/Hillary_Rodham_cattle_futures_controversy) I like the quote from the editor of the Journal of Futures Markets, when he said in April 1994, “This is like buying ice skates one day and entering the Olympics a day later.” In short, the likelihood that the trades were kosher is very doubtful.
  • Of course, you now have the ‘Clinton Foundation’ controversy with allegations of fee for favours’.

At a time when we need a Leader in the Oval office, we see two candidates who are less than worthy of that office.

A pity Lord Rees-Mogg died of cancer in December 2012 – had he lived, he would have seen his views vindicated.