New Year Resolution: Wary of Socialization of Capitalism

At the start of 2010, we have but one resolution. Portfolio management needs to be wary of the socialization of capitalism. The 1990s started with the collapse of state ownership of the means of production. The start of 2010 needs recognition by investors, rating agencies and governments alike of failure of another real time experiment. By requiring state rescue of global capital markets, it has been demonstrated at great cost that securitization cannot diversify away the systemic risk that arises from hubris. We believe that investor focus on quality is called for as the full dimensions are still unclear of the unintended consequences of concurrent liquidity injection. We have a less than maximum weight in fixed income (but favor quality corporate, strong smaller currency and emerging country issues) and favor gold/precious metals as hedge. Across asset classes and certainly in equities, we expect sharp bifurcation to be an enduring characteristic even as global economic growth bottoms and corporate earnings recover with valuation contraction likely as 10 year U.S. T-Note yields cross 5%. At the margin, our geographic equity mix has an overweight in North America in advanced markets. In the overweight of emerging markets we have a more nuanced stance favoring smaller ASEAN countries that have learnt the lessons of 1997 over the blanket favor of many others for BCRIC countries. In sectors, we expect dilution id finance but see its sector leadership by the strong few as crucial. In cyclical groups, we favor industrials over consumer discretionary. In restructuring accrued or underway, we favor healthcare, information technology and telecommunication services. As quality balance sheet/ operational companies, we see the major energy companies as beneficiaries.

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