Leadership remains focused in those sectors that are immune from shortages, lower demand, or labor cost increases.  Leadership slowly ekes out profitability and price performance from a quagmire of low expectations and bear market statistics.  Give wide berth to an economy and stock market in transition.  Selectivity is the watch-word of the day.  Government and central banks are irrelevant to the equation, now.  Stocks move either because investors perceive value or money is being put to work out of necessity.  In large measure, leadership is working in spite of underlying fundamentals.

Market crawl.

Right now, any bullish scenario for equities is independent from cyclical economic reality.  Globalization has, indeed, leveled the magnitude of downside erosion in some sectors, but has not significantly shortened the duration of historically normal capitulations.  If given some breathing room, the market might correct less disastrously than anticipated, but not any sooner than most would like.

The key to any turnaround would be a protracted period of earnings acceleration surprises and a consumer willing to suspend disbelief or fear that he won’t get burned a second time around.  I would argue that such a time is not the present.

The data indicates, in fact, that inflation and pricing power cannot be contained but, rather, sweeps most equities into a broad network of coincidental and laggard performance.  Margins are shrinking because of these expenses, and only those companies in protected strata are marginally growing their bottom line.  In fact, a good percentage of earnings performers are doing so not by increasing unit volume growth, but by raising prices to their end-users, the consumer.

My data indicates that, even for the most successful stocks, the gap is widening between multiple expansion and book value, heightening the potential for a reversal in equity price advances.

The most exposed to these reversals are Consumer Cyclicals, Financials, and Industrials.

From a contrarian’s perspective, some sectors have not yet reversed their secular (generational) advance.  There is no doubt that Energy (in all its forms) remains the most dominant sector of our decade.  If one can remove focus from fossil fuels and terrestrial stockpiles of coal and gas, one might imagine a new generation of power sources, some of which we can’t even identify today.  In that sense, Energy is the New Paradigm that many thought would be the dot.com revolution of the new millennium.  You see, it takes years to develop “paradigms”, not simply a pronouncement by marketing departments, ad agencies, or “talking heads” on business television.

A page from my book.

Our portfolios are heavily weighted in earnings performance, and solid dividends from bonds and growth equities.  I make no distinction by capitalization, geography, or sector.  Starting at an equal basis, all financial instruments are screened for price momentum and relative strength (RSI), while fundamentals are monitored closely for sustainability and profitability over the long-term.

The market is fragmenting into daily upswings and downswings of various magnitude.  It is a seductive siren song which, if played incorrectly, might lead to overweighting in the wrong sectors, or disappointment about anticipated momentum not materializing.

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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