Alexander Alternative Bet Right On Brexit
Brexit No Nightmare for Alexander Alternative Capital
MIAMI (June 29, 2016) ---Call it a gut feeling. But the more British pollsters and bookies predicted last week that United Kingdom voters would choose remain in the European Union, the more the prospect nagged at us that the vote would be to leave.
So at Alexander Alternative Capital, we went with SPX puts, VIX options and sold calls on long positions to generate funds to buy puts.
In a Bloomberg phone interview late last Friday, I noted that we started selling S&P 500 calls to fund buying of puts this year while grabbing up iPath S&P 500 VIX Short-Term Futures ETN to protect against losses that it predicted would swell to 10 percent.
My quote to the interviewer late Friday in New York: “I did not think this would have worked yesterday at 3 p.m. I felt stupid and questioned myself. So while everyone had a great day, I lost 23 bps. I thought that the bet was a loss of premium until I settled in to watch some news tonight. Tomorrow we will make money.”
And so we did.
Overall, the trade was asymmetrical because the probability for “Leave” was much greater than the financial markets priced in.
Since the vote, the markets have shed $3 trillion in value worldwide.
The case for a recession at year’s end or the start of 2017 couldn’t be stronger for the United Kingdom; the risk of political and economic contagion is also growing on the European Continent and in the U.S.
Even before Brexit, the International Monetary Fund downgraded its forecast for the U.S. economy this year. In an annual assessment of the U.S. economy released prior to the UK divorce vote, the IMF predicted 2.2 percent growth this year, down from 2.4 per cent last year. In April, the Fund was predicting a 2.4 per cent growth it forecast for 2016. Meanwhile, the strong dollar is hurting American exporters.
Politically, a fractured British leadership scene is betraying a rudderless ship: The Conservative Prime Minister David Cameron announced he would resign in the fall, and the Labour Party cabinet revolted against leader Jeremy Corbyn as nearly a dozen “shadow” ministers resigned.
In his exit speech before Parliament this week, Cameron vowed the UK would remain close to Europe in spirit and deed if not in a formal relationship. Unnerved EU ministers, however, are looking for a fast-track exit, which means a minimum of two years under Article 50 of the EU treaty for a negotiated departure between Britain and the remaining 27 members of the bloc. Brexit advocates are trying to slow the process, looking for a favorable deal that would yield financial benefits for the UK. But they’re not getting many takers on the continent.
One sure bet is that London’s status as a center of finance looks to diminish rapidly at the cost of thousands of jobs being transferred to the continent. And here’s a key question: What other EU member or members will be next to leave as immigration and security issues bring more pressures on individual governments?
While equities markets are showing some relief to the upside, we believe our hedges will hold up. We’re rotating in EURO long/short pound as the pair will work better over the longer term.
As events unfold, we can’t help but agree with a post-vote blog post written by David Beckworth, a scholar at George Mason University in Virginia.
“Brexit is the biggest global monetary shock since 2008,” he wrote. “This could be the tipping point that turns the existing slowdown of 2016 into a global recession.”
Natural Gas Storage Injections in 2016 Ahead of 2012 Pace
According to the U.S. Energy Information Administration, working gas stocks topped 3,000 billion cubic feet (Bcf) during the first week of June. The move came earlier in the refill season of April 1-October 31 than ever before. “The last time stocks reached this level in June was in2012.” the EIA said.
The agency notes that natural gas production, consumption and exports are considerably higher now than four years ago.
Demand is still “robust” during the current refill season.
“Total natural gas consumption during this period has exceeded both year-ago and 2012 levels, a trend driven by growth in power-sector consumption,” the agency said. “At 26 billion cubic feet per day (Bcf/d), power burn is at a record high for this time of year, 10% greater than year-ago levels and 5% above the level reported in 2012. Growth in exports has also contributed to increases in natural gas demand. Exports to Mexico have more than doubled since 2012 to 4 Bcf/d, and liquefied natural gas (LNG) exports are up to 0.5 Bcf/d, from being negligible in 2012.”
Supply remains strong despite a slowdown in production.
Our Watch List for the remainder of the week:
Today:
-- The European Union conducts its first full-blown meeting after the Brexit vote – and without the British.
-- The International Swaps and Derivatives Association (ISDA) conducts a webinar for members to discuss Brexit implications for counterparties.
-- Reports on U.S. Consumer spending and pending home sales.
Thursday:
-- Report on jobless claims, EIA’s natural gas numbers.
Friday:
-- Reports on car sales, construction spending, manufacturing indexes.
--- Michael Corcelli