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Ike
Iossif (President/C.I.O. of Aegean Capital
Group, Inc.) talks about the current
rally, the economy, and all of Aegean's
proprietary market indicators.
MARKETVIEWS.TV
Interview
with Ike Iossif
By
Dan Bistline
D.B. Hi
Ike, how are you doing?
I.I.
Fine, thank you.
D.B.
The last time we talked the Dow was at 9636, the
SP at 1030 and NASDAQ at 1535. As of the close
on Friday, the Dow finished at 8313 (down
13.75%) the SP at 864 (down 16.10%)
and NASDAQ at 1248 (down 18.7%) Where do we go
from here?
I.I.
I am not sure I can tell you with certainty
where it is going, but I think I can tell you
with confidence where it is not going! It is not
going to Disneyland aka "the Happiest
Place On Earth" -at least not any time
soon.
D.B.
I assume you are implying that things can get
worse.
I.I.
The potential for more difficulty ahead is
there.
D.B.
It's been already a very difficult year for many
individual investors and pros alike. In fact,
this is the worst market in 30 years.
I.I.
It's difficult, because it is very unforgiving.
Unlike a bull market that bails you
out of your mistakes, this market makes you pay
dearly even for the smallest miscalculation,
there is no room for error, that's for sure.
D.B.
Yet despite dealing with the worst market
in 30 years, your managed accounts are in the
black, and according to the latest numbers
from Timer Digest (www.timerdigest.com) you are
ranked number 2 for the past twelve months for
your timing calls. Would you like to elaborate
on your approach, and give people some helpful
ideas?
I.I.
There are two aspects involved in managing
money, methodology and philosophy. I do not want
to get into our methodology because it is kind
of complicated, plus it is posted on our
website, anyone who is interested can read it.
Mainly we apply some of the same hedging techniques
that we employ in the long/short hedge fund we
run for our European investors. With
regards to our philosophy for managing
other peoples' money under these conditions, I
can say it is pretty simple "no matter what
you do, do not lose money!" The
emphasis is on capital preservation. We are not
that concerned with "missing" a move
here and there, we are more concerned with
something that may not miss us!
D.B.
How about "market timing? You were on a
sell signal until the 22nd of July and then you
switched to neutral, why?
I.I.
I switched, because our model switched.
Let's go over it.
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Our
intermediate forecasting model, has
produced two scenarios for the next 1-3 weeks.
On the bullish side we have a target of 1450,
and a probability of 49.58% to materialize, and
on the bearish side we have a target of 1080 and
a probability of 42.62% to materialize. NOTICE
that the ratio between the bullish and the
bearish scenario stands at 1.16:1
(49.58% divided by 42.62%) thus producing a
"neutral" signal. (The red/green line
represents the most likely price action to take
place on the way to reach the target price. The
ratio means that it is just as likely -at the present time-
for the index to fall to 1080 than it is to
rise to 1450. |
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| Our
intermediate forecasting model, has
produced two scenarios for the next 1-3 weeks.
On the bullish side we have a target of 950,
and a probability of 43.11% to materialize, and
on the bearish side we have a target of 720 and
a probability of 51.73% to materialize. NOTICE
that the ratio between the bearish and the
bullish scenario stands at 1.2:1
( 51.73% divided by 43.1%) thus producing a
"neutral" signal. (The red/green line
represent the most likely price action to take
place on the way to reach the target price.) The
ratio means that it is just as likely -at the present time-
for the index to fall to 720 than it is to rise to
950.
Our
Market Positions:
Dow:NEUTRAL, SP500:NEUTRAL
NASDAQ:NEUTRAL |
If
you look at NASDAQ and compare the forecast
versus the actual, there is still room for
either scenario to take place, but with regards
to the SP it does look as if scenario one,
will materialize. If it does, we should get an
entry point for a long position, otherwise we'll
go short.
D.B.
The other day you mentioned that you had made an
observation, which led to some interesting
conclusions, will you please discuss it?
I.I.
I noticed that most of the time during the
bull market years in the 90s, the model seldom
switched directly from a "buy" to a
"sell" at market tops. Usually, It
went from a "buy" to
"neutral" to "sell" or, back
to a "buy." Conversely, at market
bottoms, most of the time, it switched directly
from a "sell" to a "buy."
Over the past thirty months that we have been in
a bear market, I observed that it behaved the
opposite way! At market bottoms, it seldom
switched directly from a "sell" to a
"buy" It usually goes from
"sell" to "neutral" then to
a "buy" or, back to a
"sell." Interestingly enough, at bear
market tops it usually switches directly from a
"buy" to a "sell" The
models take into consideration several
variables, in order to perform their statistical
calculations. So, I opined that apparently one,
or, more of the variables was acting weaker, or,
stronger under different market environments. We
went back and we recalculated each signal
holding all but one variable constant, until we
isolated the one (s) responsible for the
phenomenon. Finally, this is what we discovered:
the variables responsible for the model's action
were the ones that measure money flows, and
volume. As it would be expected, during bear
markets liquidity is in short supply, and
on average there is more supply of stock than
demand. At bear market "bottoms" the
market needs to absorb the extra supply with
less liquidity just to bring equilibrium. By the
time it has achieved "equilibrium" it
has exhausted most of the available liquidity,
consequently there is not enough
"fuel" to propel the market higher,
that's why our model would go from a
"sell" to "neutral" instead
of a "buy." Of there are exceptions.
We also noticed that the longer the model stayed
"neutral" from a previous
"sell" the shorter and weaker the
rally that followed. Our model went on a
"neutral" signal on 7-22-02, 10
trading days ago, and despite the 4 day
huge rally, it has not changed. In addition,
most of our other indicators -which I will
discuss in part b- have not changed. My
conclusion from all these observations, is that
the market is in a rather precarious position,
it has spent 10 days just trying to stabilize!
If the market can manage to move higher, the
advance will be capped at 10%-12%,
because that's all the market can support at the
moment, unless liquidity improves and/or
the current rate of distribution is reduced.
D.B.
That was very interesting, to put it
simply, unless liquidity levels increase, we are
not going to see the QQQ going from 22 to
32!
D.B.
I want to ask you one more question, and then we
will get into the technicals. What poses -in
your opinion- the biggest risk to our financial
markets?
I.I.
Without any doubt in my mind, the dollar, and
foreigners' loss of appetite for U.S.
securities.
D.B.
Why are Europeans in particular selling the
dollar? after all everyone agrees that the U.S.
offers much better prospects for economic
recovery.
I.I.
Well Dan, since 95% of our clients are from
Europe and I talk to them regularly, plus
I talk to colleagues, and I read several
European papers and magazines, I can tell you
this: Based upon the feedback and comments that
I get regularly from there, the reasons for
selling the dollar are motivated by a loss of
confidence in the U.S. political leadership.
D.B.
Can you elaborate?
I.I.
Yes, but I'd like to make something clear, so
people do not misunderstand what I am about to
say. I am going to discuss certain
perceptions among many Europeans, which may, or,
may not be correct. "Correctness" does
not really matter, what matters is that people
believe what they perceive to be real, and then
they take actions based on their beliefs -right,
or, wrong. So what is important for
us -as Americans and as investors- is not
whether their beliefs are correct, what is
important to us, is the implications to our
economy and our financial system because of
those perceptions/beliefs, right, or, wrong.
D.B.
Please elaborate.
I.I.
As the latest economic data demonstrated, the
U.S. economy is still vulnerable to an outside
shock, or, to policy mistakes. Many Europeans
have come to the conclusion that the odds of a
policy mistake by the U.S. political leadership
have increased substantially for the following
reasons:
1. At the moment the Administration is
confronted with two raging fires which it
has been unable to contain. One is the
Israeli/Palestinian conflict which is getting
worse by the day, the second is the crisis
in our financial markets and all the related
sub-crises which has also taken a turn for the
worse judging by the y-t-d losses in the popular
averages. For many Europeans common sense would
dictate that the Administration puts out,
or at least contains, these two fires before it
starts a third one. Yet the Administration is
determined on starting an even bigger and more
potent fire. No one disagrees that Saddam is a
tyrant, no one disagrees that the world would be
better off without him, no one disagrees that
he's a dangerous thug. However, getting into
another conflict while our economy is fragile,
our financial markets are reeling, and the
Israeli/Palestinian conflict is threatening the
stability of the region, poses risks that can
have adverse consequences on many fronts.
Moreover, something that the
Administration does not seem to be taking into
consideration, is that not only the U.S. will
have to absorb the cost of the operation by
herself -since everyone of our
"allies" is against the idea- but
also, the U.S. will be burdened with the cost of
occupying and rebuilding Iraq. Our European
allies, even if they were willing, they are not
in a position to contribute economically,
not only because their own economies are
suffering, but also because European politicians
will find it impossible to sell their
constituents on the idea of contributing
financially to "America's war" while
embarking on much needed pension reform which
will inevitably reduce benefits. Financing the
operation in Afghanistan, the invasion of Iraq,
its subsequent occupation, and the war on
terror, will take enormous capital and resources
out of our economy, and in the face of declining
government revenues will result in
gargantuan government deficits. In other
words, the Administration's desire
to get rid of Saddam at ALL costs, has the risk
of sinking the economy in the short term,
and also saddling it with enormous new debt,
which the government will need to issue in order
to finance its war ambitions. That's one policy
mistake that Europeans believe has very good
odds of being made.
2.
Another area that presents an opportunity for a
policy mistake is anything that Mr. O'Neil
may be involved in, especially if it has
to do with dealing with the escalating
crises several Latin American countries
find themselves in. Most Europeans agree that
the Secretary is probably a good man, an honest
man with the best of intentions. However, they
also agree that he is not the man for the job.
His has made one disastrous remark after another
on several issues, from the dollar, to
Argentina, to Brazil, to productivity, which he
had to recant later, losing both credibility and
confidence. Having Mr. O'Neil as the
Secretary of the Treasury may be an
accident waiting to happen given the economic
challenges that are confronting America right
now, and the challenges confronting many Latin
American countries, which are on the brink of
economic collapse threatening to create
additional adverse consequences for our economy,
which Mr. O'Neil has shown very little concern
about.
3.
The third area that presents an almost certainty
that a policy mistake will be made, is the
legislative branch. Two weeks ago, Mr. Greenspan
testified in front of the Senate. Senator
Gramm used the opportunity to anoint the
Chairman as the "greatest Central Banker in
history!" Although no other Senators
went as far as Senator Gramm, they all offered
their unquestioned admiration and loyalty to the
Chairman. Any serious student of economics
will recognize Chairman Greenspan as one of the
most irresponsible, inconsistent, self-centered
Central Bankers this country ever had. His
policies, errant forecasts and baseless
proclamations about the "miracle of
productivity" and the "New
Economy" non-sense played a major role in
the creation of the bubble and its catastrophic
consequences. If the members of the House had
even the smallest clue of what is ailing the
economy and what steps need to be taken to
restore its health, they would be asking for Mr.
Greenspan's head, instead of elevating him to
royal status. How can Americans and foreigners
trust that the legislative branch of the
government will produce the needed reforms to
carry the country forward when it gets its
advise from someone like Mr.
Greenspan. Furthermore, most members of the
House are so compromised by campaign
contributions from special interest groups that
you can't count on them passing any meaningful
legislation on any of the pressing issues. Take
a look at the Sarbanes bill for example, it left
out the single most needed reform to ensure
transparency and honest accounting, the
expensing of options. No other item has been
abused by corporations more than the treatment
of options. Despite the brouhaha and the tough
talk, did the legislation address this important
issue? Of course not!
In
conclusion, Dan, European investors feel that
the U.S. is facing some difficult challenges
ahead, while its political leadership, both in
the Executive and in the Legislative
branch, are prone to make policy mistakes that
will burden the economy further. After
all, if -for example- you are a German money
manager, even if Germany has potentially slower
growth rate than the U.S., you do not need
to worry about the burden to the German
economy arising from invading Iraq!
Consequently, you sell dollars for euros and you
underweight U.S. securities.
Do
we need to worry about Europeans selling the
dollar and not buying U.S. securities? MOST
DEFINITELY. We need $1b a day in foreign inflows
to finance our current account deficit, and need
a strong dollar to sell all these bonds the
government will need to issue in order to
finance its pursuit of "Evil Doers." A
mass exodus of Europeans from the dollar and the
U.S. financial market will be devastating.
Do
you think anyone either from the Administration,
or, from the House has given any thought to such
development? No! In my opinion, American
investors need to be aware of such
scenario and take some defensive steps to
protect their portfolios.
D.B.
What defensive steps can they take?
I.I.
That's another interview!
Now let's move on to part B, so we talk
about charts and the rest of our
indicators.
Now let's
take a look at the technical condition of the
equity markets.
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