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As Brussels Overreaches and Brits Wave Goodbye, What to Buy Now

- By Joseph L Shaefer

In a number of discussions with clients and colleagues, I stated my belief that Brexit would carry the day and, indeed, if I were a Brit, that's how I would have voted.

We need to remember that the primary raison d'etre for the formation of what we today call the EU was not based on economic issues but rather security issues. After two world wars tore apart the infrastructure of European nations and left permanent scars upon its populace, those still alive swore they must never again allow their bickering to reach the point of open conflict.

The Brexit and Grexit crises du jour, however, are mostly discussed as being solely about economics and trade, which demonstrates that the original reason for the organization doesn't even register today. MetLife's (MET) CEO complained on Friday, "From a strictly economic perspective, it's difficult to see who benefits from this outcome."

He's missing the point. It's about culture. It's about independence. It's about history. It's about custom, and it's about a sense of person, purpose and place as well as the economy.


The western European nations, ex the U.K., no longer have the will or the wherewithal to conduct aggression against each other. Heck, they won't even pony up, under a U.S. umbrella, to resist a resurgent czarist Russia. Many already want sanctions removed on Russia because, after all, the bald-faced invasion of Ukraine was so yesterday. Lenin may yet be proven right: "The capitalists will sell us the rope with which we will hang them." And it seems they'll jockey for position to be able to do so.

The problem, as I see it, is that all the bureaucrats hired to accomplish the minor miracle of at least creating an "economic" union that for 50 years past has been somewhat beneficial, now have to do something to justify their existence. Enter Parkinson's Law and the rise of the self-licking ice cream cones.

I was in Hungary last month fixing a pair of chipped and battered front teeth and asked for a whitening while I was there. Dr. Henrietta, my dentist of a couple years now, informed me that they were no longer allowed to whiten teeth because Brussels has decided hydrogen peroxide is too dangerous. "The fines alone would force us to close our clinic," she said. What high economic, social, medical or military problem was in search of a solution so Draconian that bureaucrats halfway across the continent found tooth-whitening of such concern of which to keep tabs on and make regular inspections?

How deeply will this "federal" power be allowed to penetrate into each nation's business?

That is why I believed Brexit would succeed. The Brits are a feisty lot, as are the Scots and the Irish. I was pretty sure the backbone of Britain had endured enough EU meddling. For instance: since the EU has classified wood as "carbon neutral" (huh?) and coal as the work of the devil, the U.S. now sells wood pellets to the U.K. for power generation - about 3 million tons a year - at much greater expense to the ultimate consumer.

If a British cheesemaker wants to sell cheese in France, it doesn't mean Gerald calls up Henri and asks if he'd like some of the British Stilton for his fromagerie in Lyon. Oh, no, all this is determined at the most faraway level from the two cheese sellers.

What's next, the average Briton wonders? Driving on the right side of the road? Labeling cheese to the U.S. only in kilograms? Ordering 500 milliliters of Newcastle Brown Ale instead of ordering a pint?

I've seen many eloquently stated cases made for trouble down the road for the United Kingdom of England and Wales. (I guess that would be the new name if Northern Ireland and Ireland merge and Scotland becomes its own nation with an economy dependent upon sheep, a pitifully small amount of oil that might be transferred, and whisky - which, as a courtesy to my ancestors I would do my part to keep flowing and profitable.) But the bottom line is that the U.K. gives more to the EU than it gets in return.

The bakers and cheese sellers and the rest of the working class and entrepreneurial class in the United Kingdom will thrive ex the EU. They will negotiate new and better trading treaties with the EU, their other current trading partners and, most assuredly, new trading partners. The U.K. without Spanish banks and Greek socialism? Better. The EU without British banking, trading and common sense? We'll see.

(Maybe there's a lesson here for the U.S. about faraway bureaucracies deciding what is best for member states as well.)

I see two immediate opportunities here, one short term and one slightly longer.

As long as there is short-term turmoil, the euro may be the most vulnerable currency out there. This is consistent with the belief that Britain's decision to exit the EU will be good for Britain, not so good for the EU.

The ProShares UltraShort Euro ETF (EUO) provides a simple way to play this possibility. I have already initiated a position in EUO. If you perform your own due diligence and decide it is worth considering, I suggest you place a tight trailing stop on the position. I am using a 5% stop. Currencies can be volatile and if there is a "relief rally" week the euro will likely rally with it. I consider this a trade, though if it looks as if the euro will remain weak, I will consider widening my trailing stop as the price of EUO advances.

The longer-term investment is to buy Ireland. I have done so via a closed-end fund selling at a discount. The New Ireland Fund (IRL) has fallen steadily as the Brexit-Bremain debate wore on. It fell an additional nearly 10% on Friday. (Such clever names to shorthand these big issues... Brexit, Bremain, Grexit. You read it here first: when Spain makes noises about leaving, to save pundits the mental anguish, I've already coined the term in advance: "Spanxit!")

Ireland is still a member of the EU. Ireland still uses the euro. Ireland and England will continue to be neighbors, I would predict in the same way that Sweden, an EU member, and Norway, not in the EU, are neighbors that share a somewhat common heritage and similar policies.

The New Ireland Fund is heavily concentrated. Its two biggest positions, at roughly 21% each, are NYSE ADR-listed CRH PLC (CRH) and discount airline Ryanair (RYAOF.) CRH is the second-biggest building materials company on the planet. In 2015, 37% of the company's sales and 27% of EBITDA were derived from European operations. They still will be. They are also the No. 1 building materials company in North America and the leading supplier of product for highway repair and maintenance in the U.S. with operations in all 50 U.S. states and nine Canadian provinces. They still will be. Brexit will have some effect, but basically the selloff in CRH is a knee-jerk reaction. This company is global, with global revenues and global earnings, that has been sold in fear but fear not grounded in reality.

Ryanair, the short haul passenger airline based in Ireland, offers some 1600 flights per day all over Europe. Could they be harmed if Britain follows through and exits the EU? I doubt it. It's not as if the British will shut down Ryanair's access to Stansted outside London. (That's waaayy outside, but that's Ryanair for you. Click here for a delightful spoof of Ryanair's "low fares." Yet more and more people keep flying it...) My guess is that companies like Ryanair (and CRH) are already discussing continuing business relationships with the U.K. Owning 315 Boeing 737s (and six more leased) Ryanair is basically a copy of Southwest Airlines (LUV) in terms of operating efficiency, though more like U.S. cable companies in terms of customer service.

Other primary holdings of New Ireland Fund include Kingspan Group PLC (KGSPF) also in the building materials business but with a energy-efficient products and renewable energy solutions twist; Kerry Group PLC (KRYAY) the consumer food and beverage company; and Smurfit Kappa Group PLC (SMFTF) the big containerboard and other paper-based packaging products company that sells its products all over Europe and the Americas.

IRL sells at a 12% discount to NAV and has traditionally paid a 10% dividend that comes solely from capital gains and dividend income (not from return of capital.) A caveat here: If the stock prices of their holdings stay at these levels or decline further, I imagine we could see a temporary disruption in the flow of capital gains distributions in short term.

The bottom line? "This, too, shall pass." And when it does I believe the U.K. will emerge stronger and more confident. The same is not true of the EU, hence my purchase of EUO. And I believe the ancillary damage to some firms, inaccurately tarred with the same brush as all British firms, is overdone, hence my purchase of IRL.

Disclaimer: I am a registered investment adviser. I write articles as a way of reaching a wider audience of intelligent investors. Since I cannot know the personal financial situation of every reader, the information contained herein represents the opinions of the staff of Stanford Wealth Management and should not be construed as "personalized" investment advice. We also publish the monthly investment letter Investors Edge (R) in which we suggest purchases and sales for our readers' due diligence, and from which some of my articles are published after subscribers have seen them for at least one week.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund one year only to watch it plummet the following year.

I encourage you to do your own due diligence on issues I discuss to see if they might be of value in your own investing. I take my responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities my clients or family are investing in will always be profitable. I do my best to get it right, and often buy the investments I write about as a show of my faith in their quality, but I could be wrong, hence my full disclosure as to whether we or our clients own or are buying the investments we write about.

Disclosure: I am/we are long EUO, IRL.

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This article first appeared on GuruFocus.