du Pasquier Asset Management

Arlington Econometrics Weekly Market Commentary for the week of July 27, 2009

The big picture.

With the globe’s equity markets rising and falling, and investors trying to get out in front of each cyclical swing, it is important to maintain a discipline about asset allocation, and identifying the overriding trends that might offer a less bombastic month-to-month volatility.  Despite a tendency to rise or fall in the short term, markets usually are defined by longer term themes which the next generation can more easily label, but which might be obscure to those currently living it.  The lifespan of these thematic events is generations, containing several intermediate (5 year) cycles within.

It is no wonder then, that doubt creeps into portfolio managers’ minds when confronted by news events that seem to knock a portfolio off course, but which, if tended to correctly, matters little in the long run.

Let the record show that asset allocation plays a greater role in the probability of a portfolio’s capital gain potential than does any individual security within that portfolio.

Thus, if managed correctly, exogenous news events, or even bad decision-making, might be obviated by implementing prudent distribution of risk, asset classes, and allocation.

It’s right in front of us.

Today, we are at the cusp of one of the most powerful bull recoveries in the last century.  Portfolio contraction has been so great that seemingly all asset classes are “starting over” at an equilibrium point that will be sorted out by earnings gains, demographic leadership, and political will.

In fact, nearly all of the last decade’s gains have been destroyed by the bear cycle capitulation during the last 2 years.

Keep in mind that cycles do not simply emerge or begin, they evolve.  The market, like the global economy, must recover from significant fundamental flaws to reestablish any sort of reversal.  A revival might be likely in the next few months, but it will not be a “V” shape recovery, emanating from a single point in time. 

How far, and how strong, the first steps of a recovery might be is a demand-driven equation.  Right now, no such pent-up demand exists.  Therefore, the most significant component to a valuation expansion and economic renaissance is the psychological one.  Today, the “fatigue factor” is too great even to contemplate a reversal’s origin.

But it is exactly now that prudent asset allocators and methodological scientists need to be evaluating the negative data from which to predict the next leading demographic themes.  History, as well as intuition, are tremendous assets when embarking upon such an undertaking.  And time is certainly on our side.

Although bottoming signals abound, it is not until psychology leads that fundamental data might actualize a price mark-up phase.

Be smart.

By definition, momentum is a coincidental indicator.  Therefore a catalyst is needed to initiate the spark.  While I am happy to have short cycle upswings within this nascent recovery, I am loathe to call them a secular bull phase until true momentum catches up to fundamental redistributions within the larger economic landscape.

When brief rallies author a euphoria, and pull-backs generate fear, we know that a secular thematic and demographic cycle has not yet exerted its full influence over the broader topography of the financial markets.

If your portfolio is currently on the “losing end,” you should worry that your methodology has little relevance to a prototypically historical bias for upside capital gains in the long run.

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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