du Pasquier Asset Management
Arlington Econometrics Market Commentary for the week of August 11, 2008
Presto!!
If you can’t believe your eyes, and ears, then what are you to believe? Unlike conventional magic, whose aim is to misdirect and deceive, the markets are right there in front of you, chock full of fundamentals and information that can serve as productive backdrop for any type of analysis you wish to employ.
Really, could you not have imagined a housing bubble, or its subsequent deflating impact upon the economy-at-large? Did you not see the demise of consumerism in the face of rising inflation in commodities (energy)? Were you the last holdout in failing to predict the dollar’s decline or rising unemployment? If not, then you weren’t looking, or you weren’t reading my column.
Trends, as I’ve stated before, are not one-off occurrences but, rather, a sequence of vectors which taken in sum and over time, can be observed, predicted, quantified and played. Overweight one, you underweight another.
For the un-observant, gas prices began their rise almost a decade ago. Although the rate of acceleration has magnified significantly in the last three years, the cycle rotation into tangible assets began at the height (and demise) of the technology spike in 1998. Evidence was available then that changes were occurring in the flow of capital and the level of speculation towards “value” equities, of which Energy and Basic Materials were a part.
Further, the banking system began a trend to capitalize upon the real estate boom by leveraging their product valuations, in some cases by a multiple of 20 to 1. Inflation didn’t start with Energy; it started with the trustees, in government and the private sector, of our financial system.
Alas, it’s not a magic trick.
Although the evidence is decisive that this bubble, too, has imploded, the numbers don’t tell the whole story. To be sure, portfolio declines are all over the map. But how do you measure the psychological impact of a breach in trust or confidence? I expect that measurement to permeate the levels and vectors we observe from here on to the bottom, and back up again.
Further exacerbating the obvious, job cuts and wage stagnation have increased at their highest rate in the last decade, dissipating the potential for discretionary equity purchases. Anything that increases at a 30 percent rate is large. So have Energy prices, job cuts, and real estate devaluation. These data increase the likelihood of a more enduring capitulation towards the bottom than, say, a more definitional bear market contraction of short duration because the psychological effects are more long-lasting and debilitating.
It’s not magic; it’s in front of you.
I am often accused of being too bearish. I disagree. Our portfolios more than doubled the rate of appreciation in the S&P for the last 8 years. But I am a quantitative scientist, and unlike the magician, I am not trying to deceive or manipulate what’s in plain sight.
In fact, I see capital gains potential in a variety of sources in the near term, including biopharmaceuticals, alternative energy, infrastructure and technology, telecommunications, and ecological science. Keep your eye on water purification as the next “black gold” of world consumption.
If it were as easy as waving a wand like the magician to produce amazing results everyone would do it. The fact that we can’t is what has everyone frustrated.
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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