STOCK MARKET REPORT

                 Report#20,         4-14-2001,       Page 1 

Not So Fast !

   In our March newsletter, we said  "... At the moment NASDAQ has technical support (+/- 25 points) at 1750, 1600, 1500 and 1350. Which one is going to hold? For now the 1750-1600 zone should provide -at least- a temporary comfort zone, from which the market will attempt to regroup. In our opinion, a sharp “bear market” rally can not be that far from here. Whether it starts from current levels, or from lower ones, it does not matter, because in either case it should be between 25%-35%, which is a very respectable return..." So, it should be no surprise to our readers, that finally the market managed to put together one decent week. The only surprise -to us- is that it took as long as it did! Immediately, "Bottomologists" (aka Wall Street Chief Strategists) rushed to declare the bottom of the bear market! We are open minded, and good natured fellows, so, we would normally give them the benefit of the doubt. However, these are the same "experts"  who have declared -with much fanfare and little shame-  several bottoms, over the past six months! Thus, we are a little hesitant to open the champagne bottle. Let's examine what sparked the rally last week. First was the announcement by Amazon.com that the company will have lower losses. We find it a waist of time to comment too much on Amazon.com. However, we will say this: neither Amazon.com is in any imminent danger of becoming profitable, nor, its Chairman Mr. Bezos, is in any imminent danger of becoming credible and believable. If Amazon.com was the fuel for the rally then SELL NOW while there is still time!  Second reason for the rally, was Mr. Jonathan Joseph -the  semiconductor analyst at Smith Barney- who upgraded the chip stocks. People paid attention, because -to his credit- he was the first one to downgrade them on 7-5-2000. We genuinely like Mr. Joseph, so we will spend some time examining his call. We think  that exuberant investors apparently forgot a few details. A) His call -this time- was by his own admission, due mostly to "anecdotal" evidence, rather than any tangible signs of fundamental improvement. Simply put, he thinks "business can not get any worse" To a large degree, we agree. However that does not mean business is going to get a whole a lot better either! B) We did a little exercise -the results of which- are summarized in the table below. We examined the price of some chip stocks the day Mr. Joseph downgraded the chip sector (7-5-00) and the gains the stocks experienced after the downgrade, on average they gained 32%! Obviously Mr. Joseph, was right, but a bit too early. We think it is safe assumption, that even if he is right (which would be the best case scenario) he is  probably just as early as he was last year. So, take the price of the same stocks on 4-9-01(the day before the upgrade), subtract  32% and you get the picture! (Worst case scenario, Mr. Joseph is simply wrong this time, although very brave)

In our humble opinion, the best leading indicator of the health of the semiconductor sector, is the Taiwanese dollar. The reason is this, due to Taiwan's position -as a major producer of chips- any industry- wide  pick up in orders, invariably causes the Taiwanese dollar to rise, because chip buyers need to buy Taiwanese dollars to pay for the chip purchases! Unfortunately, we could not upload a chart of the Taiwanese dollar, but we assure you it does not confirm Mr. Joseph's belief that things can only get better from here for the chip stocks. Moreover, let's examine the message of the equity markets, assuming that indeed  the bear market is over. Bear market are caused due to poor fundamentals (just as bull markets are caused due to improving fundamentals -or bubble mentality) Thus, if indeed the bear market is over, the implication for the economy is that its fundamentals are about to improve as well. That is where we have our doubts. In our view, we have not seen even one indication that the economy is about to turn around within the next 3-4 months. By now, it should be clear to everyone -except of course the Federal Reserve- that the economic slow down has to do more with overcapacity, and less with just a temporary build-up in inventories. It takes much longer to grow into the added capacity, than it takes to work off excess inventory. In addition, the recent employment data, confirms that the only hope to avert a recession -robust consumer spending- is about to be curtailed, as the employment picture gets more uncertain.  In our opinion, the coming economic data will show that the second quarter, if not the first, will mark the start of the recession. According to Mr. Banerji who is the director of research for the Economic Cycle Research Institute, http://www.businesscycle.com    in an article that appeared on The Street.com on  4-7-01  "...growth in the ECRI's Leading Employment Index plunged to a 19-year low in February: This suggests that the labor markets will get much worse in the coming months. And nothing can undermine confidence as much as the loss of jobs. Ultimately, a worsening job market will feed on itself, causing a recession. As the chart shows, the employment index is clearly at recessionary levels..."  

               Source: ECONOMIC CYCLE RESEARCH                                               

We could not agree more, with Mr. Banerji and his conclusions.                                
   If that is not enough, we also would like to add two other factors that, in our opinion, will pose additional challenges to a speedy economic recovery. The first factor, is going to be higher energy prices during the summer. Higher oil prices will negate the benefits of lower interest rates  Higher oil prices hit both the consumer and the corporate sector. The enormous capital investment that corporations embarked on in the 90's was fueled both by healthy profits and healthy financial markets. However, higher energy costs are adversely affecting corporate profits,  forcing companies to reduce capital investment. In order for the economy to re-accelerate, corporations need to increase capital spending, not reduce it! The second factor that will impede a speedy recovery, is actually a byproduct of the first. The productivity increases of the past few years, were without much doubt, due to the enormous capital investment in IT technology. Since, investment in IT has collapsed, so will the productivity gains of the past few years. Reduced productivity, will result in increased costs and lower profits for U.S. firms, forcing them to lay off more workers in order to boost sagging profits and share prices.                                        

    In conclusion,  no one can argue that we are in the middle of a "trading rally" After all, NASDAQ has rallied from an intra day low of 1620 to close at 1961, that is a 21% advance, how can one argue with that? We believe that this trading rally, may have another 10%-15% left in it before it expires. So, on a short-term basis we think we should be long the market. However, as far as, the bear market having ended, we think there is no evidence to conclude that upon. The end of the bear market will signal the improvement of the fundamentals of the economy. At the moment, all indicators are showing that the economy is still deteriorating. 

Our Market Positions:
Dow: Trading Buy,SP500:Trading Buy
NASDAQ:Trading Buy