du Pasquier Asset Management

Arlington Econometrics Market Commentary for the week of February 23, 2009

Despite the market's extremely violent, and quite negative, response to stimulus attempts private and governmental, the hope is that this week might be better after the carnage is digested.  I believe, however, that irrespective of the short-term gyrations, both in sympathy and valuation, the actions of the global markets confirm my data that the bear is entrenched.

In fact, any obsession with short-term patterns in market direction are misplaced, and analogous to trying to put square pegs into round holes.  The facts indicate that consumers have stopped spending, corporations have stopped investing, and that financial institutions have simply expired, altogether.  So why bother to fight the trends when so many other vectors are pointing us in another direction.  Instead of trying to fight for what we expect to happen, a better solution might be to recalibrate a baseline assessment of market trends, valuations, and sector opportunities, and to move on from there.

For example, money-flows out of traditional stocks might be an opportunity for the emergence of new alternatives in medicine and bioscience, energy sourcing, and education.  In addition, the globalization of commerce might be redefined by geographic regions heretofore not in the mainstream of public thought, such as Latin America or the Central European countries.  Rather than trying to guess the economic output of traditional Western nations, we might follow the data in telecommunications advancements from less "traditional" sources.  The money flow and earnings patterns of the last year show a much different analog than the one we keep trying to resuscitate.

It becomes disheartening to watch the averages bottom out, recover, and then go lower again.  It seems we keep asking the question "where is the bottom?", when the real question is "where are the sector rotations, and into which equities might we see profit opportunity?"

Our leaders have indicated that fiscal stimulus might take a long time to filter into the economy.  I agree.  That is why it is fruitless to buy the banking stocks down here, at these levels, only to hope for a percentage gain born out of speculative bottom-fishing.  Instead, it is much more intelligent to seek out the tangible signs of asset and sector rotation for the more enduring long-term possibilities.  Already this year, bottom fishing has resulted in "more" bottom fishing, and net losses of twenty percent or more.  Our clients have held their head above water by reallocating into cash, bonds and selected equities in proportion to the risk involved, and the profit potential offered.  This, then, is my methodological advantage for my clients.  Bear in mind, too, that while the averages have given back almost all of their gains from the past decade, most of our clients have seen returns during that period that result in double digit net profit, and certainly better than the averages.  I caution all of my advocates not to get too concerned with day-to-day, 24 hour news cycles, and to focus more on our methodology of driving returns with asset allocation, earnings, and risk reduction.

The data also clearly shows that inflation, while not currently the most significant problem in the economy, is the most significant long-term problem the markets might face.  By printing money, expanding the debt, and focusing on stimulus, the global parliamentarians are boosting dependence upon natural resources.  Concomitantly, the opportunity for Basic Materials' exploration and development might be the most glaring sector opportunity I see for the future, far greater than betting on devalued financial institutions or expiring industrial companies.

In future weeks, I will write some columns about currency, interest rates, and inflation.  Bear in mind that my focus is on building portfolios with a long-term, sector-allocation orientation.  

And I will have my eyes far away from the talking-heads on television whose primary interest is to keep your focus on them, and the short-term backwards-looking conversation they promote.   

Scotty C. George

(212) 624-1147

www.dupasco.com

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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