AEGEANCAPITAL.COM INC.
STOCK MARKET REPORT

 Report#10,          June 9th, 2000 

Has the Federal Reserve really done it, again?

    What  a difference a month makes! Last month Nasdaq was supposedly down and out, as we write these lines is in and all the rave again. Prior to the spectacular 19% advance -in just four days- that Nasdaq posted two weeks ago the following facts had occurred 1) For three consecutive weeks -preceding the advance- three out of the four investor sentiment reports, had indicated a higher percentage of bears than bulls.
2) The ARMS index reached a level as high as 7, which we do not recall ever seeing before. 3) Premium ratios for options had reached a  level below  .25 which had not happened in fifteen years.
4)53% of the stocks that make up the Nasdaq 100 index were below their 200 day moving average, (16% were below their 200 day moving average by more than 40%!) 47% of the stocks that make up the SP100 index were below their 200 day moving average. 5) The VIX index had managed to stay above 25 for 40 consecutive trading sessions , it should be noted that for the preceding 250 trading days, the VIX index had closed above 25 for only 49 times. 6) There had been wide positive divergence with regards to money flows versus price movement in several high profile  Nasdaq stocks. Thus on 5-19 we commented to clients with managed accounts the following "... the conclusion from all the above must be that selling pressure should -in theory- be at least temporarily exhausted thus, permitting the markets to stage a rally for 2-3 weeks, opposed to just a few days! These are good odds to go long with reasonable sell stops in place. In other words, by everything we know the markets at this point should be rated a "technical buy..." Subsequently, in our  weekly market report for week ending 5-26-00 we wrote "...Based upon what we see, we must conclude that given the market's oversold condition, it could literally turn on a dime, if some event acted as a catalyst to reverse the monumental negative Well, that event took place in the form of a benign unemployment that set Nasdaq on fire, up 19% in just  four days. At this point, technically speaking, Nasdaq and the SP500, have improved considerably, especially Nasdaq. It is safe to assume that Nasdaq has -in all probability- seen its lows for now. Volume has picked up and the advance/decline line has finally turned up after eight consecutive weeks of declines. Until new economic data come out that change the current perception, the market should trend higher. In fact, we would go long in any pull back. (Currently, all of our indicators are positive but at the same time very overbought, thus prompting us not to chase stocks at these levels) The area we would like l to concentrate at this point is whether indeed the economy has slowed down or not. According to the the Labor Dept.'s survey of businesses, payrolls fell by a whopping 116,000 employees! Can this be possible when  compared with May's low levels of new claims for unemployment benefits? Also, such a huge decline in employment, in the past had taken place in a recession, are we in a recession? Furthermore we would like to point out, that economies -especially one the size of ours- do not come to a screeching halt -as the data suggests- in a the course of thirty days! Economies slow down gradually, ours won't be an exception. Last, but not least we would like to point out, that February's data were also abnormally weak,  only  to be followed by very strong data in March and April. In our opinion, there is some evidence -as measured by lower home sales, the May purchasing manager's index reading, and lower future orders- that the economy has slowed down a bit. We do not believe it has slowed down to the 3.5%-4.0% level that is acceptable by the Federal Reserve. Which brings to the next question : 
Let's suppose the economy did slow to a  growth rate of  4.0% annually. The past three quarters the economy has grown at an average rate of 6.0%. Consequently, a growth rate of 4.0% would mean a reduction in growth of 33%. If the aggregate rate of economic growth is reduced by 33% can one expect aggregate corporate earnings to continue to grow at the rate they have been growing? 

Seven of the twelve have no earnings, and the other five that do, their P/Es range between 100 to 628! And while we are talking about P/Es, we have to mention CSCO. Before the recent decline it had a P/E of 200, now it sports a nice cheap one of 156! There is nothing cheap about a P/E ratio of 156. What is the purpose of the above exercise? The  purpose is to demonstrate that high tech stocks are priced to divine perfection, and any earnings disappointments in the future quarters will crash them. We do believe that these stocks present great trading opportunities in the short term, and they should be viewed as such.Trade them when you can, but if you plan to keep them for 2-5 years in your portfolio, more likely you'll be very disappointed. In conclusion, we feel  the current perception that the economy has slowed is misguided .Moreover, when the economy does finally slow down, corporate profits will be adversely impacted.  However, for as long as the current perception lasts, so will the current rally. Given the great short-term gains that can be achieved, we would definitely advise to go long in any pull back. But let's not kid ourselves, regarding  a stock "cheap" because its P/E ratio has come down from 200 to 150 is naive, and plain silly! 

Our Market Position:
Dow: Neutral ,SP500: Neutral
NASDAQ:Neutral 

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