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"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 winners 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 team's 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.
 
Best of luck out there,
KM

LONG ETFS

EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.  

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/29. Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.

GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.
 

SHORT ETFS

EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   

SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.

EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.