du Pasquier Asset Management

Arlington Econometrics Weekly Market Commentary for the week of August 17, 2009

It is different this time.

In several of my last pieces I have referred to “a new equilibrium amongst global equity bourses.”  By this I mean to say that the declining tide in equity fundamentals worldwide (earnings, manufacturing, productivity, etc.)  spared no region, no capitalization, no sector.  Simply, the “pause” in global market expansion was all-encompassing.

But I have also referred to this baseline equilibrium as a positive, of sorts, because it affords us as investors a chance to redo our thinking, our analysis, and our asset allocation without the worry about catching a moving target in haste.

The characteristics of this “new equilibrium” include slower earnings growth acceleration, price-driven profits (as opposed to unit volume increases), lower downside risk to equities, sector rotation towards inflation-sensitive stocks, higher nominal interest rates.

My portfolios began to adjust for this new paradigm more than two years ago.  When equity markets “broke out” of traditional upside barriers, it became apparent that the low cost of money was skewing traditional growth and investment patterns towards near-manic levels.  And, just as psychological depression is no incentive for wading back into stocks, nor is euphoria a reason for buying “anything that moves.”  In all cases, either side of the bell curve is not the prime location in which to be.

A return to traditional accounting and fundamental analysis is also a by-product of the hysteria the bull/bear cycle created.

Top-down.

One should remember that market cycles are generational.  Although we have the tools to calibrate efficient quotients on a minute-by-minute basis (and the television “talking-heads” who constantly remind us of the necessity to do so), the outlook for capital gains potential lies in broader demographic themes which resonate far beyond commercial earnings cycles.

Longer-term does not mean less excitement.  Putting one’s money to work at the proper inflection point means having more than one opportunity to buy.  Correlating short-cycle activity within the broader top-down trend is the essence of Arlington Econometrics’ quantitative discipline.  We have demonstrated an ability to do more within a cycle than traditional buy and hold investors.

The expansion of our themes began well before the data was perceived by the masses.  Thus, the gap in our upside performance versus the S&P, for example, widens over time in our favor.

Ready, set……

I still believe in a higher potential for stocks over the next decade than at any time since the last secular global bull cycle in 1982.  Utilizing our value and earnings models, I am forecasting a major three year reversal that can ultimately support the next secular bull phase, and uncover significant sector leadership in the process.

How efficiently we process these data will determine the spread over global bourses we achieve in portfolio capital gains.  With so much contraction having taken place, the fun will be in the new competition to perform and to lay out the macro-themes that will guide our allocation decisions.

I believe we are starting to see those themes’ potential in agriculture, biopharmaceuticals, materials, energy, and technology.

For the time being, that should be plenty to digest.

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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