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In
last's month's newsletter we specifically
said that the economy won't slow down unless the stock
market does! We felt vindicated after listening to Mr.
Greenspan's semiannual testimony before Congress. What
the Chairman did not say, is that the current hyper
inflated equity assets are due to the Fed's very
accommodative policies of the last few years. Thus,
given how permissive the Fed has been with ever
expanding liquidity, it will probably now have to
become a lot more assertive to reign in that excess
liquidity that has propelled some sectors of the market
to ridiculous price levels. Many insist that as long as
there is no inflation, the Federal Reserve should quit
being obsessed with the stock market. Well, although on
the surface inflation does seem to be under control,
under the surface that is not the case. According to the
price index for personal consumption expenditures,
inflation has started to trend up. In addition, so far,
increases in prices of raw materials and in intermediate
goods have not been passed on to the consumers, but that
can not go on forever. If demand continues to outpace
supply, these price increases will begin to show in the
finished goods as well. So, now the question is how high
do rates have to rise, for the economy to slow down?
Probably the question should be re-phrased to "how
high interest rates have to rise for the "New
Economy" stocks to "top out?"We honestly
do not know. However, our position since last June (log
on to our web site and see our weekly market updates
dating back to June 1999) that if the economy slows down
meaningfully, the argument that high-tech stocks won't
be affected will be proven wrong. If corporate profits
erode, that erosion will find its way into the
"stealth" high-tech sector as well. It is
notable that Mr. McNealy, CEO of Sun Microsystems, has
publicly said that "the old economy of brick- and-
mortar companies isn't sick, but it's not on fire
either. And if rising rates send it spiraling downward,
it could pull the foundation out from under the clicks
economy." We agree with him! In short, we believe
that rising interest rates will first impact the
"Old Economy" which will in turn impact the
"New Economy" 6-9 months later. A "rule
of thumb" of the old days, was that utilities
usually peaked 3-6 months before the overall market did.
We would like to suggest a new "rule of thumb"
tailored for this "New Era." From now on
"Old Economy" stocks will peak 3-6 months
before Nasdaq does. Assuming a)we've seen the highs in
the SP500 and the Dow in January and b)interest rates
continue to rise, then Nasdaq will probably peak by
June. In our recent daily and weekly updates we've said
that our forecasting model for Nasdaq was predicting a
target price of 4950 +/- 100pts. That price level is
within one standard deviation, within two standard
deviations it becomes 5250 +/- 100pts!
Our
Market Positions:
Dow: Neutral ,SP500: Neutral
NASDAQ:Neutral
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AEGEANCAPITAL
GROUP INC.