Market Strategy: The Importance of Proactive Planning

Includes: QQQ, XLE, XLV
by: Keith McCullough

“It's not the will to win, but the will to prepare to win that makes the difference.
-Bear Bryant

Paul William “Bear” Bryant was one of the best American college football coaches of all time. While it’s almost a household phrase in any winner's thought process today, he’s the author of this incredibly simple game plan as well: “Don’t give up at halftime. Concentrate on winning the second half.” Today is day 1 of the second half of the 2009 investment season. No matter where you go this morning, here we are.

Many people in this business spend the majority of their time reacting. Running their portfolio or their business is a constant fire drill. From Bush to Obama, Washington takes the latest cake in being the poster child of running a country this way. That’s not risk management. It’s what losing teams do. Bryant’s “long term” investment model (25 years as Alabama’s coach winning 6 National Championships and 13 Conference Championships), is much more of an American leadership template that I can buy into.

While being proactively prepared may sound redundant, it’s as simple as simple does. It takes discipline, focus, and objectivity. Rinse and repeat.

The Chinese government continues to impress with their proactive plan to maintain economic growth while stymieing inflation. This morning we are waking up to the 4th consecutive monthly acceleration in Chinese Producer Manufacturing (PMI), and the Chinese stock market hitting yet another year-to-date high as a result.

The Shanghai Stock Exchange Index’s close above the 3000 line will undoubtedly attract the bubble watching flies. I took the ball right up the middle on Barron’s Alan Abelson pretty hard a few months back for getting negative on the Chinese growth story. He has been predictably quiet on the topic ever since. If we can get him and his editor to slap a China Bubble on the front page of Barron’s in the coming weeks this will almost assure us of seeing higher-highs in Chinese stocks from here.

As the Chinese sell US Treasuries and leverage their newfound global economic power to diversify their risk, plenty a pundit seems readily available for a CNBC interview to tell you why the US Dollar won’t be affected. Rather than depending on hope based rhetoric, we suggest you continue to keep your eyes on the field that’s in front of you. The rear view club’s track record of accurately predicting tail risk is what it is – it’s on the loser’s side of this increasingly interconnected game of global macro investing.

At the 2009 halftime, the stock market score is as follows: China +65% vs. USA +2%. If you’re more of a “long of” liquidity and “short of” financial leverage type of investor, you’re using the Nasdaq’s +16% 1st half score for the US instead, and I have no qualms with that accounting. It’s marked-to-market, and you’ve been winning with that strategy.

How are the Chinese getting this done? I think their proactive plan has been simply stated – they want to be long 3 things:

1. Liquidity
2. Safety
3. Returns

As you proactively plan for today, tomorrow, and the quarter ahead, I think you should look at every position in your portfolio and ask yourself if they subscribe to this simple investment plan. And when you get to #3, I mean unlevered returns – not the kind that my ex-colleagues in Private Equity Inc. are going to have to deal with explaining away post their field goal try with Great Depression fear mongering. In an investment landscape where long term cost of capital is going to continue to increase, you do not want to be long financial leverage.

We want to be long the 3 things that China’s central banking head, Zhou, outlined on Sunday night. We want to be long the economic leverage associated with accelerating Chinese demand. We want to be long the operating leverage embedded in a great management team’s cost structure.

We do not want to be “long of” financial leverage.

On the US side of our Asset Allocation Model we continue to express these macro views by being long QQQQ (Nasdaq), XLV (Healthcare), and XLE (Energy).

Immediate term TRADE support for the Nasdaq is 1.5% lower than the 1st half of her 2009 close, so you do have a larger margin of safety there versus being choke full of financial leverage in an index like the Dow Jones. In sharp contrast to the liquidity laden Nasdaq, the Dow remains one of the worst performing major country indices in the world for 2009. And for good reason.

Your will to “prepare to win”, will undoubtedly decide your team’s success in the next 6-months. Stay in your crouch and keep those chin straps tight. This will be a full contact affair.