Advisor Cheat Sheet – This Week’s Report

Here is this week’s Report.

What’s in this week’s Report:

·       Weekly Economic Preview (there are now two key events to watch).

·       Post Brexit Market Outlook (Updated).

Futures are modestly lower (down -.5%) thanks primarily to a Brexit hangover.  Nothing new happened over the weekend as the news was focused on Brexit reaction commentary.

Currency markets remain in focus as the Pound is down another 3% and took out Friday’s spike low while the Dollar Index is up .9% (both of which are headwinds on stocks this morning).

There are signs of life, though, as Asia actually outperformed and the Nikkei rose 2% after PM Abe instructed the BOJ to intervene in currency markets if needed.

Additionally, there were elections in Spain yesterday and the mainstream parties did better than expected, implying (for now) that a populist, anti-EU wave is not sweeping the continent.  It’s only one result, but it’s some needed good news.

Today the economic calendar is quiet (May Trade Balance (E: -59.3B) and June Flash Service PMI (Previous 51.2)) are the only two reports.

From a market standpoint, focus will be on the Pound and the SX7P (the Stoxx 600 Bank Index).  If both continue to fall, the drop in stocks will likely accelerate.


Advisor Cheat Sheet




% Change

S&P 500 Futures




U.S. Dollar (DXY)












10 Year






Near Term Stock Market Outlook:


SPHB: 25% SPLV: 75%

Last week was historically volatile for stocks as markets spiked assuming a “remain” Brexit vote, then plunged Friday following the shock “leave” victory. Going forward, Brexit creates a lot of additional uncertainty and will provide upward support for the dollar, and we believe both those headwinds make a sustainable rally in stocks a lot less likely. We remain cautious on stocks broadly.

Tactical Allocation Ideas:

 What’s Outperforming: Defensive Sectors (XLU/XLP, FXG), Short Duration TIPS ETF (VTIP), Inverse Emerging Market ETF (EUM), Super Cap Internet/Social Media Stocks (AMZN, FB, GOOGL, LNKD, FDN is a good internet ETF).

 What’s Underperforming: Europe (HEDJ/VGK), Banks, (KRE), Retail (XRT), Tech (AAPL related supply chain), Healthcare (especially specialty pharma and biotech stocks), Small Caps.

The Week Ahead (Macro and Micro Catalysts This Week)

This was supposed to be a quiet week as the next major economic data points in the US aren’t until the June jobs report (July 8) and the start of Q2 earnings season (July 11).

But given the Brexit vote, the EU Leaders Summit (Tues/Wed) and the ECB Forum on Central Banking (today-Wednesday) are important from a headline standpoint. Generally, the market needs to see solidarity and a united message from Europe, and specifically a start of an outline for how the UK will depart the EU.

Outside of European politics, US economic data will be in focus. There aren’t any material micro-economic events this week.

Last Week (Needed Context as We Start a New Week)

Stocks dropped sharply Friday following the “leave” victory in the Brexit vote, although importantly the S&P 500 held the lows of two weeks ago (around 2,040) and it certainly could have been worse. The S&P 500 dropped 1.64% and is now down 0.32% year to date.

Monday through Wednesday were quiet, and markets were little changed in anticipation of the Brexit vote. Janet Yellen gave her Humphrey-Hawkins speech but didn’t reveal anything new on policy, and even if she had it would be negated by the shock on Friday, as there are no longer any rate hikes expected this year.

Thursday was when volatility erupted as global stocks surged 1%-3% on anticipation of a “remain” victory. Europe led markets higher but the S&P 500 closed with nearly 1.5% gains on Brexit optimism and decent economic data (June flash manufacturing PMIs and jobless claims). Then, Thursday night happened.

By midnight Thursday leave was declared the winner of the Brexit vote, and global stocks were in freefall. At one point very early Friday the S&P 500 was down over 100 points and through 1,900, although by the time markets opened here in the US, the declines had almost been halved.

It was a very standard and orderly macro-economic risk-off move on Friday. The S&P 500 opened down over 3% and rallied slightly throughout the morning Friday as some sense of calm set in. But, there was no real will to mount a rally in the face of so much uncertainty so stocks basically traded sideways from 10 a.m. onwards to close the day with huge losses, but again well off the overnight lows. Positively, there was no sense of panic in markets Friday, and overall it certainly could have been worse. Appropriately, the S&P 500 closed basically right where it was at the height of the Brexit fears from two weeks ago (June 16).

Your Need to Know

After spending the weekend reading Brexit analysis and having some time to digest last Friday’s news, we think the most important takeaway (despite pockets of hysteria) is this: In its current state, Brexit is another (albeit large) headwind on stocks that simply reinforces our caution on US and global equities. Brexit is not yet a bearish game changer, or a contagion event like Lehman or Bear Stearns unless we see more significantly negative price action in European banks. As a result, we do not view this event as a reason to materially de-risk and dump good stocks to raise cash. Going forward, the SX7P, the Stoxx European Bank Index, is now our barometer of Brexit contagion, and it now sits atop our quote screens.

From a market outlook standpoint, we view the events as dealing a big (if not potentially fatal) blow to the idea that stocks are about to break out in 2016. Political ramifications aside, the surging US dollar (assuming it continues) and resulting macro uncertainty will hurt earnings, and put the $120 2016 EPS and $130 2017 EPS expectations in doubt. Additionally, I certainly am a lot less comfortable paying 17X earnings in this environment, so again that deals a tremendous blow to the bulls who are counting on a 17X $130 number to send stocks higher.

Additionally, the macro uncertainty created by this event reduces the chances of a broad economic acceleration that can become a “rising tide” for stocks.

Tactically, other than the obvious change on the outlook for European equities, domestically the news didn’t alter our outlook that much. We remain cautious broadly (and are more so), and from an allocation standpoint continue to prefer defensive sectors and cash-flow rich equities (XLP/FXG). Given still-rising inflation indices, VTIP (our short term TIPS ETF) remains one of our preferred names in the fixed income market, although high grade corporates (LQD) will now have a new tailwind as money flows into Treasuries and trickles out the risk curve as a result. Generally, we would not abandon US equities but we would make sure we’re in lower beta, domestically focused, high-quality names that have good dividend payout ratios.

Finally, you will hear a lot this week about the “political contagion” of this event (i.e. whether this is the start of the breakup of the EU). No one has any idea and won’t for years, and the simple fact is that political contagion doesn’t cause market pullbacks—financial contagion causes market pullbacks. So, we will be ignoring the political hypotheticals over the coming weeks and stay focused on SX7P. That will tell us when political contagion becomes financial contagion.

Economic Data (What You Need to Know in Plain English)

Need to Know Econ from Last Week

Obviously the Brexit decision Friday throws a varying degree of uncertainty across every major economy, but putting Brexit aside for a moment, the economic data last week was actually legitimately encouraging (which makes the Brexit even more disheartening because these green shoots have likely been trampled on by uncertainty). From a Fed standpoint, expectations of a rate hike this year collapsed in the wake of Brexit, as now December has just a 21% probability of a hike.

Starting with Fed expectations, Yellen gave her Humphrey-Hawkins speech last week but her comments are obviously outdated at this point. Post Brexit, it’s now universally expected that the Fed will not hike rates until December, and even the odds of a hike then are hitting new lows. And, in a testament to just how jarring this is, there’s now a greater probability of the Fed cutting rates at the July, September or November meetings than there is of them hiking rates.

Looking at the economic data last week, June global manufacturing PMIs were better than expected in the EMU, Germany and the US (and importantly all moved higher above the 50 threshold that differentiates expansion from contraction).

Specifically, in the US, the manufacturing PMI rose to a three-month high at 51.4, bouncing nicely from May’s seven-year low. Details of the report were generally better, as New Orders and shipments rose, confirming the strength in the headline.

The real positive surprise in the report was exports, which jumped 2.8 to 52.5 to a two-plus-year high. That was a potential sign that finally the weaker US dollar and uptick in global growth was finally starting to produce some benefit for US manufacturing and exporters, although following Friday’s Brexit result and subsequent dollar rally, any boost in exports is likely to be fleeting, which is an economic disappointment.

The one disappointing report was Durable Goods, which missed estimates on the headline (-2.2% vs. (E: 0.7%) and on the more important New Orders for Non-Defense Capital Goods Ex-Aircraft (-0.7% vs. (E) 0.0%). Bottom line, business spending/investment (for which Durable Goods is a proxy) has been weak all year and it will remain so (if you were running a business, would you be making large purchases with all this political uncertainty looming?). Given Brexit, we expect that number to get worse in the coming months.

Important Economic Data This Week

Unfortunately, the Brexit outcome to a point negates a lot of the data we are going to get in June, because all anyone cares about now is gauging the damage done to the global economy from Brexit uncertainty, and unfortunately we won’t have even a preliminary idea on that until mid-August (when we get July data).

But regardless of the Brexit influence, there are still some important numbers to watch this week, starting with the global June manufacturing PMIs (out Thursday night and Friday morning).

The most important number here will be from China, as we no longer get flash PMIs from that country. Bottom line, Chinese growth is widely assumed as stable following the numbers from May, and I’ll tell you what the market does not need right now is a downward surprise in these manufacturing PMIs. That will raise concerns about global growth and whether the yuan will get devalued again (both potential negatives).

The manufacturing PMIs from Europe are largely useless because they will be pre-Brexit vote (unless the research firm Markit can do some sort of additional questionnaire). So, while they likely will be decent numbers and show continued slow expansion in the European economy, that now comes with a grain of salt. Looking at the US numbers (also out Friday) we should see continued slow improvement, but again with the surging dollar and new uncertainty, even that number will be largely disregarded.

The next most important number out this week will be the Core PCE Price Index in the Personal Income and Outlays report. That’s the Fed’s preferred measure of inflation, and one of the few corners of the economy that Brexit won’t influence is inflation—so this will be a valid number this week. So, if the Core PCE Price Index surprises to the upside and further confirms slowly rising inflation, you will start to hear “stagflation” a lot more, considering the Brexit headwind. While the Chinese data will get the headlines, this inflation metric is almost as important from an economic/market standpoint.


Commodities, Currencies & Bonds



Commodities dropped nearly 2% thanks almost entirely to the risk-off move following the Brexit vote Friday. But even looking beyond that macro event, outside of gold fundamentals, most industrial commodities have been quietly getting more bearish, and that remained the case this week. Going forward, the Brexit result is dollar positive, and between that and potentially shifting oil fundamentals the commodity complex ex-gold will face stiff headwinds.

Starting in Commodities, investor sentiment became euphoric into the Wall Street close last Thursday as everyone assumed a Bremain vote would prevail, and no one wanted to miss out on the subsequent risk-on rally. The only problem was, according to the data, the Thursday moves were completely unwarranted as just about every indication was pointing to a very tight race. After a volatile week, the commodity ETF, DBC, closed down 1.70%. As a result, risk-on positions in the commodity space became extremely overcrowded while there was barely a bid to be found in safe-haven assets. Once the results largely favoring a Brexit began to roll in, there was a violent reversal in that imbalanced positioning as oil fell as much as 7% in electronic trading Thursday night while gold surged over 8% during the same time frame. When it was all said and done, WTI closed the week down 2.64% while gold ended the week up 1.34%.

The unknowns surrounding the Brexit and chances that other countries may follow suit will be seen as a substantial headwind for risk assets including oil in the near term while demand for safe-haven assets such as gold will remain elevated amid the uncertainty. Additionally, gold made substantial progress on the charts, and it is likely that a new uptrend is underway with a measured move carrying gold up towards the $1,400 level in coming weeks.

Looking ahead to this week, there will surely be some digestion of last week’s whipsaw moves, but don’t expect price action to calm down too much as there will be a lot of repositioning across asset classes. The two most well-defined trends in commodities right now are the bullish shift in gold technicals and the bearish divergence between crude oil futures and the term structure. As things settle, we will look for further confirmation of these trends.

US Dollar


The Dollar Index surged nearly 2% largely on Friday thanks to the surprise Brexit result. Going forward, while the Fed may no longer hike rates in 2016, the pound and euro will be under consistent pressure and a new uptrend in the dollar has likely begun solely because of other currency weakness, although the rally in the dollar should be more gradual going forward.

Looking at the Currency Markets, positioning in the space was completely over crowded in anticipation of a Bremain vote, and as a result we obviously saw massive, historic moves in the forex markets Thursday night and Friday. When the volatility settled, the Dollar Index gained 1.47% on the week.

The pound fell the most on record for a single session, losing 4.59% Friday to settle at the lowest level since 1985. Near term, there is a lot of speculation on whether the Bank of England will ease policy in the wake of Brexit, so short term the pound may see further weakness. Longer term, from a fundamental standpoint, unless Brexit does material damage to Great Britain’s economy, the pound is likely undervalued in the mid-to-low 1.30s. As volatility begins to ease, a march back towards the mid-1.40s isn’t out of the question, especially if the BOE doesn’t ease further (or does so only marginally).

The yen was the other big mover on Friday as the sharp reversal in money flows from risk-on to risk-off spurred a knee-jerk 7.5% surge in the Japanese currency. The USD/JPY pair fell to an intraday low of 98.99, a level not seen since late 2013. Brexit or not, we have continued to beat the drum on the strong uptrend in the yen, and likely continuation of that move (Friday the yen crashed into our first support level between 100 and 102). For now, we will look to that area for support both technically and fundamentally, as Japanese officials have mentioned intervening near the 100 mark. Like most other currencies, expect some sideways price action in the near term with new resistance above at 104.

Turning to the dollar, the fundamental outlook is mixed in the wake of the Brexit vote, as the global market uncertainty reduced the chances of July rate hike to effectively 0%—bearish from a speculation standpoint. But, the bearish effect on the pound and euro from the European uncertainty is a near-term supporting influence for the greenback. Bottom line, the Dollar Index remains largely range bound between support in the low-90s and resistance in the mid-90s, and we expect that to continue in the near term amid the broad market digestion.



Treasuries exploded higher, and at this point it’s likely only a matter of time until the multi-year lows in yields in both the 10 and 30 year (lows from mid-2012) are broken. With the Brexit result casting a shadow of political uncertainty on Europe, demand for Treasuries will only get stronger due to demand from foreign buyers, and thanks to a more dovish Fed.

Turning to Bonds, Treasuries surged exactly as expected given the vote to leave. Yields hit fresh multi-year lows on Friday with the 10 year falling 16 basis points to 1.579% while the yield on the long bond fell 13 basis points to 2.430%.

Bottom line for bonds, this is obviously a very risk-off development, and the demand for safe-have government debt can be expected to remain elevated in the near term. Additionally, the uncertain effects of the Brexit on the already-stumbling global economy just adds fuel to the bullish Treasury fire.

Special Reports and Editorials

Brexit Post-Analysis

For Great Britain, a messy two-year “divorce” will begin from the EU, and a massive cloud of uncertainty will descend on that economy.

Whether the Brexit will be good or bad for Britain or the EU economy remains unclear (and will stay that way for years). But, the bottom line is that businesses and people will become substantially more risk averse amidst all this uncertainty, and that sapping of risk taking and capital expenditure (which is the key to economic acceleration) will be a headwind on economic growth in the region.

Also, get ready for more “exits.” Scotland actually voted to remain in the EU, so there will almost certainly be another Scottish referendum, and it’s very possible the Brexit outcome will result in the dissolution of Great Britain over the coming years. For Europe, talk will start on a new kind of “Grexit,” only this time it will be a “German exit.”

I’m not saying it’s likely, but the Brexit decision will embolden all the nationalist parties across Europe, and the EU as a whole will now be under attack at the polls over the coming year.

This Is Not a Bearish Game Changer for the US Yet, but is a New, Material Headwind that Makes Us Cautious but Not Outright Bearish. I am not wholesale reducing US equity exposure on the Brexit news because the direction of US stocks is more tied to the economy and valuation than Europe over the medium and longer term. However, there will be real-world impacts for the US: Earnings for the commodity producers, banks and multi-national exporters will all get hit and that further calls into question the $130 2017 EPS figure (which creates a valuation problem). Economically, obviously the recent uptick in manufacturing activity is at risk, and the broad uncertainty isn’t helpful given we need to see further economic acceleration to power stocks higher.

Market Winners and Losers. Losers are exporters, banks/financials and commodity-sensitive companies. Winners are Treasuries (which will continue to surge as they and Japanese Government bonds now are the safe-have destination of choice), and domestically focused US stocks sectors.

If I were to buy anything here, it would probably be US investment grade corporate bonds (if we see a dip), because US balance sheets remain incredibly well capitalized. LQD is one of the easiest ways to do this.

Do I Buy the Dip in US Stocks? I don’t think so, at least not here. Stocks aren’t cheap enough to buy the dip given the uncertainty. At current levels the S&P 500 is trading just under 16X $120 EPS, and that’s not cheap enough for me. I would look to potentially add some light longs between 1,800-1,850, so more towards 15X $120 EPS with 1,725 still representing compelling valuation (that’s 15X a $115 S&P 500 EPS).

What Makes This a Bearish Game Changer? You will hear the term “Lehman moment” a lot over the coming days, but that’s a bit aggressive (at least so far). As always, contagion is the risk here and the first signs of that will appear in British and European banks, so we will be watching the price action in the SX7P. If that continues in freefall well into this week, that’s a major warning sign.

Wildcard to Watch—The Yuan. If the dollar continues to surge, then we will have to worry about Chinese officials devaluing the yuan in retaliation. That is one wild card to watch over the coming weeks if we see the dollar move higher towards par.

Bottom line, the Brexit is not a bearish game changer for US stocks yet, but clearly the surging dollar and massive uncertainty will be a renewed headwind. We remain cautious on stocks here but would not wholesale dump equities at this point. Despite the hysteria, the outlook for stocks over the next year really hasn’t changed that much, as US economic growth remains the determining factor in whether stocks move materially higher from current levels.

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