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For
this newsletter only, we will deviate from our
usual format. Given our foray into several media
venues during the first Quarter of 2002, such as
cable TV and radio, we are publishing a lengthy
interview by Mr. Ike Iossif (President/Chief
Investment Officer for Aegean Capital Group,
Inc.) covering all the issues that we were
planning to touch upon in this month's
newsletter. For his views on the economy,
equities and bonds, please read on.
MARKETVIEWS.TV
Interview
with Ike Iossif
By
Dan Bistline
01/05/2002
3:30 PM PST
D.B.
Hi Ike, let me start with congratulating you for
finishing the year in the "Top Ten Market
Timers" for 2001, according to "Timer
Digest" (www.timerdigest.com) Based upon
your market timing signals you were up 15.95%,
how did you do it?
I.I.
Thank you Dan. The market timing model we
follow, is based on quantifying market risk, and
comparing that to our required rate of return.
When the return to risk ratio is favorable, our
system gives a buy signal, and vice versa. It
should be noted that the return to risk ratio is
highly subjective, and it varies from one
investor to another. A ratio appropriate to us,
may be inappropriate for somebody else.
Never-the-less, the Dow ended the year down
6.02%, the SP500 ended the year down 12.06%, and
NASDAQ ended the year down 19.56%. Therefore,
our timing calls based on our own
"return to risk" parameters, allowed
us to outperform the popular Indexes by 21.97%,
28.01% and 35.51% respectively. Investors should
keep in mind that "Timer Digest"
assumes that a "sell" signal means
100% short, a "buy" signal means 100%
long, and a "neutral" signal means
100% cash. I am not sure how many people
actually switch positions 100% overnight!
D.B.
You were able to generate these returns, without
participating much in the spectacular rally that
took place in the fourth quarter, you have
remained mostly hedged, why is that?
I.I.
First of all, it shows that it is not necessary
to participate in every market move -up, or,
down- in order to generate a decent return.
Second, as I mentioned, we make
"timing" decisions based upon specific
"return to risk" parameters. We do not
make timing calls based upon trend,
momentum, or seasonality. However, in all our reports we
display "pure" trend and momentum
indicators, that people can use in order to make
decisions, if they care to make decisions based
on such indicators only. For example, our trend indicator for
NASDAQ has been solidly up, we have repeatedly
told our subscribers, that those who
trade/invest based on trend, they should be
long, because the trend is up. We have given all
the upside targets the indexes have reached so
far since the September 21st low. For example,
on November 24th, our model gave an upside
target for the SP500 of 1180, the last I checked
it got up to 1178. Our model (see page 2) now
that the targets are met, has given new ones.
Again, it does not mean that we will un-hedge
our long positions-although those who strictly
follow trend, they should be net long- Our model
is telling us that the current "return to
risk" ratio is unfavorable. That is the
same model that allowed us to outperform all
indexes by a wide margin last year, following
the same methodology, so me must be doing
something right!
D.B.
Can you elaborate on the subject of market risk,
and why you find it unacceptable?
I.I.
Sure, we follow 16 different indicators for each
market we cover. All of them are shown in our
daily, weekly and monthly reports. Here's just a
sample:
I.I.
After the sharp sell-off following the 9-11
attacks, the market experienced a similarly
sharp rebound, which I do not think it was
surprising to anyone. After all, markets do not
go down forever, just like they do not go up
forever. However, after the initial surge, not
one of the 16 indicators we follow has confirmed
the advance. The trend indicators have remained
solidly up, but they were also solidly up in
March of 2000, we all know what followed, that
is why we do not make market calls based on
trend alone. It is not uncommon during major
transition periods to see some indicators not
confirming a particular move. The reason is, if
you are using data going back 60-90-120 days,
and the market is right in the middle of a
transition from a bear market to a bull market,
then inevitably some of the indicators will
continue to give "false" non
confirmations until the "bear" market
data is filtered out of the system. To give you
a simple example, consider this: Let's say
you're using a 14 RSI as your sole
indicator. In bull markets it gets overbought
above 80, in bear markets it is considered
overbought above 60. So, if you got a reading of
70 , and you are going by the experience of the
last couple of years, you would assume that the
market is overbought by bear market standards.
If the market is making a transition from
bear to bull, then your conclusion would be
incorrect about the market being overbought. An
14 day RSI reading of 70, is normal in bull
markets. Obviously it would take some time to
catch up. Considering that the last bull market
lasted from 1982 to 2000 (18 years) I do not
think missing out on the first 3-6 months made
any difference.
D.B.
Ike, are you saying that the divergences you
have observed may be due to the fact that the
market is indeed making a transition from a bear
market to a bull market?
I.I.
What I am saying is this: It
is possible that during a major transition some
indicators will give a false signal, but it is
highly unlikely that all indicators will give a
false signal for a prolonged period of time.
Moreover, if such transition is indeed taking
place, it can be detected by other ways.
D.B.
Such as?
I.I.
At the beginning of all Bull markets of the last
100 years, one thing that we got right away, was
"uniformity" Wide participation by all
sectors. We have never had a Bull market that
started with sectors that are positively
correlated going the opposite direction!
D.B.
What do you mean, can you elaborate?
I.I.
It is the market that is
contradicting itself, and thus creating serious
doubts about the bullish case, take a look at
the six charts below.
| TELECOM
HLDR (TTH) |
FON |
UTILITIES
INDEX |
 |
 |
 |
| NETWORKING
HLDR (IAH) |
CSCO |
TRANSPORTATION
INDEX |
 |
 |
 |
I.I.
I am willing to believe what the market is
telling us, unfortunately what is telling us is
total nonsense! For example, the networking HLDR
is up over 60% since 9-11-01 implying a
tremendous recovery in the fortunes of
networking gear manufacturers. At the same time
the telecom HLDR, is below where it was on
9-11-01, implying a worsening in the fortunes of
telecom companies. The problem with this picture
is that, in order for the networking sector to
recover, the telecom sector must recover first.
Unless the buyer (telecom companies) of
goods is doing well, it is impossible for the
supplier of the same goods (networking
companies) to do well, yet the market is saying
just that. Look at Sprint and Cisco. According
to the market, Cisco's fortunes have already
turned around, however according to the market,
Sprint's recovery is nowhere in sight! The
problem is, Sprint is one of Cisco's biggest
customers. Unless sprint -and the rest of the
telcos- recover, how in the world Cisco -and the
rest of the networkers- are going to recover?
All these companies are positively correlated,
it is impossible for the networking sector to do
great, while the telecom sector is doing lousy,
yet the market is telling us just that! Look at
the DJTI and the DJUI. These two indexes are not
correlated to each other, but they are both
positively correlated to the economy. The DJTI
is telling us that an increase in the
shipment of goods is imminent. However, for
goods to be shipped, first they have to be
manufactured, causing plants to consume energy
during the manufacturing process. It is
impossible to increase manufacturing activity
substantially without increasing the use of
electricity. If the use of electricity and
natural gas is increased, then Utility
companies should see increased earnings, yet the
DJUI is hovering near two year lows ( even
excluding ENE) These are just some of the many
contradictory statements the market is making.
You do not see that kind of nonsense at the
start of new bull markets. Therefore, if the
technical indicators were not confirming the
rally, but the rally had "uniformity"
I would assume that the market was in the middle
of a major transition, and thus it would be
possible that some indicators were giving a
false signal. This is not the case now, not only
the technical indicators have not confirmed the
advance, but
more importantly, it is the market by its own action
that has not confirmed the advance.
D.B.
How about the economy, are you seeing anything
positive?
I.I.
Yes, definitely! Over the past few weeks several
of the components in ECRI's Weekly Leading
Index, have risen, implying that a recovery is
highly likely. However, I must stress that just
a few weeks of an upturn is not enough to
qualify as a "de facto" indication
that the economy has turned around. If things
continue to improve in the next 12-16 weeks at
the rate that they have over the past 6 weeks,
then we can reasonably conclude that the
economy has turned the corner. At the
moment, the recovery is in its infancy, and thus
it is highly vulnerable to external shocks.
Assuming we do not get any, and asuming the
improvement in the WLI continues, then one must
conclude that we will see a stronger economy in
the second half of this year.
D.B.
Is that why the bond market has taken such a
beating?
I.I.
No, I do not think so. We have had 27 recessions
since the end of the Civil War. Although rates
did advance somewhat in anticipation of a
recovery, not once have long term interest rates
jumped 100 basis points right at the trough of
any of those 27 recessions(According to my good
friend John Hussman/ www.hussman.net) If that is the case
now, it will be definitely a first. I think
there are other forces at work. It could be that
the bond market is sensing that the era of
budget surpluses is gone, and deficits will be
the way of the future. It could be that some big
derivatives player has been caught on the wrong
side and is slowly trying to unwind an errant
position. Most people do not know, for example,
that J.P. Morgan/Chase has at least 20
trillion dollars of exposure in notional value
terms to interest-rate derivatives contracts
(trillion with a T!) The people at JPM are
pretty smart, but so were the geniuses behind
Long Term Capital Mgt. Ninety percent of the
derivatives market in the U.S. is dominated by
just three banks, Bank Of America, Citigroup and
JPM. J.P. Morgan has the honor of being
the biggest player of the three, controlling
nearly 60% of the derivatives market. I would
not e surprised to find out -after the fact of
course- that one of these big banks -more likely
JPM- has made an errant call and is in the
process of reversing it, by selling large
amounts of the 30 year bonds, thus depressing
the price. However, I must say this is only
speculation on my part. I think the most likely
reason behind the collapse in bond prices is
that the bond market sees an end to the era of
surpluses.
D.B.
Shouldn't higher interest rates have a negative
impact on the market?
I.I.
They should, but I do not think we will get a
real shock unless they climb another 75 to 100
points from here, while P/Es remain as high as
they are at the moment.
D.B.
Let me challenge you with one question before we
go into the technical analysis part of our
interview. What do you think the market will do
over the next 5 years?
I.I.
Asking me to predict the market 5 years out is a
real challenge, especially since I did not get
my "Henry Blodget Crystal Ball" for
Christmas.
D.B.
"Henry Blodget Crystal Ball" what's
that?
I.I.
It's a crystal ball made in honor -or should I
say dishonor- of Henry Blodget, it makes
outrageous predictions based on nothing but
silliness, but they are very entertaining!
D.B.
Please, lets get serious now.
I.I.
I was serious! Anyway, I believe that the market
will trade in a large trading range for probably
the next 5-10 years, unless something causes it
to collapse. I think we will see the DJIA
trading between 11,000 to 8,000, the SP500
between 1200 to 800, and NASDAQ between 2800 to
1100. There will be huge trading opportunities,
from bottoms to tops and vice versa, investors
should be patient, and also re-adjust their
thinking and expectations.
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AEGEANCAPITAL
GROUP INC.