Last night’s vote for Great Britain to exit the EU was a massive shot to the bow of the European establishment. While polls had been even, the betting odds were basically 8-1 that the country would stay in the EU, so markets are quite shocked at the result. In overnight trading, just about every asset in the world saw some of the biggest one-day moves in history. This includes the British Pound, which traded to levels not seen since 1985. Friday’s trading in the aftermath of this vote is going to be one of those crazy days that happen every 4 or 5 years because it really caught the market by surprised.

With that said, the long-term impact on stocks that we own should be quite limited.

We have purposely avoided UK stocks and have very little exposure to Europe as a whole.

I believe this selloff will actually create some pretty good opportunities on that front, which we can use for long-term investment purposes.

 

Stress Tests yield great news for the banks

Yesterday we received great news on the U.S. banks with the results of the Stress Tests done by the Fed. After assuming one the of the greatest recessions and stock market crashes one can imagine, the banks would still have ample capital and be in a strong position.

They actually would still have more capital than they had going into the Financial Crisis, which really is a reflection that these companies are safer than they have ever been.

 

Puerto Rico and Brexit

We’ve seen good progress on Puerto Rico for our big positions to the bond insurance companies. They have no real exposure to the Brexit in my opinion. There is no doubt volatility will spike and stocks across the globe have sold off dramatically with a ferocity not seen for quite a few years.

Usually when we get this type of a shock, the pain lasts a few days and then there is a sharp recovery.

Keep in mind that most of the actual impact of the Brexit wouldn’t be felt for many years. In days like this, my advice is really focus on other things.

When we look at this a few months from now, it likely will just be one of the many significant short-term events, which are an inevitability in financial markets, but not something that will be of lasting impact to the long-term performance of your investments.

 

Stay positive, the fundamentals of our companies are very strong

Remember the “flash crash” and all of the those crises that seemed so big at the time and now seem quite moderate as the months and years have gone by. Even after the 1987 Black Monday stock crash, markets recovered within a few months and went on to new highs. The worst thing that one can ever do is panic or react emotionally. The fundamentals of our companies are very strong. We also have puts and calls working for us, which will benefit as time expires, bringing valuable income and reducing risk. You won’t see the full benefit on a day like today, but by mid-January volatility and time go to zero and these options will provide valuable income upon expiration.

We will get through this short-term drama and see much brighter days in the markets. We’ve been through many World Wars, major recessions, terrorism, etc. and markets have gone on to greater highs.

We have an incredible portfolio of undervalued stocks and after the CCAR results, we should see very sizeable dividend and stock buyback increases over the next few weeks for most of our large positions.

There is a lot to be excited about as fundamentals are good. With that said, history was made last night and this will be one of the more chaotic days for financial markets in a very long time. As always, we will get through and it will maintain our deep value focus to minimize permanent losses of capital and to maximize long-term profits.