du Pasquier Asset Management

Arlington Econometrics Market Commentary for the week of October 27, 2008

World markets fell last week, ostensibly because focus shifted from credit crises to fundamentals.  And when viewed in its totality, fundamentals, especially current and future earnings, looked quite bleak.  It may be time to forget who caused the crisis, and move towards finding a direction that fixes the problem.

Fundamentals decoupled.

Global baskets, moving in near-unison downwards, stand in marked contrast to political commentary saying “everything is fine, crisis averted.”  Fears about economic stagnation and earnings slowdowns are draining huge amounts of net-worth from the markets, and further deteriorate the psyche of potential investors.

Although central banks sought to recapitalize their national banks, there is precious little evidence that banks are lending to anyone but each other.  The spigot that needs opening would be capital into the industrial community, but concerns about commodity cost overhead and employment are dampening projections about any capital expenditures in the near future.

Today a strong bias against speculation is developing.  How quickly we have come from a few months ago when conservatism and deleveraging were the furthest things from most minds.  I believe that the “thirty-second investment time frame” is a thing of the past.

How interesting, too, that our ubiquitous business news networks are renaming their programming from “fast”…. to “conservative”…., as if to exonerate themselves from being part of the folly.  Isn’t it the same “talking heads” now trying to tell us how to “preserve our retirement funds” who earlier urged us to “speculate our way to success”?

This whole scenario reminds me that many investors tried to deviate from proven methodology, towards greedy, “quicker” strategies for acquiring net-worth.

Reality check.

During the past weeks I have had to remind clients that we have consistently outperformed benchmarks for several years, that we avoided the dot.com collapse because of our aversion to non-earnings equities, that we are minimally exposed to risk, and that bond prices reflect a liquidity (pricing) inefficiency not a credit risk.

Nevertheless, I must remind them that markets are cyclical not linear, and that any assumptions about timelines or enduring upside potential (without capitulation) are unrealistic.  There is always a price to pay for capital investments.  Today that price is “time”.

I see no significant actionable themes right now.  That doesn’t mean that I am filled with pessimism.  Quite the contrary.  As I have said, I was more concerned about the financial markets at their greatest level of excess than I am now.  Going forward, the next upcycle will represent the highest probability of capital gains we have had in the last 15 years.

While I would be cautious about being drawn-in during a bear slide, the valuations in biotech, ecology, industrials, and agricultural equities are becoming quite attractive for the long term.

When the synchronicity of downside momentum is broken worldwide, I look for those opportunities to become clear and profitable once again.

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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