du Pasquier Asset Management

Arlington Econometrics Weekly Market Commentary for the week of October 19, 2009

Dow 10,000 again, and again.

For those who experienced unbridled joy when the Dow hit 10,000 last week, let me be the first (second, third?) to remind you that we’ve been here before, and before that, too.

Ten years ago we passed the “magical” threshold, that time on the way up and during a fairly strong bull market powered by Tech and dot.com.

More recently we hit 10,000 again, but this time in a downdraft of significant proportion, on our way lower, and to generational historical lows.

Last week the significance of the integer itself was only relevant because it more so represents a redirection from psychological and economic distress experienced during the last three years brought about by capitulation-causes that historians will document for decades to come.

In other words, it’s just another number.

Up or down?

Oh yes, I heard one pundit say that “5 integers is more significant than 4.”  But in reality, passing through this benchmark over and over, without any forward progress, is like driving through Cleveland repeatedly on one’s way to the West Coast.  If you find yourself constantly crossing the same threshold from different directions then you’re truly driving in circles.  Keep in mind that the net 10 year gain in the Dow from the first time we crossed 10,000 to today is zero percent.

Of greater significance is the prevailing, and comparative, trend of the financial averages.  While growth and consumption are clearly not at the levels of our first 10,000 sighting, it appears we are making progress towards remediating the ills of global stagnation.

Certain asset classes, such as Basic Materials, Technology, Energy, Utilities and Industrials are remarkably strong and resilient.  The credit crunch might have diverted a secular growth market, but it hasn’t derailed it.

A dynamic corporate response is underway, muted slightly by a concerned populace that hasn’t yet mustered the psychological will to consume with discretionary monies.  Nonetheless, there is more investment opportunity than at any time in the last three years, and it is time to commit. 

Full spectrum.

Yield, which hardly exists in the traditional fixed-income market, is available in global telecommunications, energy, and traditional consumer non-cyclicals.

Capital gains, as alluded to earlier, are germinating in secular, long-term demographics such as industrials and materials (tangible assets).

The difference, today, is in the sequencing of those commitments.  Rather than traditional, consumer-led equities signaling the advance, we are finding more modest success in the “back-end” of the market, more defensive themes and brick-and-mortar businesses.

Indeed, reinventing profits and creating top line revenue growth is the challenge for corporations.  Squeezing efficiency from job cuts, wage reductions and the like will no longer suffice.  Investors are looking for “better mousetrap” companies whose innovation drives new customers and social good-will at the same time.

To keep those ideas replenished, banks need to lend money more freely, and emerge from their cocoon of isolation and handouts/bailouts.  When cultivating an environment for strategic growth, one can’t look at oneself as the sole beneficiary, only.  Instead, I believe a partnership of corporate, private, public and governmental sponsors holds the ultimate responsibility for making “Dow 10,000” a permanent support level, and not just another back-and-forth footnote.

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. 

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