du Pasquier Asset Management

Arlington Econometrics Weekly Market Commentary for the week of July 20, 2009

Lethargy?

A review of some of the market’s best summer performances yields very little to inspire the notion that we can break out of the doldrums during the next two months.  As the U.S. Treasury wrestles with the aftermath of last year’s credit crisis, we are left to confront an “expiring” short-term rally in stocks, as well.

These issues, while not simply academic, inspire a loss of confidence that transcends the sense that maybe we are “turning a corner” on the economy.  There are, indeed, many more signals that the global economy is stabilizing, but why don’t consumers feel better?

It could be that objective data doesn’t filter down into the psyche like job security, family health, and peace of mind do.  Before the crisis began, legislative officials urged us not to focus on the objective data.  Now, we are perhaps being given too strong a dose of reality and in some instances, it’s causing paralysis.

There are no easy solutions.  Any legitimate efforts are being met with equally as viable a response from the other side.  So unless the momentum shifts in our favor, the markets might choose to hibernate for another summer.

Plenty of time.

My data is actually showing positive signs as the markets “bottom-out.”  If you haven’t yet gotten back in, the next few months might provide the right opportunity to diversify your risk profile.  Interest rates are rising making short term bonds more attractive.  Equities are trading at valuations nearly 60% below their peaks.  Despite the reflex rally of the past six months, we are far from establishing a new secular bull phase; we’ve simply begun the bottom fishing and accumulation necessary to cease the rate of downside momentum.

With only a slight risk that you might miss out on a summer rally, I believe that this is an interesting time to prepare for a portfolio rebalancing.  Good or bad, low equity valuations provide us with the most potential for capital gains than any time in the last 5 years.

For that opportunity to actualize, however, one must follow certain thematic and methodological covenants.  Firstly, follow the earnings trail and the cost side of the accounting ledger.  Rising costs, higher inflation, are not necessarily bad for the economy.  They may, in fact indicate a surge in activity.

Secondly, one must be sufficiently diversified within/amongst a basket of demographic leaders.  Going back over previous bull cycle history, we know that early rallies gain a boost from cyclic indicators that include relative strength outperformers.  Those RSI leaders today are Energy, Biotech, Technology, Utilities, and Basic Materials.  Laggards are Financials and Consumer Cyclicals despite what the value hunters might tell us as justification for their speculation.

The central idea is simple:  we must assume a perpetual secular bias for capital gains.  Our interpretation of those data is what makes markets.  As the summer languishes, I believe we have an excellent opportunity to adapt to a changing landscape in stocks and bonds, and channel that opportunity into prudent asset allocation strategies.

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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