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In our last
newsletter, we said that " ONLY the excesses in the
Internet sector have been eliminated. Other sectors,
such as biotechnology, fiber-optics, networking are
still richly valued. If such scenario took place,
investors should expect stocks such as BRCD, GLW, JNPR,
BRCM, IPDH, GENZ, etc, to trade at levels ranging
between 50% to 75% lower from current levels...” As of
the close of the market on 1-12-01, BRCD, GLW, JNPR,
BRCM had closed at 90, 61, 131, and 114 respectively. As
of the close of the market on 2-16-01, BRCD closed at 53
(down 41.1%), GLW closed at 33 (down 45.9%), JNPR closed
at 80 (down 38.9%) and BRCM closed at 74 (down 35.08%)
In addition, most stocks in the fiber-optic and
networking sectors, have fared just as horribly with
JDSU, PMCS, NT, NEWP, CSCO, SCMR, EXTR, just to name a
few, leading the way to similar declines. If you recall,
we had predicted that prices can fall by at least that
much -if not more- if it turns out that the economy will
not recover robustly in the second half. It appears,
that investors seem to have concluded just that, thus
driving prices down to these levels. After all, the
financial markets have always been a very reliable in
forecasting future economic activity. The abrupt plunge
in prices last Spring, coupled with the inverted yield
curve telegraphed loud and clear -to anyone who would
listen- that economic growth in the second half of the
year was going to slow dramatically. The question now
should be this: “are the financial markets correctly
predicting further economic malaise in the near future,
or investors are just “overreacting” thus driving
prices to unjustifiable levels?” If you listen to Mr.
Greenspan, “growth will return in the second half”
If you listen to corporate executives from companies
such as NT, CSCO, SUNW, HP etc. “the current economic
slowdown will extend into the second half of the
year!” Both are supposed to have superior knowledge,
thus enabling them to make a correct prediction.
Unfortunately, both sides have lousy record in
accurately predicting the economic climate. The
corporate executives who now claim “low earnings
visibility” are the same people who just three months
ago were predicting no slow down at all! Mr. Greenspan,
and the FOMC, on the other hand, consistently
underestimated thru-out the 90s the strength of the
economy, and also they failed miserably their last
“test” with regards to predicting a recession. In
1990 (before Mr. Greenspan was coronated as “Central
Banker of the World”) he and the FOMC, failed to
recognize early on, that the economy was heading into a
recession, thus acting too late, and therefore failing
to avoid it! In January, judging from the 100 basis
points reduction in interest rates in just thirty days,
it appeared that Mr. Greenspan and the FOMC were
determined to avoid the same mistake. In last week’s
testimony in front of the hopelessly clueless senators,
it appeared (judging from his categorical declaration
that the economy will recover in the second half) that
Mr. Greenspan and the FOMC are about to repeat it! In
our view, the outcome is still undecided, but there is
no room for error and/or wasting time. We strongly
believe that the recent sharp reduction in capital
spending will last longer than people believe. We think
that after years of double digit increases in IT
centered capital spending, we have reached a level of
over-capacity that will take longer than just six months
to address. That is what corporate executives are now
realizing, and that is why they are predicting the slow
down to last into the end of the year. Thus the only
hope for a fast recovery rests with the consumer. So
far, consumers’ confidence has not reached the
“breakdown” threshold level. However, it could get
there pretty fast. A further erosion in stock prices,
coupled with continuous lay-off announcements will cause
consumer spending to come to a complete halt, due to
complete loss of confidence in the prospects of the
economy. Further aggressive rate cuts by the FED are
needed, in order to prevent total breakdown in consumer
confidence. Mr. Greenspan’s premature conclusion that
the economy is on its way to recovery, with its
implication that aggressive rate cuts may not be coming
in a timely manner, raises the possibility -but not the
certainty- that the “Central Banker of the World”
may repeat his 1990 mistake. We are maintaining our
“neutral” position on the markets, as our position
on the economic front remains neutral as well, although
we are becoming increasingly concerned.
Our
Market Positions:
Dow: Neutral,SP500:Neutral
NASDAQ:Neutral
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AEGEANCAPITAL
GROUP INC.