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If you recall, last summer the "experts" on
CNBC were predicting a pick up at the end of the year,
then in the fall of 2000 they moved their target to the
second quarter of 2001, when that did not pan out, they
moved their target -again- to the
second-half-of-the-year 2001, and probably they will
move it again, as we get closer to the end of the year
and evidence will show that the much anticipated
recovery, is in no hurry to arrive -much to the dismay
of the Federal Reserve Gods, and to Wall Street
analysts. Why are we saying this? Because the market is
telling us so! Please allow us to elaborate. We are
indebted to Mr. Chip Anderson, from Stockcharts.com, for
his innovative work with regards to how the nine major
S&P sectors do relative to one another. The idea -
based mainly on S&P's chief analyst Sam Stovall's
work - is that as the US economy cycles between
recession and recovery, various sectors of the stock
market will rise and fall relative to the market as a
whole. Since, as a group, investors try to predict the
economic cycle, the stock market rises and falls ahead
of the economy. Using lots of historic data, Stovall
came up with theoretical model the connects the major
stock sectors with various points in the general market
cycle. Several years ago, Mr. Chip Anderson refined Mr.
Stovall's original work somewhat so that it ties in with
the S&P Select Sector SPDRs - nine
"stocks" that trade on the Amex but whose
value is really tied to the performance of the sector
that they represent. The following charts represent how
the different SPDRs performed from June 1999 until now.
What are they telling us? In the beginning of
acceleration in economic activity, technology leads the
way. At the present time -on a relative basis-
technology has simply stopped to under perform, but by
no means it is outperforming the rest of the market, as
one would expect if indeed the economy was on a solid
road to recovery. If you look under the surface and into
the details of the market's action (where usually the
truth lies) technology has not shown signs of any out
perfomance coming any time oon, which means there is
recovery signs in the near future.
To further illustrate
this point, we would like to refer to what Mr. Stansky
-the skipper at Magellan- wrote to his shareholders, in
the fund's quarterly report, with regards to technology
the following:
"...At the end
of the period, I felt there were more questions than
answers regarding technology. Looking back, several
elements converged to cause the downfall of tech
stocks through 2000 and into 2001. I've mentioned high
valuations. In addition, the late '90s saw a
combination of significant Y2K spending -- which had a
finite duration -- and the rapid build-out of
technology networks by newer companies that quickly
received funding from the capital markets despite a
lack of earnings history. That ended when it became
increasingly difficult for these companies to raise
the capital they needed to sustain strong growth.
Plus, the slowing economy put pressure on corporate
profits across the entire market, causing many
different types of companies to begin to cut their
spending on technology. As a result I reduced my
investments on some of the larger tech companies
believing that, because of their size, they would find
it difficult to sustain the growth rates of recent
years. For example, Cisco, EMC and Sun
Micro were no longer among the fund's top-10
investments at the end of the period. Looking ahead,
I'm trying to analyze how long the soft demand for
tech products will last. And I'm trying to examine how
quickly companies will work through the excess tech
inventory in the marketplace before they begin to
reorder products and services. Longer term, I believe
the technology sector still offers attractive growth.
But I'll have a better feel about the near term in the
months ahead..."
It should be noted,
that Mr. Stansky has at this disposal the research avail
to him thru Fidelity's incredible resources. Being an
agnostic bunch ourselves, we would like to pose this
naive question: "If such a well informed investor
sees no recovery yet, why should you? What resources do
you have at your disposal? Are your resources the
opinions expressed by Pickle Heads on CNBC, or the
opinion of the Federal Reserve Officials who are now
declaring that inflation is dead, while a year ago the
same Officials viewed inflation as "Public Enemy
Number One?"
The bottom line is
this: there is no evidence, at least not yet, that the
economy is going to recover in the second half, yet the
SP500 is selling at 22 times p/e, while the NASDAQ 100
index has a market-cap weighted price earnings ratio of
102, based on projected 2001 earnings. It is true, that
the stock market recovers ahead of the economy, in
anticipation of economy's recovery. However, when you
look at the relative performance of technology in the
SP500, it tells you that no sharp acceleration is in
sight. At best, we are looking at a growth of 1.5% to 2%
neither of which can support current prices.
Now let's take a look
at the technical condition of the equity markets.
Our
Market Positions:
Dow: Bearish ,SP500: Bearish
NASDAQ:Bearish
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AEGEANCAPITAL
GROUP INC.