du Pasquier Asset Management

With the markets trading at all time highs and investors scurrying to find alpha, much is being made about the demise of the bond market. Analysts and economists are in accord that the age of bond appreciation is over. The cause? Global austerity and national treasuries forcing (holding) interest rates down to their lowest levels in generations.

Recent history has shown us that when investors feel prosperous their spending habits become more robust. Sometimes they even throw caution to the wind and splurge on discretionary purchases they previously sought to avoid or postpone. Such is the nature of a rapidly changing landscape that what previously had been a vulnerability now becomes a necessity. The impact of financial decision-making can have a manic effect upon virtually any part of the world. This is why crises become epidemics, and cures become panacea.

All in all, one’s track record of success, or defeat, is defined by the consistency of one’s methodology and the frequency of positive pulsebeats one can amass over a specific duration.

Even in the face of this years remarkably vibrant stock market, there remains some ugly undercurrents of how the bounty doesnt touch everyone. In particular, I find it extremely disquieting, as an investor and as a citizen, that people might be going to bed hungry.

The agonizing process of building momentum from a bear market economy has initiated a number of trends that remind us that time can be either an ally or foe. Inconsistent in its nature, a markets response from dire lows is not always a pleasure to watch.

Despite recent gains in portfolio valuations, I question whether we are really profiting from the upward surge. To be sure, there is more money in your account, according to your last three monthly statements. And whos to argue that doesnt translate to real dollars, real well-being.

The deadly bombings in Boston last week, along with a spate of senseless killings in Newtown and Aurora, should highlight for those consumed by economics and financial market statistics the fragility of life and a sense of perspective about helping those in need at their darkest hour. How noble that on the day of the U.S. equity markets most damaging point collapse in years, our focus was on Boston and not on our wallets or portfolios.

My work has always been predicated upon using quantitative modifiers to enhance portfolio value through greater efficiency of information processing and the creation of momentum-driven asset allocation models. But because so many investors quizzically suffer from a herd mentality, they find it difficult to digest common sense solutions to diffuse problems. And yet, our methodology and its consistent point of view has enabled clients to benefit without compromising investment expectations.

Even after a global market surge that virtually wiped away the four year bear market, equities still seem to be the best game in town. Corporate and individual investors are flocking back to a haven they had abandoned in favor of bonds when, in an era long ago, yields and credit rating offered them a secure place to park money.

Although ecstasy reigned supreme last Tuesday as the Dow crossed into record territory, not everyone felt as if they shared in the bounty. It's at times like these that we must be mindful of the distinction between economic recovery and market recovery. Two phenomena which fly in tandem, on parallel tracks, are not always inextricably linked, and in this case the parallel disconnect is wide and obvious.

The single biggest predictor of financial growth is not how much money we have stashed away in secret savings accounts, but how much confidence we feel about a fair return for the deployment of those dollars. In that sense, corporations and individuals alike uniformly adhere to a quid pro quo matrix. Investing must be fair; it must be reasonable; and, win or lose, it must be swathed in aspiration that makes us feel worth making the investment in the first place.

For many months I have been commenting that the critical element most lacking from our rebound in economic development has been "consumer confidence." Wouldn't it be nice if we could not only quantify confidence but also to define it, accurately? After all, something so nebulous as one's opinion about something, also has the power to shape behavior and consequences for a myriad of financial and economic events. Besides, one man's opinion might not be shared by a multiplicity of others

Without question, the financial markets yielded better in 2012 than what most had believed possible at the beginning of the calendar year. At that time, embroiled in a U.S. Presidential election and ongoing turmoil in the Middle East, many analysts would have been happy if we simply avoided catastrophe.

It's not surprising that the markets responded with a resounding "so what" to Fiscal Cliff negotiations in Congress, and a Federal Reserve pronouncement that it intends to tie low interest rates to low unemployment for the foreseeable future, in order to maintain whatever stimulus effect low-cost borrowing might be having upon economic development.

Economics is a science in a constant state of flux. While it is true that any science is defined by its immutable laws, few disciplines are as influenced by emotion and perception as the science of "money."

Now that the election is over, and the markets are oversold, the Mideast is again volatile, and the fiscal cliff is fast approaching, most market concern rests with whos going to be the first one in the pool? Interestingly, although the stars are aligned once again to make money in the equities markets, it is still a psychological, not financial, component that governs peoples capital deployment considerations.

Fortunately, no one is compelled to invest money. They do so in a climate of tranquility, or turmoil, in an attempt to utilize their specific discipline, their risk/reward tolerances, and their expectations in order to achieve capital gains. There is no "one size fits all" system, nor is everyone suited for an all-in, win or lose, paradigm.

And so, we move on. Not simply the collective "we" of the markets, nor the political parties, nor any special agenda groupings, but, really, the global tapestry which can now divert its attention from American politics and focus once again on capitalism, peace-making and common ground solutions.

Instinct tells us that a heightened focus upon negative influences yields a self-fulfilling prophecy, a result which is either negative or perceived to be negative. Conversely, an inordinate predisposition with "good news" yields a new normal, a world where everything piggy-backs upon unrealistic expectations. Unfortunately, markets fall victim, too, to this kind of either/or thinking and sometimes rupture the performance of investment portfolios built upon an "all-in" methodology

Active investors like to think that it's alright to take risk as long as commensurate reward is a possibility. Further, they base this analysis upon whatever methodology they employ as long as the data, the systems and the game are fair for all who play. Thus, it is no surprise that last year more money was withdrawn from global equity markets than committed, and that more investors operate upon a short-term trading mentality than a longer macro-themed expression.

Overall, equity market risk is dissipating. There appears to be a stronger momentum ameliorating a global tapestry of "ills." What may have been a domino effect when the credit crisis began has stopped short of a cataclysm and turned closer to equilibrium. As a result, equities might be poised to perform. The question is when?

Certain studies commissioned by the securities industries governing bodies have recently concluded that terrible things happen to people who are too ignorant to know better. It's amazing that your confidence and trust could be so obfuscated as to propose that an economic tailspin was your fault.

Does a powerful upcycle necessarily have to be followed by a downcycle? Well, yes, if one believes in the notion of parabolic quantitative market theory. Given that you can't fill up a phenomenon greater than 100%, nor empty it more than zero, what happens when you reach a statistical "saturation point", when the laws of probability no longer engender positive outcomes?

For many weeks, I have received feedback from readers of my commentary that I am "too negative," "too pessimistic" in my views about the markets. While it is true that my objective quantitative science leaves little room for interpretation, let me dispel the notion that it is I, not my data, that is contemptuous of the "next move."

In the common parlance of Wall Street, youre either a bull or a bear. It's difficult to be both at the same time, yet this market has as many agnostics as it does true believers. What you believe, however, is another story altogether.

So far, key data has been unable to answer conclusively whether we are in deflation, stagflation, or targeted inflation. I wrote several weeks ago that I saw no empirical statistics indicating inflation. I was partly right...and partly wrong. Indeed, I had been early in identifying targeted inflation in tuition, foodstuffs, energy and healthcare. These demographic price hikes are systemic, and mostly driven by consumer demand or ecological/climatological influences.

Markets are so fixated on anecdotal and factual imagery like jobs' reports and sentiment meters that they are experiencing mania and panic over the least things. While reaction to hype tends to lead to price exaggerations, I also see a "so what?" response to data that sometimes borders on boredom. I prefer to believe that analytics can be useful in cutting through the ambient noise, to place an identity upon sectors' trends and their probability of trend maintenance.

Our collective mood is souring, particularly in light of falling wages, increased competition for jobs, portfolio (net worth) depreciation, and daily news about politics, terrorism, and business corruption. Wheres the good news?

I want to dispel the notion that I am an investment bear. There is nothing wrong with expressing an opinion, bullish or bearish, particularly when the consensus says its alright. Proof of one's courage, though, lies at the margins, during undetectable inflection points, before the consensus has arrived. My track record versus the benchmarks demonstrates a successful delineation between bearishness and being opportunistic.

In order to achieve optimal portfolio returns, particularly in un-optimal market periods, it is vital to adopt an ongoing strategy/methodology that is consistent. Attention to details, without capitulation, is the hallmark of a professional portfolio manager. Ideally, one is seeking durable results over the course of a long-term, and not a reflex change to short cycle events.

This is not your fathers stock market. Nor really is it yours, the one you envisioned two decades ago. Instead we may have leveraged, in a literal sense, all the financial details to our heirs. The bad news is that we have become marginalized. Our goals and expectations have been sequestered, postponed, for another time.

While the Dow Jones, S&P, and global bourses initially followed the EUs announcements about Spain and Greece with a rebound, the rally stalled last week because facts trumped suspicion. Short sellers and profit takers took control of the markets averting a weekend of being long in the face of more bad news.

The big problem last week was in trying to distinguish between macroeconomic factors and underlying stock performance. The resulting decoupling made some equities more vulnerable than aggressive weekly gains might otherwise have one believe. As we muddle through the disappointment of global austerity packages and downwards earning revisions, too many stocks have spurted up simply on traders dreams for a new bull cycle.

Each week produces a newer round in global woes, this past being highlighted by Spain and a verbal, if not political, battle over whether austerity trumps spending. We will not know how the debate concludes, but we can see its effects. Manufacturing slowed and consumer confidence went with it. The unknown consequences of a global economic paralysis is, nevertheless, having specific impact upon our markets. Most notably, the stock market is morphing into a roller coaster ride.

More importantly than not, it is vital to focus upon a bigger broader landscape when evaluating the condition of ones portfolio, than to focus upon tinier exogenous noise as those factors which indicate the probability of outperformance. Too often, and with more frequency, I have seen micro-analysis paralyze investors decision-making, rendering them incapable of reasonable response.

Its not simply the magnitude of the number, two billion dollars, nor the redundancy of these tales of corporate hubris. No, its the laissez-faire manner in which business continues to ignore its customers that encapsulates a feeling of angst, disrespect and depression that overtakes an average observer when confronted with headlines about oil companies, pharmaceutical firms, technology megaliths, or financial institutions.

Celebrations normally reserved for heroic events or political ascension have been breaking out during earnings season, as first quarter (2012) portfolio valuations accelerated and year-over-year comparisons show margin expansion. Doing what they do best, market pundits have been turning flax into gold, proclaiming that the recovery has begun. Another anecdotal elixir. One always wonders whether the chicken or the egg comes first. In this case, proclaiming it to be so precedes the actual fact.

Machines talking to machines. That is how some describe the machinations of Wall Street currently. Clearly, as volatility dissipates, the balance of orders becomes driven by execution systems and tonality that looks to outsiders as more artificial than negotiated between two parties. Thus, a chain reaction a decade in the making has supplanted the human factor, opening up new avenues for greed and opportunity. All the while, obstacles and inefficiencies are being manipulated out of financial trading. Of course, this is not an American phenomenon, it is a global one.

As markets regroup from their phenomenal start to the year, certain groups have transformed the conversational dynamic. Focusing as I do upon longer term demographics, I have noticed a shift from traditional consumer cyclical brands toward epic population issue sectors, such as agriculture, healthcare, energy and infrastructure. Beyond the obvious significance of these topics, trading machinations within those secular themes have transformed during the last year. One notices a steadier stochastic pulse to equities within these sectors, emblematic of a longer attention span.

As markets regroup from their phenomenal start to the year, certain groups have transformed the conversational dynamic. Focusing as I do upon longer term demographics, I have noticed a shift from traditional consumer cyclical brands toward epic population issue sectors, such as agriculture, healthcare, energy and infrastructure. Beyond the obvious significance of these topics, trading machinations within those secular themes have transformed during the last year. One notices a steadier stochastic pulse to equities within these sectors, emblematic of a longer attention span.

Europe hopes the latest (bailout and reg) moves will help it get its act together. (Good luck with that.) China applies the brakes. Labor looks strong, but can it continue? The Fed debates the need for more stimulus (without any consensus). Facebook moves closer to IPO (and investors beg to participate). The world lectures Iran and finally takes harsh measures (stand by to help Saudi). Investors hope to keep the mo going for another quarter, while being tempted to take profits along the way. Can we finally start focusing on Obama vs. Romney?

Although performance in our portfolios was good during the first quarter, it is likely that my defensiveness might be costing us during the current rally. Right now, my allocations reflect a lack of conviction that the rally can sustain, so while cash is king is a handy catchphrase, in our case it is our best defense against the kind of draw-down that ruins portfolios. Our methodology is not to have one or more security rupture the probability of continued portfolio progress, point A to point B. In that sense, we successfully continued our steady climb in valuation appreciation.

Hard data hasnt been collected, but its a safe bet that we waste more food and energy resources than we think. A green boom is a common dialogue amongst some communities but, not universal. In fact, green technology is often a luxury that only wealthy nations can talk about. And yet with so much money being wasted, there are no permanent solutions for spreading the bounty. Alternative energy and agricultural science are in their gestational periods, historically, and far from being the immediate solution to environment mis-management.

Instead of playing old fashioned fundamentals, gamblers are trying to pre-empt the true north of the markets by risking cash on dangerous bets about real estate, commodities, energy and bonds. In the meantime, the game continues for those who seek cover from the mayhem. Right now, there is little support for bonds or stocks. Yields are too low, and equity valuations have gone through a dangerous cycle. Thus, one might expect turmoil to continue. My risk rankings suggest that there is still more potential for the secular (bear) cycle to continue than there is momentum to reverse that course.

What constitutes a recovery? Is it simply the absence of negative news, or must it also imply a robustness of capital, capital gains, and euphoria. It seems to me that we are currently in rejoice only because the steady drumbeat of negative noise has abated somewhat. While it may foretell the redirection of a bear market/economy, we cannot yet proclaim the regeneration of a secular bull cycle.

Historically, its difficult to have economic expansion without job growth, fiscal expansion, and consumer confidence. And yet, despite low interest rates, and a leveling-off of unemployment, we find ourselves in the middle of an economic recession. Of course, phrases like recession, expansion, and depression do not represent points in time, but, rather, periods during which these phenomena occur. So to suggest that we might be in any one of these economic cycles also implies that we must define the time line, the trends direction and magnitude, and our place within it.

Spread amongst positive innuendo about the Eurozone austerity discussions and strength in the global oil markets, was consternation about contentious earnings reports and a build up in selling pressure upon equities whose values are bumping up against relative strength resistance points. The state of the financial markets is net-neutral. The most important characteristic of the markets today is the aging of intermediate recovery trends and the high number of equities that amble along laterally. Any entry into long term probabilities would be done today at high risk.

As I have written, the early-season rally is growing tired and overextended. While there is nothing specific which might have accounted for last weeks stall, the evidence is clearer that relative strength quotients in equities are growing outside sustainable levels. Usually, such valuations precede a reversal in equity direction. Last week also saw a continuation of mediocre earnings acceleration patterns. The number of companies that actually beat analysts estimates is at its lowest since the credit crisis in 2008.

Historically, its difficult to have economic expansion without job growth, fiscal expansion, and consumer confidence. And yet, despite low interest rates, and a leveling-off of unemployment, we find ourselves in the middle of an economic recession. Of course, phrases like recession, expansion, and depression do not represent points in time, but, rather, periods during which these phenomena occur. So to suggest that we might be in any one of these economic cycles also implies that we must define the time line, the trends direction and magnitude, and our place within it.

Last weeks performance was distracting. Spread amongst positive innuendo about the Eurozone austerity discussions and strength in the global oil markets, was consternation about contentious earnings reports and a build up in selling pressure upon equities whose values are bumping up against relative strength resistance points. The state of the financial markets is net-neutral.The most important characteristic of the markets today is the aging of intermediate recovery trends and the high number of equities that amble along laterally. Entry into long term probabilities would be high risk.

In recent discussions with clients, I have answered questions about good new versus bad news and short-term versus long-term probabilities. As my readers are aware, I have become increasingly bearish in my asset allocations, a factor which derives from a combination of very short-term information along with macro, secular data. In short, my analysis quantifies policies, valuations, and fundamentals which have dragged down the prospects for global earnings acceleration (in the near-term). Notice that I refer to these statistics as decelerators, not necessarily absolute impediments.

Time is a luxury many investors seem not willing to indulge. A stop/start economy, seemingly moving valuations laterally, has them on the edge of their seat, hoping that something exciting happens to their net worth. Ominously, however, the recently completed holiday season comes replete with its own set of hangovers. Some economists now worry that households took on too much debt, and might cause spending in the ensuing months to contract. More foreboding is that banks and brokerages are reporting that some cash for our holiday expenditures was withdrawn from retirement fund accounts.

Relative strength integers are congesting at resistance points each time our New Year rally attempts to gain traction. I am skeptical that we can sustain an upcycle. Although short cycle rallies are tempting, the dominant secular theme always prevails. We have a lot of work to do to dismantle the negative fundamentals which precipitated our current bear market. Thats not to suggest that portfolios cannot make money in here. Our portfolios have found success in mid-maturity corporate bonds, as well as trading with a shorter pulse in utilities, basic materials and technology shares.

As junctures go, the post-holiday euphoria might be short-lived. Despite a sprinkling of good numbers, the headwinds are too great when considering a secular change from bear to bull. I would be careful about being drawn into a sucker rally. As I wrote in my current Quarterly, markets today are much more synchronized in their direction. While we wait, impatiently, for the Eurozone to get its act together, other regional bourses are held hostage. Growth becomes relative to how the other guy is doing, not absolute in its own right.

Leave it to global austerity to bring confidence in markets to a grinding halt. Our global credit crisis allows for very little wiggle room in addressing both a moral and economic bankruptcy that has now engulfed the worlds financial markets for four years specifically, and nearly two decades, generally. In recent weeks, efforts to create multinational solutions worldwide, and bipartisan solutions domestically, have erased some doubt that the problem of overspending will be addressed, but only quenched an immediate taste for something positive to occur.

I expect that the year-end will be rife with psychological mania of this kind, yielding to an extremely volatile attention span. Despite the numbers, a new landscape is emerging which trades upon hype, happiness, and expectation. It could cost us the opportunity to tune in to dormant themes that might be next years capital gains winners, or, possibly, to overlook them altogether while wallowing in excess negativity.

I expect that the year-end will be rife with psychological mania of this kind, yielding to an extremely volatile attention span. Despite the numbers, a new landscape is emerging which trades upon hype, happiness, and expectation. It could cost us the opportunity to tune in to dormant themes that might be next years capital gains winners, or, possibly, to overlook them altogether while wallowing in excess negativity.

We yearn for improvement, yet do not wish to lower our standards of evaluation. Year-over-year uptrends are indeed showing some progress, but dont factor in the bigger issues of jobs loss, savings depletion, home and portfolio devaluation and most importantly the loss of innocence/confidence that our institutions know how to do it better and can help us to sustain enthusiasm for something better ahead.

Any euphoria about last weeks intermittent triple-digit rallies has to be couched in a context of longer-term developing downtrends and a desire to see any positive news as bear-busting. Alas, the ongoing downcycle persists and is likely to be the primary determinant to market performance for the foreseeable future. As junctures go, last week represented a few days of post-holiday welcome relief, but hardly the initiation of a change in secular direction. The headwinds are too daunting when analyzing market and sector relative strength quotients.

Like a train wreck, the global markets have maintained a vicious shakeout whose collapse is frightening not only for the Europeans but for America and its trading partners. For the past several months we have been building a slow crescendo which, like a great symphony, has many codas yet to play. Clearly, a correction to overborrowing, overspending, and over-expecting is in place. Turbulence and volatility, both in the markets and political discourse, is the order of the day. The foundation of trust which underpins all capital exchange and political governance is nearly in default.

Incredibly low interest rates are telling us a story that few seem able to decipher. For well over a year, interest rates on cash deposits have been near zero, while the reward for being a long-term Treasury investor has hovered below 3%. The last time rates coalesced around 2% was more than a generation ago. Concurrently, the economy has lost buying power, jobs, and valuation. As every global bourse in my universe struggles to gain upside traction, a worldwide decline in sentiment, earnings acceleration, and pricing power has diminished the foundation of free-exchange and capital markets.

A violent shakeout in global equity bourses is reverberating to U.S. shores, and exacerbating the fear that a second global credit/equity crisis is likely. In response, the domestic equity markets shook significantly last week, despite intraday bargain-hunting and attempts to forget altogether an unresponsive fundamental framework. In hindsight, my call towards a more conservative asset allocation model this past summer was fortuitous. The financial markets dont trust the underlying fundamental statistics, and the public doesnt trust the financial markets.

For those of us seniors, the problems are now owned by the next generations. For them, it is a striking and overwhelming legacy which, not of their doing, they must attempt to fix. If asked by a younger person, your son or daughter perhaps, can it get better? can you respond with a straight face and without remorse that it might? I am not a pessimist. I worry, however, about the effect of our economic transgressions upon the psyche of young adults and children.

The Fed, and a majority of global state treasuries, have made the decision that keeping money inexpensive is at least one of the tools they can use both to sustain economic growth. This policy has been a boon to those with money, and a severe hindrance to those without. A vexing conundrum exists when monetary policy is designed to promote the flow of money into dynamic expansion but the spigot gets blocked because psychology and momentum are running in the opposite direction. In the meantime savings rates have nearly disappeared, along with whatever savings the losers in this game had.

There is one certainty about todays markets: nothing is certain. Traversing the economic landscape is akin to walking across a room with a trap door looming unseen. It is not just equities which pose this risk. Austerity programs worldwide are forcing interest rates down, and bid prices to fall as well. In effect, waiting until maturity is ones greatest hope for financial recapture in a bond portfolio. As strongly as capital gains drove bond investing during a period of declining rates, strategic options dont exist anymore as long as interest rates remain pegged to these low levels.

A fixation with tangible metals is both forward looking as well as reflective melancholy. Because the price of commodities had risen in the past, people might expect it to do so again. In the case of commodities trends lose their appeal when everyone already knows that the valuations have become inflated. In todays case we have been in a twelve year commodities price expansion. While some might try to eke out the last few cycles of profit within that trend, others wonder how much greedier can the trend enthusiasts be. There are no linear cycles that last forever and no free lunches.

When the Federal Reserve Board runs out of tools to fix the economy, its an even worse scenario. They are not simply useless, they become irrelevant. And so, last week the Fed meekly bought more long-term treasuries in an effort to salve the economy by keeping interest rates, all across the time spectrum, low. Instead, what they wrought was disdain, confusion, and declining confidence. Ive said it before. Low interest rates today are analogous to giving free drinks at closing time. You can lead a horse to water, but you cant make him spend.

September has been a wild ride for global markets, and October is expected to bring more of the same. On the horizon is a key inflection point at which portfolio allocation might either protect or bury any portfolios. As global economic recovery sputters there is a new urgency about either continuing on a portfolio path of growth, or reverting altogether to a default cash position. Within each scenario, however, is a psychological uneasiness that borders on shock and awe. It is much more difficult to manage clients downside risk appropriately, than to pick winners when all stocks are rising.

With the market recovering only slightly last week, I am once again reminded of my admonition that the market and the economy are not interchangeable, one-and-the-same phenomena. In fact I coined the term parallel disconnect to refer to two paths which seemingly move in lock-step, but which are not innately connected in any way. To be sure, they are sometimes confused one for the other, but in real terms the events and triggers which guide one do not necessarily, or specifically, impact the other.

A number of factors have conspired to make investing not the same game it used to be, not the least of which is the excessive need for speed and immediacy of information. Keep in mind that before the internet, fortunes were also won and lost. The difference is access and acceleration of information digested. The human brain just isnt wired for that type of speed when processing data. As a result, many investors are unprepared for the impact of exogenous events upon their plan. When the market moves at a snails pace, it is unacceptable, when it moves at warp speed it is too fast.

A number of factors have conspired to make investing not the same game it used to be, not the least of which is the excessive need for speed and immediacy of information. Keep in mind that before the internet, fortunes were also won and lost. The difference is access and acceleration of information digested. The human brain just isnt wired for that type of speed when processing data. As a result, many investors are unprepared for the impact of exogenous events upon their plan. When the market moves at a snails pace, it is unacceptable, when it moves at warp speed it is too fast.

A new political dynamic is overspreading the globe. It's a force not only of political will, but fiscal interests. It sets up a defensive, cash-only paradigm which favors no one but those who have capital. Ironically, this new renaissance is concentrated not in regions of vast wealth already, but in the more distressed areas of the globe. The implications are vast. Foreign investment in these regions in agriculture, water purification, industrial development, and manufacturing could prove to be the next revolution in capital spending that saves the markets and people in need at the same time.

Has the markets crisis been averted because Congress passed a debt-ceiling bill or because the bear panic last week wiped out a lot of doubters? Not at all. One can forget the immediate knee-jerk responses. The most powerful ally we have now is time. The indecision and ambiguity which triggered the panic is still firmly entrenched in boardrooms and kitchens around the globe. Multiple solutions only confuse the markets direction. While spending and stimulus are probably whats needed to avert a recession, neither is going to happen in this climate of political intractability.

Historically, the most potent bull markets and vibrant economies are led by significant consumer demand and corporate capital expenditures. We know, today, that corporations are sitting on cash reserves and that consumer demand is lacking owing to confusion and concern about fiscal and monetary policy and governments direction. In addition, there has been a drastic decline in disposable household spending, shifting the burden to government intervention to keep production incentives viable.

Since the end of the internet bubble in the late 1990s, the medias search for the next it sector of the market has been incessant. Let me suggest an area for your consideration: crops and farmland. While a debate rages about climate change and global warming, it is indisputable that the search for fertile natural resources is basic to humankind. Today, any magnitude of population shift is based less upon need than vanity but a focus upon survival in some distressed areas redirects our attention to the search for replenishable natural resources.

Technology has indelibly changed our lives. One sees this evolution in the way we process information and the multitude and complexity of decisions we are called upon to make but the overriding issue to me is not whether we have the technology to execute complex decisions but whether or not there is an imperative to do so.In other words, simply because we have it does not necessarily mean we have to use it. This is particularly relevant to the financial industry because the complexity of market derivates, multiplied by infinite factors has created a system that cannot support its own weight.

As governments are forced to shift policy from spending to saving, the instruments they have at their disposal become obsolete without consumer support and/or confidence. The acquisition of ?things? paid for by leverage, margin, and debt is a fruitless endeavor in today?s climate. As a result a truer ?new paradigm? must develop which: Shifts the focus from hard asset leverage to savings and cash, Raises secular interest rates, Globalizes investment capital, trade, and profitability and Provides for a fairer, equal playing field in financial assets.

Last week, the market digested less-than-spectacular end of quarter data about earnings, interest rates, valuations, investor sentiment, inflation and exports and took a lurch towards the downside. Investors and observers are growing weary over interday advances which recede at the slightest inference of declining fundamentals.The market wants growth. It needs sustained positive valuations because the flow of investment capital requires a secure landscape. If manufacturers slow down making things, or hiring people, the drip of capital becomes inert.

Market trading is driven more and more by machines talking to each other triggering buy and sell orders that are algorithmically pre-programmed. Gone are the days of floor traders executing the specialist?s book, doing favors for each other and ?working the bid.? Today?s syncopation is well orchestrated and devoid of human response or emotion. Machines aren?t the enemy, however. They are simply the new reality. As the burden of making trillion dollar bets shifts from to machine, greater efficiency and lack of peer pressure gives the markets a new benchmark of necessary change.

?Which way is the market going?? That?s one unanswerable question. What we do know, empirically, is that the global credit markets are poor; pricing in most stocks is inefficient and governed by short term trading and speculation; sustainable economic growth is non-existent; and inflation is rampant in consumer goods and raw materials. Even if we?re correct with our asset allocation, we are playing defense and hoping to minimize any downside damage. If hindsight and backtesting are any indication, I would posit that the current equity market continuum is poised for more downside potential.

So what is the state of the economy and the financial markets? Poor. Whether it?s drought, weather disasters, human disasters, or economic uncertainty, the markets seem to be going nowhere. The most potent markets are driven by cash, confidence, and confluence. But with two bear markets in the last decade, behavior and attitudes have changed. There has been a drastic decline in consumer confidence brought on by the dot.com bubble and by the horrific events of 9/11 and their reverberations. No matter how accessible cash became, it only seemed to lead to some kind of disaster.

The funny thing about perpetual motion devices is that they give the impression of constant, and sometimes complicated, activity, but in reality they don?t actually go anywhere. Such is the state of global bourses, traversing an active up, then down, then up again pattern, yielding a great big net-nothing. The problem, though, with such market-driven perpetual motion is that unless the ?axis of ascent? is rising it must either be neutral or falling. And in today?s climate since the run-up in markets dating back to 2008, many securities are doing just that, declining or going nowhere.

Last week, I wrote about a phenomenon in global markets ?at the top? as being almost like perpetual motion inertia, constant movement, seemingly ending up static. Why does that exist, and what can we do to enhance its portfolio benefit and to reduce its incumbent risk? I believe that today?s risk derives from overvaluations created from ?efficiencies? which magnify profitability, but don?t reflect declining top line revenue or demand. Indeed, as stock prices have migrated upwards, relative strength quotients within my proprietary measurements have disconnected, instead moving downwards.

Investors cheered the execution of world terrorist Osama Bin Laden last week, by parking money in defensive sectors such as Non-Cyclicals and withdrawing from tangible assets while they waited for what many believe might be an inevitable disruption and reprisal. Obviously, patriotism was running high but confidence was not. Can the markets persist in gaining new capital inflows, or will money recede in cyclical fashion into cash and defensive investing? It depends on whom you ask. Speculators see exogenous moments like this as reason to gamble short-term in currency exchange.

It looks to me as if some are confusing a market rally, an extension really, for an economic revival.The Fed Chairman declared last Wednesday that we are only half-way through a decade?s long process of recovery. The primary engines of capital gains today are price pressure, speculation, natural resources and inflation.It?s no wonder that Energy, Basic Materials, and Technology are in the vanguard, while ?traditional? front-end engines of economic prosperity languish.At first blush this reveals that the consumer is not the driver of prosperity at this time.

As the markets fumble and roil, bounce intraday from Fed pronouncements and geopolitical unrest, should we be cautious or aggressive at these levels? Although the averages defy gravity by maintaining lofty valuations, I would think twice before betting the farm on its continuation. Although most data indicate that we are ?turning the corner? from recession, the same risks that got us in trouble originally still exist for the most part. In addition, as if climbing a ?wall of worry,? the more robust the numbers get, the more frightened some become.

Acknowledging that all market activity is cyclical, not linear, I am often amused at the reaction by investors to each day?s trading results and the media commentary that follows. I am often asked by the media to characterize a market?s daily events, as if one might create a justification for volatility out of context. I view this day-after commentary as specious, at best. It takes days/weeks/years for real trends to evolve. In my methodology and study of the market it is most often these secular, or generational, themes that most resonate upon asset allocation and equity selection.

Every Year, every new calendar quarter in fact, brings a heightened sense of anticipation about market performance. In its proper perspective, we have a unique demarcation that allows us both to look back and to look forward. Whether we are ?licking our wounds? from a beating we took previously, or rebalancing our assets and expectations for future success, investing is by its nature a regenerative endeavor, always filled with hope. That is why I find it almost comical that day-traders, hedge fund managers and strategists calibrate their successes, or failures, by the minute, day, or month.

Recent events in the Middle East, combined with weather, have put tremendous pressure upon raw materials prices. The fear is that cyclical pricing pressure might become secular (generational) trends, accelerating inflation in energy prices, foodstuffs, and industrial components, thus undermining a tenuous uptick in consumer spending, global trade, and consumer confidence. While Wall Street rejoices that something, anything, has stimulated trading activity and profit margins, the world watches as surpluses contract and statistics become human convoys of disaster.

No one disputes the necessity to trade the markets or to engineer boardroom-level merger and acquisition conversations. These activities are the foundation of the capital markets. But there has been an unusual amount of focus upon deal-making almost to the exclusion of efficiency, to give the impression that someone?s at the helm and using capital to acquire ?stuff.? To that end, clients do suffer, finding their equities violently fluctuating based not upon long term fundamentals, but short news cycles and speculation. Such activity numbs the average investor into submission.

Despite last week?s contraction in global equity prices, the activity seemed mainly focused upon energy stocks and the turmoil in Libya and the Middle East. Of course, the world is also shocked by the earthquake tragedy in Japan. More significantly, there seems to be no cohesion of thought about whether these disruptions are ultimately (1) good for shareholders (2) bad for economic recovery. Instead, the debate rages on as to the sustainability of any short market rallies or the viability of real economic recovery in the face of pricing pressure upon commodities, particularly energy.

The case for gold and energy-related price spikes is rooted, in part, by good intentions hedging against dollar fluctuations, inflation risk, and political discord. But unlike a level of rational speculation one might expect to see, one has to wonder whether the market?s players are overdoing their hand just a bit. Simply, the world of commodities gambling has been turned into a shootout. While oil production and distribution (as with gold) has been spiking over the last 3 years, real demand has only turned up modestly.

Among the economic havoc wrought by turmoil in the Mid East and severe weather around the globe has been the impact upon inflation and upward pressure on prices for raw (and core) materials. Today, most economists and market analysts fear that this confluence of factors could accelerate inflation in energy prices, foodstuffs, and industrial materials, thus undermining a nascent uptick in consumer spending, global trade, and consumer confidence.

I believe the markets are extended and at risk of consolidation. If one is compelled to invest, I would urge caution, patience, and dollar-cost-averaging rather than an ?all-in? philosophy at this time. The big picture for financial securities is long-term positive but short-term precarious.

While many are transfixed by the chaos and confusion in Egypt, Tunisia, and Yemen, it is important to recognize that such unrest is not uniquely Middle Eastern, nor is it caused specifically by unruly despots.Indeed, the root cause of social upheaval usually lies in the breakdown of social institutions whose function is to provide, or create, fairness and opportunity amongst the citizenry.

There is a lot of talk about the direction of interest rates and the cost of money.Sometimes, exogenous influences also exert influence over monetary factors.Today, tightening supplies of natural resources have created a subterranean inflation whose gross result has been to raise prices at the production and consumption sites.Corn, sugar, coffee, soybeans and other crops are at their lowest reserve levels in a generation.Demand, however, has not ebbed.

Today, bond and stock inventors sit at the edge of a new paradigm, indeed, where inexpensive money has yielded about as much as possible from corporate balance sheet expansion, while lower interest rates no longer offer high yield or capital gains probabilities to fixed income investors. The difficulty today, however, is that stocks are at a significant inflection point where the likelihood of perpetual sustainable upside gains is limited.

As if to signal the arrival of a new yardstick, the year?s first trading day was strong, while the balance of the week was digestion of the same old lack of enthusiasm and trust. Might we expect to see a new metric in place after the rough-and-tumble in Congress is settled? Don?t count on it. Whichever way the debate shapes up, there is still a credit crisis, an insurance crisis, and a confidence crisis. All the avoidable blunders Wall Street might make will still occur because the brazen on Wall Street are not being held accountable for their greed.

Despite 2 year gains in financial valuations, most major global bourses remain in a downtrend as we enter 2011. Year-end improvements in market performance have not erased the erosive cycle trend decline begun in late 2006. Some argue that the past two years represented the regeneration of a new bull cycle in financial markets. However, empirical macro data, as well as a longer term perspective about the duration of bull markets, indicates that last year?s bull was simply a second intermediate upleg within a much longer bear market. No turnaround in the secular trend just yet.

Each of the recent ?relief rallies? draws many into thinking that the worst is over, at least for equities. I believe, however, that investors are putting too much emphasis upon short-term consequences to the exclusion of looking through the wider aperture. Of course, during the holiday season we are all searching for ?good cheer,? but market cycles that are unsupported by fundamentals are not ?rallies,? but bear traps.

Federal debt, personal debt, political gridlock and global currency imbalances are systemic problems. It was difficult and time-consuming getting into these predicaments, and will be equally as difficult getting out. I am seeing indications in my quantitative database that we are in the early stages of cyclic deterioration, a period during which the rate of capital gains probabilities declines and market valuations perform indiscriminately in a non-correlated way. We should be prepared for the opposite of what we expect or want.

We?re in a particularly vulnerable time in world financial markets. Having just completed a significant 2 year market response (upwards) to the global credit crisis, the question of whether or not we can sustain similar economic magnitude has everyone?s attention. Although financial data seems more or less in line with a nascent recovery, investor confidence and activity are still less than robust.

'How will the election results impact upon the markets and my portfolio during the next year?' Scotty George evaluates the data.

We are two months removed from the end of this year, 2010, and already investors are bracing themselves for 2012 as if next year won't count. With unemployment widening and portfolio values simply treading water, many have their sights set on a rebound year in 2012 that they think has more promise than 2011. In fact, informal opinion polling suggests that many see 2011 as nothing more than a postscript to a miserable three year cycle begun when the global credit crisis erupted.

After the steady run-up in natural resources equities the past year, some are concerned that the progression might come to an end. Based upon improving policies and demand worldwide, however, it is still entirely appropriate to reserve an overweight ranking for these investments. As long as industry prudently manages inventory-versus-demand cycles, upward valuations might persist. In the long term, depleting resources might provide the science and politics for an elongated trend with significant capital gains potential.

Global equity markets are doing a poor job of mirroring the fundamentals. The key to equity performance is earnings acceleration. Despite year-over-year improvements from their depths one year ago, real integers are still down from their highs, and are unlikely to show any improvement without marked top-line demand. Du Pasquier is therefore continuing to underweight equity exposure, even as certain individual companies become more attractive from a valuation standpoint.

The current global rallies in stocks seem to be short-cycle upswings within the existing secular bear trend. Low interest rates are leaving no other suitable alternative for investors, and high grade fixed-income opportunities are few and far between. Interest rates may rise, however, before year end as global debt continues to mount. Investors should therefore look for an above-average exposure to cash in the short term while waiting for downward movement in stocks in the long term.

The American financial system is losing political and economic power. U.S. output is burdened by expectations and obligations that are increasingly hard to meet, and the country's GDP suggests a national economy that has lost control of its destiny to forces beyond its control. Energy dependence, rising fiscal deficits and an aging population and infrastructure will present problems in the next half decade, but will provide opportunities for capital gains, and will seem more manageable as markets recover.

It is important not to get carried away with short-term bursts in the market. These bursts have not eradicated the causes of the ubiquitous bear trend. We must not measure our self-worth by the value of our portfolio at the end of the given day. The most aggressive gains emanate from prudent portfolio methodology and a long-term orientation toward economic dynamics.

Scotty George of du Pasquier says in the Arlington Econometrics weekly market commentary that the disinflationary curve is at an inflection point, and that we are likely to see an upswing in the cost of money, savings rates and prices. All of this could usher in a new cycle of economic phenomena.

Financial markets need to stop picking at old wounds before they can heal, says du Pasquier advisor Scotty George. Slow earnings acceleration, poor industrial and consumer demand, job cuts, stagnant wages, currency imbalances, expanding worldwide debt and skeptical consumer sentiment are all keeping market numbers in negative territory.

?The aftermath of a bull leg is sometimes unpleasant. We are experiencing a normal capitulation in stock prices that follows the remarkable success of last year?s bull cycle. ?Unleveraging the euphoria? is far from crisis levels, yet, but unsatisfying, nonetheless, while it?s happening.?

?Today, the climate in the financial markets is tenuous. Despite the public?s low levels of trust and confidence in their institutions, particularly their financial institutions, they continue to inv

My work is leading me towards smaller cap and emerging markets as untapped sources of capital gains. Additionally, since earnings acceleration patterns are quite narrow, the universe of possible cand