Market Commentary for the week of November 12, 2007

Last week provided additional evidence to this observer that traditional market analysis is out of touch with the facts. No longer can strict balance sheet analysis be sufficient to predict, or depict, the condition of companies, nor is the data entirely reflective of the undercurrent that lies beneath the financial markets.

United States’ Labor Department statistics last week indicated a rise in unemployment, a rise in inflation, and a decrease in capital expenditures owing to severe psychological and fiscal concerns about the credit crisis and recent portfolio devaluation.

Blame lies at the source.

Wall Street treats its clients with an arrogance that is unprecedented. The proliferation of synthetic products, and their resultant demise, is an example of such posturing and ego that valuations cannot possibly accurately reflect the amount of ill will and financial leverage that constitutes these investments. Banks and brokerages have been admitting that they “had no idea” of the potential negative impact of these offerings, nor do they accurately know the value of such chaos held on and off their balance sheets.

But the true obscenity is the amount of collateral psychic and monetary damage being done to global economies and markets as a result of the hubris that was proffered as a surrogate for scientific method.

Finding the intrinsic value.

Instead of traditional benchmarks, such as the S&P, DAX, Dow, etc., Arlington Econometrics™ relies upon a proprietary measuring stick which postulates that earnings and price acceleration/deceleration rates can be quantified and that irrespective of capitalization, geography, or category every investment can be located on a nexus of probability and ranked in order of those probabilities occurring. A “perfect” method it is not, but it comes a lot closer to reflecting leading, coincidental, and laggard phenomena than a static basket.

If the goal of any scientific method is to prove or disprove a theory, then I believe market analysis must do a better job of reflecting the fluidity of financial markets, and not just focusing upon snapshots of index valuations daily. Indeed, I believe the consumer’s obsession with do-it-yourself technology and instant feedback stokes an unnecessary greed in the market and does serious damage to long-term trend analysis.

Experience vs. ignorance.

Recall that only 6 years ago, the markets endured another catastrophe ushered along by extraordinary hype and leverage. As I wrote last week, Technology shares have matured from their nascent origins, and are now measured in the same context as mature equities, and with the same criteria for evaluation. Unfortunately, the public has yet to awaken from its obsession with alchemy, making something from nothing. And Wall Street firms are all too willing to oblige the appetite for get-it-now results.

If last week’s triple-digit up and down volatility teaches us anything it is that we must widen the aperture of observation in order to appreciate the forest and the trees.

Portfolio management is an art-form which reflects risk/reward parameters of the client. Product origination, on the other hand, has too often become the domain of ivory tower strategists, litigators, and CEO’s whose objective is to generate income for their shareholders.

By now, I would hope that my clients, readers and prospects might understand the distinction, and on which side they need to place their expectations. Consider that with the holiday season beginning next week (Thanksgiving in the U.S., for example) investors might be too weary to rally stocks back into a serious bull upleg.