du Pasquier Asset Management

Arlington Econometrics Market Commentary for the week of October 20, 2008

Willie Sutton, America’s most infamous bank robber, was once asked why he robbed banks.  He replied, “Because that’s where the money is.”  How ironic, then, that you and I are being asked to recapitalize his treasure trove, now that we hear there is “no more” money in the banking system.  Poor Willie, poor us!!

The market’s quite tepid response to yet another global banking bailout tells me that the crisis is not uniquely financial, it’s psychological.  Many have read my oft-coined refrain “You can lead a horse to water but you can’t make him spend.”  Now add “You can reconstitute the vault, but you can’t fake the spigot.”  The problem with money-flow and credit illiquidity is not only the consumer’s insecurity about borrowing, but also the lender’s unwillingness to get caught short, yet again.

In this climate, you might as well throw traditional balance-sheet analysis out the window and go with instinct, instead.  Besides, who has a profit, a capital gain, or earnings?

The real paradigm.

Into this vacuum flows uncertainty and fear.  People are worried that their job might disappear.  They hold back from saving, spending, or investing.  Their inertia slams the financial market and, thus, the economy.  Unemployment becomes a self-fulfilling prophesy.

You can forget sector analysis because all groups are pulling back uniformly.  The only advantage to this avalanche of bad news is that from the rubble will emerge a new equilibrium out of which fundamentals will play a part.  It is more important than ever to have a macro, top-down orientation about the world in order to capitalize upon themes, values, and opportunities that might become our next capital gains playing-ground.  Stocks are looking inexpensive and may be nearing a “buy” inflection.

In the meantime, a slow motion cataclysm is unfolding that threatens real estate valuations, economic/industrial development, capital expenditures, and psychological peace-of-mind.

Children with toys.

The solutions being offered seem stop-gap at best.  Like throwing money away on one-night “liaisons”, the cure seems insufficient for the underlying market psychosis.  The next morning we’re waking up asking “now what” and “what have we done.”

Throwing money at the problem with a scorched-earth approach does not address the subtleties of regional or local problems.  Giving money to risk-takers will not make them more risk averse, just frightened that they won’t fail again.  Frankly, we might see a decline in business lending that is unanticipated, and, certainly, not the intended effect of the reconstitution.

We might see what looks more like a high school dance, boys on one side of the gymnasium, girls on the other.  With no coercion, bravery, or reason to break ranks, neither side will budge.  Thus you have a “party” that nobody really attends, although all are present in the same venue.

In order to overcome the fear factor, we need a catalyst.  Massive upswings in the Dow are not the catalyst we need;  those upheavals only reinforce the notion that financial markets are somewhere else, not connected to the average citizen, but rather the domain of professional “players” and speculators.

So not only are we dealing with a bond market that is devoid of “bidders”, but we have a stock market that whipsaws violently throughout the day, not allowing for cogitation or fundamentals.

These historic confluences are the brainchildren of those whom we now expect to solve the problem.  Good luck.  I would argue they might do more harm, in the near term, than good.

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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