Market Commentary for the week of January 22, 2008

In case you’ve been too busy to notice, investing is “going global”. As borders become obsolete, theme driven investments carry greater impact upon portfolio success than does a jingoistic location from which the idea emanates. Today, issues like natural resources, pharmacology, energy, and technology have their solutions in factories, boardrooms, and playing fields as diverse as the globe itself.

That is why Arlington Econometrics’ portfolio products have been so successful. Irrespective of capitalization or geographic location, my database serves up vigorous strategies and solutions which capture the essence of capital gains and price momentum worldwide. It is another reason why I am averse to using standardized benchmarks such as S&P or Dow Jones as a means of comparison for performance.

Instead, Arlington Econometrics applies proprietary calibration to financial products to sift efficiently through the noise and hype to arrive at characteristics that give my clients a better probability of portfolio performance over the long term.

Bought and paid for.

Interestingly, a confluence of sector analysis and globalism coalesced this past week with the announcement of an infusion of foreign cash into the U.S. financial services sector. From sources as diverse as the Middle East and Asia, money was used to bail-out catastrophic losses in mortgage-related and other synthetic financially-driven faux pas of many financial megaliths in the United States. To be sure, the collapses are not limited to the United States, but do seem, oddly, to have U.S. corporate interests behind their folly.

As I said in last week’s missive, terms like “efficiency” and “productivity” are buzz words coded to signify lay-offs and unemployment. Right on cue, job cuts in the U.S. banking and brokerage universe topped out over 40,000 during the past six months, alone.

In world news…..

But the reverberations of negative data are far-reaching. Rising energy costs, as well as the increasing costs for food, pharmaceuticals and education may mean layoffs in healthcare, business, transportation, publishing, etc. Last week the Beige Book reported the largest year-over-year inflation rate than any in nearly two decades. If investing is, indeed, global, then no border or country of origin can protect the innocent from the tidal wave of economic deconstruction. As with everything else, there are two sides to the sword and at least one of them cuts quite deeply.

I also found it amusing that President Bush chided his Arab counterparts while in the Middle East last week by saying that “rising energy prices hurt the average (American) family”. His responsibility is to provide policy and strategies to his constituents that mitigate the negative consequences of secular themes whose devolution could be harmful, not to beg others to do it for him. In other words, his plea fell on deaf ears. If it weren’t true that he said it, I don’t believe I could have made it up and been believed.

Consumers and businesses had to reach deeper into their pocketbook to pay for goods and services during the past year. Price push inhibits industrial production. Global output and inflation data hit decades-long negative thresholds. It seems that the market is only now willing to acknowledge what had been discussed anecdotally in kitchens, hallways, and meeting places for the past two years: something is amiss, and someone needs to do something about it. Unfortunately, a short term “stimulus package” is not a long term solution to inflation or natural resource depletion.

So it’s pointless, right?

While it is increasingly more difficult to isolate market baskets that seem poised for upward movement, it is not as difficult to find individual one-off circumstances in equities or bonds that might offer capital gains potential. The key to such an endeavor is to work, top-down, from an idea and then eliminate capitalization biases from one’s research. Today’s successful portfolio looks like an emerging-market basket of varying probabilities in sectors whose actualization might be found first in the imagination, and secondly on the balance sheet. Price and location are secondary considerations.

(Note: There will be no Market Outlook next week. The next scheduled publication will be Monday February 4^th.)