A Post-Brexit Bounce Back

Global stock markets closed a strong holiday-shortened week with the the Dow Jones up 2.48%, the S&P 500 rising 2.58% and the NASDAQ gaining 2.79%. The MCSI Emerging Markets Index ended the week 2.32% higher.

Big gainers in your Alpha Investor Letter portfolio included the Market Vectors Biotech ETF (BBH), which climbed 4.00%; PureFunds ISE Cyber Security ETF (HACK), which rose 3.63%; and the Guggenheim Spin-Off (CSD), which moved 3.53% higher.

Both the Guggenheim S&P 500 Equal Weight ETF (RSP) and the Vanguard Russell 2000 Index ETF (VTWO) rose above their respective 50-day moving average and are back to a BUY.

Global stock markets stabilized remarkably quickly in the week following Brexit, as the S&P 500 chalked up its strongest week of the year through last Friday. While British banking and housing shares, as well as the British pound sterling, continued to suffer, the rest of the world’s stock markets managed to find their feet surprisingly quickly.

The S&P 500’s recovery was remarkably sharp and broad, dropping several percentage points over a short period, and then rallying just as strongly and quickly.

Historically, when such behavior occurs near a high, the market has eked out further gains in the medium term.

The strangest aspect of the rally is that both bonds and gold are rallying, too. It is extremely unusual to see these markets rally so hard together, as there have been only a handful of times in 40 years that the S&P 500 has been near a 52-week high while bond yields were at a low and gold near a high.

All of this suggests that there is a sharp division in the minds of major market players, with one camp shouting ”all clear” and the other still worried about impending financial Armageddon. Jeremy Siegel, of the Wharton School at the University of Pennsylvania, is in the bullish camp, suggesting the S&P 500 could rally 15% between now and the end of the year. George Soros is in the opposite camp, suggesting that Brexit signals the coming of another 2007-2008 style breakdown in the markets.

I continue to believe that while Brexit is causing turmoil in the United Kingdom’s economy, as well as the political classes, its direct impact on U.S. stocks is limited.

Even if Jeremy Siegel is right and stocks do rally later this year, I don’t expect that to happen in the dog days of summer. This is the time of weak seasonality, and betting that stocks will tread water as they have pretty much all this year is the likeliest outcome.

Portfolio Update

Berkshire Hathaway (BRK-B) gained 1.39% over the last four trading days. Berkshire Hathaway disclosed in a first-quarter filing that it owned 10% of Wells Fargo — a seemingly good move as the bank was executing a share buyback at the time. Berkshire just recently filed an application seeking Federal Reserve approval to purchase more than 10% of the bank, moving above the 10% threshold. Interestingly, Berkshire declared in the application that it would not merge with the bank and was not moving towards making a specific transaction of any kind. Perhaps what is most interesting is the immediate post-Brexit timing. BRK-B is a HOLD.

Markel Corp. (MKL) gained 1.31%. A.M. Best, an insurance rating agency, affirmed a financial strength rating (FSR) of “A” (Excellent) and the issuer credit ratings (ICR) of “a+” for the members of the Markel North America Insurance Group last week. A.M. Best then went on to affirm positive ratings for a slew of other Markel operating companies, even upgrading the ratings on a few, and setting a “Stable” outlook for all. MKL has been trading above and below its 50-day moving average (MA) over the past days, but is a HOLD.

Google Inc. (GOOGL) rose 1.97% over the previous holiday-shortened trading week. Google will report earnings on July 28 after markets close. Analysts’ consensus estimates put earnings per share (EPS) at $6.47 on revenue of $20.76 billion. GOOGL is a HOLD.

The Walt Disney Company (DIS) rose 1.68%. DIS will pay a dividend of $0.71 on July 28. The dividend’s Declare Date was June 29 with an Ex-Dividend Date of July 7 (tomorrow). DIS is a HOLD.

Sincerely,