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The Whaley Report: Never worried, hurried, or desperate

Trump’s win and the reaction of financial markets around the world is providing us with a real-time opportunity to evaluate the critical difference between making decisions using a well-articulated investment process versus simply relying on charts, headlines and gurus.

The phrase “never worried, hurried, or desperate” succinctly describes the mindset you should have when you make any trading decision. This is especially true during market environments such as those we experienced last week. Using a time-tested, dynamic investing framework will ensure that you’re never worried, hurried, or desperate; it will allow you to sidestep danger and position yourself for opportunity.

The simple fact is that if you’re chasing charts, headlines, or Wall Street knuckleheads, you’re eventually going to have to explain to your spouse how you turned your 401k into a 200K. There are a lot of people chasing charts and headlines, and it will be very tempting to join them. Do me a favor, and before you invest everything you own into infrastructure and healthcare stocks, read this commentary.

Blew Out My Flip-Flop

The problem with being a chart or headline chaser is that you have no context for the price action of a given market. Price alone cannot help you determine the most profitable and risk averse way to trade a market.

Enter Dennis Gartman.

I’ve wanted to write a commentary about this jackleg for months now because he represents everything that is wrong with Wall Street. This guy’s name ought to be Captain Flip Flop because he changes his bias on markets as often as the average person checks their Facebook.

You should absolutely have a process that allows you to change your mind as new information becomes available. But if your bias for a particular market changes every two hours, then you don’t have a process. Period.

Knowing Wall Street, I’m not surprised that Captain Flip Flop’s newsletter is available to advisors at all the major brokerage firms, or that he is constantly spewing his nonsense on CNBC. One example was back on January 26, when he was on CNBC saying, “I will never see $44 oil again in my lifetime.” Crude oil was trading at $30 a barrel at the time, and it hit $44 just 10 weeks later. The only way his forecast was going to be accurate was if he got hit by a bus during those weeks!

His brilliance pertaining to the election started on August 31 when he channeled his inner Nostradamus, writing, “The market is wise enough to know that Mr. Trump has no chance of becoming the next president and thus cannot and will not affect monetary and/or economic policy here in the U.S. or abroad.” Oops.

On Election Day he recommended people reduce short positions and increase their long exposure. Fast forward 24 hours, and in the wake of Trump’s victory he recommended, “positions on the long side have to be reduced into any strength that may develop; that we fear that the bull markets are indeed finished and that bear markets are now full [sic] engaged.”

Wait, it gets better!

The very next day he said, “We see no reason to try to discount our comments made here yesterday for they were truly and entirely wrong. Had we known that Mr. Trump was going to give the speech that he gave, we would have suggested buying equities instead, but we did not. The “game” had not yet changed by then; it has since. What do we know now? We know that “infrastructure” was the single most important word in Mr. Trump’s acceptance speech and that that shall guide our trading/investment philosophy going forward. We shall resurrect our familiar philosophy of wishing to own only “those things that if dropped on your foot shall hurt,” for if “Infrastructure” is to be the guiding principal of the Trump Administration then steel, cement, asphalt, bricks, mortar, coal, ball bearings, construction and drilling equipment shall be our focus. Not to think so, and not to act accordingly, shall be wrong.”

This is a guy with no process, but apparently he wants to be Biff Tannen and get a market almanac from 2020. Here’s a news flash, Dennis: if we knew about market-changing events before they happened, the “game” would be easy and even fewer people would listen to you.

But I’m glad he wishes to own “those things that if dropped on your foot shall hurt.” OK, Walt Whitman, I’ve got your ball bearings right here. This is the type of “market commentary” that shall get you repeatedly whipsawed and shall have your portfolio experience death by a thousand cuts.

3-G Says What?

I’m never worried, hurried, or desperate, no matter what’s occurring in financial markets. My 3-G framework is like the blanket you had when you were a kid that you could always rely on to make you feel better. Whenever financial markets are volatile and freaking out, I can always rely on my framework to help me make sense of the madness.

The reality is that neither Trump’s use of the word “infrastructure” nor his rhetoric about doubling U.S. growth and giving us the strongest economy in the world changes the current fundamental gravity for the U.S.

The fact that markets went from pricing in a U.S. recession to pricing in a full economic recovery in a matter of hours doesn’t change the fact that U.S. growth has been slowing for almost two years and continues to do so.

Even if Trump doubles U.S. growth, it won’t get us back to the 3.3% peak growth we experienced back in the first quarter of 2015. In fact, doubling U.S. growth only gets us back to the growth rate we enjoyed in the summer of 2015.

While the fundamental gravity hasn’t changed, it is undeniable that the quantitative and behavioral gravities have changed dramatically. That said, it’s too soon to tell whether these are knee jerk reactions that will quickly reverse or whether we are undergoing a transition shift to a new regime.

Before you follow everyone else loading up on industrial stocks and shorting U.S. Treasuries, let me remind you of the markets’ reaction to Brexit. Similar to last week’s election response, the quantitative and behavioral gravities of markets around the world changed overnight in response to the Brexit vote.

Specifically, gold and Treasuries ripped higher, while Eurozone stocks got trashed to their lowest levels since 2013. Fast forward two months, and Eurozone stocks were right back to their “pre-Brexit” highs. Gold and Treasuries hit their 2016 peaks in the week following Brexit and have been cascading lower ever since.

Investors who chased Eurozone stocks lower and bought up gold and Treasuries have put their investment portfolios in a wood chipper. I have a feeling that everyone who followed Gartman’s advice last week to plow billions into industrial stocks, wishing to own things that hurt when dropped on one’s foot, will meet a similar fate.

A case in point is the investors who tried to cash in on the rollback of Obamacare by buying up healthcare ETFs on Wednesday and Thursday. It took Trump less than 72 hours to go from repealing all of Obamacare to saying he was only going to repeal certain parts of it. Healthcare stocks were down 150 basis points on Friday. Lesson learned: chasing charts and headlines is not a process, it’s a sure path to the poor house.

Trump’s win has convinced everyone that the Fed will raise rates in December. I’ve said for months now that if the Fed raises rates into slowing U.S. growth, there will be a recession. Not even The Donald can stop economic gravity.

You don’t want to own industrial stocks during a U.S. recession, because it’s the worst-performing sector in such times. Given the current economic backdrop, investing in industrial stocks right now based on Trump’s rhetoric makes as much financial sense as buying state lotto scratchers.

That said, don’t underestimate the power that quantitative and behavioral gravities can have over the short-term direction of markets.

The worst thing you could do is immediately try to fade last week’s price action by shorting industrial stocks or buying up long-dated Treasuries. That, my friends, is a recipe for disaster, which will leave you poorer, in the fetal position, and sucking your thumb.

So, the $64,000 question is what should you do now?

Two of the hardest concepts for investors to embrace are that deciding to do nothing is, in fact, a decision, and that holding cash is an acceptable investment position. These two concepts are even more difficult to embrace when the fear of missing out is screaming at you, “Do something you idiot, do anything! The train is leaving the station and you aren’t on it!”

My 3-G framework is telling me to reduce position sizes, raise cash, wait, and watch. My advice is to not chase Captain Flip Flop and the parabolic price charts of everything that hurts when you drop it on your foot. If you want to be a successful investor, never make a trading decision when you are worried or hurried, or from a place of desperation. Right now, that means you raise cash and wait.

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Landon Whaley

Landon Whaley is the Founder and CEO of Whaley Capital Group. Mr. Whaley launched Whaley Capital Group in the aftermath of the 2008 Financial Crisis because he wanted to provide real value and a unique client experience in an otherwise highly commoditized industry. Whaley Capital Group delivers on this mission by following a rigorous investment strategy that is committed to a global macro-style of investing, while simultaneously providing a world-class, boutique-style client experience. You can contact Landon at: landon@whaleycapitalgroup.com