du Pasquier Asset Management

Arlington Econometrics Market Commentary for the week of November 17, 2008

The wave expands.

Risk aversion expanded last week as a fresh wave of selling swept over the global markets.  Inspired by a slowdown in industrial capital expenditures, and a reluctant consumer, investors unloaded shares rather than remain long in the face of more bad news in this grim era.  Unlikely as it is, much of that newly-created liquidity went into cash deposits rather than fixed income securities.  After all, who can determine which issuers will still be solvent in two years?  Forget the bonds, right?

Most global bourses ran away from equities, too.  Heading towards the end of the year, we find ourselves at 5 year lows in most global equity averages.

Surveys show sentiment for playing Wall Street’s game to be at historically reticent levels.  All eight global equity sectors I follow are within existing, and enduring, bear trends, and nearly all global regions are performing downwards in unison.

One of last year’s biggest gainers, commodities, is this year’s big loser.  A slowdown in production and sales is deflating the pricing pressure on tangible assets, although most households are hard-pressed to tell you that inflation isn’t a primary concern around the dinner table, the drug store, and the college campus.

Everyone’s in.

It isn’t for lack of interest that stocks are today’s ugly stepchild.  More households participate in equity ownership than at any other time.  Pensions, IRA’s, employee stock ownership, 401-k plans and mutual funds make up the lion’s share of individual equity ownership.  The latest data shows, however, that more households feel immobilized by the equity market’s fall, and despondent about future recovery of value.

The bailout packages instituted by Central Banks, Congress, and legislatures have done little to assuage the fears of the public, or to rescue the originally designed end-user, you and me.  Instead, we see how those funds have gone to shore-up shareholder equity, pay dividends, solidify compensation pacts, acquire the competition, or go into hoarding.  Aren’t these the same persons who ran the ship aground in the first place?

I want to reiterate, also, that intervention only delays the “natural” evolution of these cycles.  Recall that to fight an upcycle (inflation) we witnessed the manipulation of interest rates to stave-off the inevitable rise in commodities prices.  While, indeed, the role of Central Banks is to regulate the money supply, it is imperative that the intervention be the right tool at the time.  If not, well intentioned responses might exacerbate the prevailing trend by elongating it.

Let it ride.

Such is the case now.  Our deflation cycle does not require more money, but just an evolutionary demise of those who fail to be competitive.  All the risk-takers, arbitrageurs, and leveraged speculators, should be flushed out not bailed out.

Where to hide right now?  There is no hiding place, not at this late juncture in the capital market’s decline.  Patiently, we need to wait out the turmoil, still being prudent with our asset allocation.  I do not recommend bottom-fishing.  Besides, if you knew this was the bottom, I would be suggesting another tact, altogether.

Rather, I suggest we keep enough money in yield, equity, and cash so as to be opportunistic when the need arises, and secure as the mood dictates.

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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