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Due
to the overwhelming positive comments that we
received last month with regards to
January's newsletter and our decision to
post an interview with Mr. Ike Iossif (President/Chief
Investment Officer for Aegean Capital Group,
Inc.) we decided to deviate one more time from our
usual newsletter format. For his views on the economy,
equities and bonds, please read on.
MARKETVIEWS.TV
Interview
with Ike Iossif
By
Dan Bistline
02/10/2002
3:30 PM PST
D.B.
Hi Ike, on November 23rd you went on a
"sell" signal. At that time, the SP500
was at 1150. You had indicated that the index
could rally a bit more, up to
1180 level, but you were expecting
the Index to fall back to the 1080 level. In
addition, in recent days you told your
subscribers that you were expecting NASDAQ to
reach the 1770-1780 level before short-term
support could be found. Both the SP500 and
NASDAQ met your downside targets, is the decline
over, and have you turned bullish?
I.I.
Hello Dan, As our subscribers, and listeners
know, our "market timing"
methodology is based on assessing "risk"
at any particular time. We make decisions based upon
"return to risk" ratios. We rate the
market based upon our own "return to
risk" ratios that we have determined to be
appropriate for our investment objectives.
At that time the return to risk ratio -on the
long side- was rather poor by our
standards and that was the reason why we went on
a "sell" signal. At the moment, we are
on "alert" for the possibility of a
change for the better, but it has not
materialized yet.
D.B.
What would it take for the required return to
risk ratio to improve?
I.I.
The internals of the markets would need to
improve. For example, let's take a look at our
trend indicators. The accuracy of these
indicators is clearly illustrated by the fact
that they correctly identified the down trend in
the Summer, the up-trend in the Fall, and the
trend reversal in January.
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The
trend is still down, of course it does not mean
that it can't change in the near future, it may.
Never-the-less for the time being the trend
remains on the downside. The same holds true
with every single indicator that we employ. They
are all listed in pages 5-12 and as I will go
over them, we will see that they are all at
areas from where we get both short-term bounces,
as well as, multi -week rallies. At the moment,
although all of our indicators are at critical
support levels, at the same time they are all
below zero. That means the risk is still on the
downside. We would need to see the majority of
our indicators to return to positive territory
-which would indicate favorable market
conditions on the long side- in order for us to
change our view on the market.
D.B.
You have been long enough in the business, not
to mention that you have personally designed all
these analytical tools, that you must have an
"insider's opinion" with regards to
what may lie ahead. Yes at the moment all these
indicators are still negative, but you must be
able to extrapolate where they may be going
next, so, in your subjective opinion, do you
think they may turn positive in the
coming days?
I.I.
You are trying to get a prediction out of me!
Unfortunately, I can't give you one at this very
moment. The markets are at a critical
point. All they need is a "catalyst"
to either push them over the edge, or, pull them
back to life. At times of uncertainty,
investors can be best served by being able to
objectively identify the prevailing market
climate, so, they can take appropriate action
now, opposed to trying to speculate on what the
climate may be tomorrow. As of the time of this
interview I can say with authority, that our
indicators -which we will discuss in great
detail later -are telling us the
current market climate is unfavorable for
those wanting to own stocks. A week, or, two
weeks from today, that may change, but it has
not yet.
D.B.
Let's change the subject. What is your current
opinion of the economy?
I.I.
My opinion is based upon our own in-house
economic research, and upon the research
provided by ECRI (www.economy.com) The
ECRI 's WLI bottomed in October of 2001. Since
it has been in an up-trend for over 14 weeks
now, it's highly likely that the economy
will begin to recover by the first quarter of
2002.
D.B.
That should be positive for equities, after all
we never had a bear market at the start of an
economic recovery, right?
I.I.
In the long-term stock prices reflect future
corporate earnings. An economic recovery that
does not bring about a recovery in corporate
profits, does little to help stock prices.
Theoretically, an economic recovery should put a
"floor " under the market, but the
lack of improved earnings also creates a
"ceiling" for the market as well.
D.B.
I take it you do not believe corporate profits
will improve, despite a recovery.
I.I.
The earliest I see a recovery in corporate
profits is in mid-2003. Mainly, because I
believe it will take until then for the recovery
to pick up steam. Although the "Stock
Bubble" is behind us, the "Credit
Bubble" is not. The enormous amount of debt
currently carried by both U.S. consumers and
corporations alike, will impose formidable
obstacles to the economy's ability to recover
quickly and robustly. Consider the
following two numbers: by the start of
recoveries, installment debt as a percent of
DPI, usually declines to around 16%.Today it
stands at 22%, moreover, total household debt is
close to 8 trillion, or, 77.7% of GDP. Likewise,
the debt load of U.S. non-financial, non-farm
companies at the end of the 3rd quarter of 2001,
was equal to 48% of GDP! These kinds
of indebtness are seen at the beginning of
recessions, not at the start of recoveries.
Consequently, both the consumer and corporations
will be limited in their ability to increase
spending substantially. In fact, the
market's latest swoon may be due to the
realization that the recovery will be slow, and
corporate profits will remain depressed for
quite some time. Given that the economy is
recovering, if the markets were to violate
the September lows, I would have to assume
that the market is telling us there will
be no profits recovery any time soon.
D.B.
So, is it safe to assume that
"fundamentally" you are bearish on the
stock market?
I.I.
I think it is safe to assume that I believe the
equity markets will continue to be challenged a
while longer than the shameful Pollyannas
are touting on CNBC.
D.B.
In recent weeks, you had been saying to your
subscribers that the XAU was heading to the 67.5
level, now that it is there, are you
pulling any "chips" off the table?
I.I.
Actually Dan, the ferocity of the advance caught
me by surprise! I was expecting it to reach that
level, but in a more subdued manner.
Currently, we have 8% of our long-term portfolio
in gold stocks, I will use any meaningful
pullback to the 60-62 area to increase our
holdings to 15%, which is the maximum we can
allocate to gold stocks. I like HGMCY, NEM,
AEM, DROOY, ASA. However, I'd rather talk
more about the XAU, a little later when we get
to the charts.
D.B.
As you wish. In fact how about if we move on to
the next segment now?
I.I.
That's fine. Let me summarize up my views, for
those who are not subscribers and won't be able
to read the rest of the interview, or, see our
indicators. All of our indicators are at levels
from which both short-lived and multi-week
advances start. The determining factor is
whether the indicators turn positive. If they
do, then any advance from current levels can
last into April. If the market advances further
this coming week, but the indicators fail to
turn positive, then the advance will be
short-lived, and it may not even last beyond
Wednesday. In such case we would expect the
SP500 to visit the 1040-1050 area, and NASDAQ to
visit the 1650-1680 area. Also
keep in mind that the trend is still down (see
charts earlier) which means at the present time
the risk is still on the downside, until proven
otherwise.
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