Market Commentary for the week of September 14,2009

Now what?
With global markets seemingly stabilizing, the conversation now shifts to the location of potential long-term capital gains opportunities. Arlington metrics show that all eight significant sectors are bottoming in a long-term accumulation, but that industrials, technology, and utilities are poised to accelerate at a faster rate than their counterparts. This represents a potential improvement in infrastructure and traditional brick-and-mortar businesses.

Obviously, completion of these endeavors takes time, but time may be the risk-mitigating factor. There will be less volatility and more correlation to expected returns as projects near fruition.

Industrials.
For decades, analysts have spoken about the globe’s aging infrastructure. The multiplicity of definitions runs from electric utility grids, to roads, to buildings and to the environment. The characteristics of these projects all lead to social good, as well as profit potential. Additionally, cash flow returns from these projects have the potential to outstrip their original cost. Being attuned to cost/benefit analysis is the new norm in federal and private expenditures.

The bottom-line for clients, though, is capital gains. The resonance of job creation, taxes received, societal benefit, and return-on-investment has my models overweighting these sectors.

Additionally, these projections are borderless. The need, and capital, is everywhere. Cross cultural effort will be required, allowing for accounting transparency and global exposure. It is conservative to forecast that the next upleg in the global bull equity cycle might be its broadest and most significant in generations.

Given the diversity of need, the statistics are in favor of non-developed regions “catching up” to industrialized nations, and for the more advanced economies to “re-boot” their expansion potential. As the percentage of capital flows into these projects increases so, too, does the benefit to the region. Our own Department of Civil Engineering estimated, for example, that over 90% of bridges and roads are at risk, and need reconstruction.

Eyes forward.
As my models gyrate with short-term market activity, it is important to take a step backward, to widen the aperture, and to focus upon sector rotation within the upcoming secular bull-leg. In that context, market activity becomes clearer, and asset allocation modeling becomes more successful.

I do not mean to suggest that short-term trading is inconsistent with portfolio returns. Indeed, clients have noticed a much higher level of short-term activity designed to capture the current level of opportunity in the markets. But long term macro modeling is always the context in which our portfolio success occurs. Asset allocation plays a greater role in the probability of portfolio performance than does any individual security, or trade, within that portfolio. Most of you have heard that before, and it’s true.

Before we succumb to the doomsday scenario, keep in mind that capital always follows need. Simply, find the need.