Financial markets by their very nature are always going to be volatile.  The key to understanding that volatility is to define the location, phase, and duration of the current cycle.  Comprehending the psychology of those responses is what defines a bull or bear.

My less-than optimistic viewpoint is defined purely by the data, not my hopes or expectations.  As an earnings-driven investor I begin my analyses with prevailing magnitude and duration of earnings acceleration patterns.  When working well, markets expand because of an increase in share price, or earnings.

In today’s climate, the correlation I seek is limited to very few sectors.

Upside down fundamentals.

Earnings are rising but in equities and sectors whose pricing power creates hardship for the rest of the economy.  It is clearly no secret that energy, basic materials, and agriculture (Consumer Non-Cyclicals) are performing well.  And although their shares are not performing well, pricing power is moving pharmaceuticals, utilities, technology, and infrastructure (Industrials).

So why all the negativity?

Firstly, I am not negative, I’m practical.  We had been in a bull market since late 2002, and if you missed it because the Tech-bear frightened you away, it is already gone.  Five years, that’s it.  Today, on the back side of the parabolic upswing, I see a lot of “stock-picking” but few strategists who are able to define an enduring bull leg without first allowing for a definitional pullback in excessively priced shares.  In other words, be patient the next bull leg is developing, but presently doing so “under the radar”.

The long view.

The market’s bigger problems emanate from fiscal and monetary policies which I deem to be very limited in scope and not creative enough.

Monetary policy, the sequential lowering of interest rates, has created enormous speculation and inflation in tangible assets.  By any measure, real estate speculators drove prices into prohibitively high ranges, causing what now has become a punitive cycle for owners and investors.  Similarly, energy, food, tuition and healthcare cost more and represent a bigger percentage of budget expenses than ever.

Banks need to reconstitute their lending practices and, in some cases, their management.  Excesses in greed and product-origination contributed to the last cycle’s misplaced and misguided expansion.  Today, financial shares are the worst performing group, and the least likely to turnaround first.

The emergence of strong sector leadership abroad also dilutes the success of fiscal policy at home.  It cannot be taken for granted that U.S. leadership in industrial and technology shares will go unchallenged.  And without an energy policy resulting in self-sufficiency our budget will be stalled economically, militarily, and creatively.

Bring it home.

The tip of this economic iceberg is only what we know and see today.  Weather related challenges around the globe point out how precarious life and money really are.  If we are to measure the quantity and quality of market potential, I believe it requires a recalibration of thought and imagination.

Benchmarks are simply guideposts, not absolutes.  We need to customize our approach to investing in order to reach quantifiable, and achievable, goals.

Scotty C. George

(212) 624-1147

Arlington Econometrics is a quantitative market tool.  Utilizing proprietary algorithmic equations, Arlington offers solutions for market-timing, asset allocation, and macro economic analysis.  Arlington Econometrics’ database spans over forty market bourses, and includes over 70,000 financial and statistical instruments.  Using historical time-series measurements, Arlington Econometrics optimizes the analytical process and forecasting coefficients to make economic forecasting more objective. 

The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and it accuracy cannot be guaranteed. It is intended for private informational purposes only. Any opinions expressed are subject to change without notice. Du Pasquier Asset Management and its affiliated companies and/or individuals may from time to time own or have positions in the securities or contrary to the recommendation discussed herein.

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