Sector Mini Rotation Late 2009 Considerations

In the twelve months since October 2008, purveyors of Armageddon held sway for the first six months and then since March 2009 holding sway have been soothsayers of highly leveraged (this time, government) finance. In fact, capital markets may instead be undergoing serial mini-rotation in transition to a less leveraged, higher quality oriented environment. We believe that before sustainable recovery patterns can be established in equities, reconciliation is needed between the starkly differing behavior of the last six months of sharp government finance driven equity behavior in the OECD countries and that of first sharper recovery but then consolidation of gains of equities in fast growth emerging countries.

The same contradictions need to be reconciled in equity sector performance between leverage from cyclical credit expansion driven performance that thrived in the last cycle and quality growth driven performance. Asset contradictions between equities and fixed income also remain to be worked out. In the present reality of massive deficits in the largest currency zones, a post- election German conservative coalition, France and the DJP in Japan could offer globally useful checks and balances. Now (as in the pre-Euro environment in European finance) global fixed income rotation to fundamental preferences for more flexible/conservative smaller markets could be significantly sustained over preference for the liquidity of the large currency zones that previously represented a trading view of markets.
 
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