“It's easier to think outside the box if you don't draw one around yourself.”
One of the hardest things to accomplish as a person is mental flexibility when things go wrong! Mental flexibility means forgiving yourself for slips, while keeping the mental focus on positive progress – learn from your mistakes because you are going to make them. Wow, that’s deep for the early morning wake up call, but here we go anyway.
If you have some degree of mental flexibility, it’s unlikely that you will get overly bent out of shape when things go wrong. One of Keith’s favorite sayings is “when the facts change we will”, which is of course borrowed from Keynes. Having the mental flexibility to change is a very desirable trait, but it takes a strong discipline and a process to admit that you are wrong.
As an investor, without the flexibility to change, you put at risk your performance and the ability to recover from mistakes. As an analyst, the key questions to ask are: Am I able to see things from different perspectives? Can I fully appreciate the viewpoint of others that disagree with me? “I'm right and you're wrong" - is nothing more than an expression of intolerance and narrow-mindedness - that is a problem.
Having the mental flexibility to be open to new or different ideas allows one to adjust to a changing environment. Much of the stress we experience in life and in the market is due to the inability to accept change. Change is both inevitable and the very nature of life. Changing one's mind is not a sign of weakness, but of flexibility and growth. Flexibility also promotes mental and physical health because it frees us from stress, resentment, anger, and fear. To the flexible person, life is not about survival but about enjoyment.
I know there have been a number of times in my career when a stock was going against me, but I kept making excuses to justify my opinion. The facts just kept getting in the way!
Keith wrote yesterday “when I made the transition from being wrong on the top end of my Range Rover (954) to calling it for what it was – a confirmed breakout - I started giving you higher-lows of support and higher-highs of resistance. Now your daily risk management objective is to play the game that you see in front of you.” This is a process that some have criticized as too short-term, but certainly allows for mental flexibility!
Which leads us to the set up for today; the risk reward for the S&P 500 suggests that there is 1.5% downside and 1% upside. This is a trading range, with commensurate risk and reward. The levels of immediate term support/resistance for the three key indices are:
1. SPX = 971-996
2. COMP = 1
3. Dow = 9026-9238
I suspect the July rally has caught a number of people flat footed. I know where I sit; I have not found the mental flexibility to get bullish on my stocks, the restaurant sector. While I have certain names that I like and dislike, being out right bullish seems counter intuitive to the fundamentals. But the market seems to be telling me I need to be more flexible and look past next month’s comp number. I’m working on being more mentally flexible every day.
Function in disaster; finish in style
EWG – iShares Germany — We bought Germany on 7/28 on a pullback in the etf. Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last three months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy.
QQQQ – PowerShares NASDAQ 100 —With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don’t need as much financial leverage.
CYB – WisdomTree Dreyfus Chinese Yuan — The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.
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.
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.
UUP – U.S. Dollar Index – With a +1% move in the USD on 7/29 we shorted the greenback. This is how you earn a return on the socialization of the US Financial system’s risk. We believe that the US Dollar is a 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 US dollar.
XLI – SPDR Industrials – We don’t want to be long financial leverage, which is baked into Industrials.
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.
DIA – Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.
EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.
XLY – SPDR Consumer Discretionary – As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9 and again on 7/22.
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.