AEGEAN CAPITAL GROUP INC.
STOCK MARKET REPORT

 Publisher: AegeanCapital  Group, Inc.,    Report#30,    3-9-2002,  6:30pm PST ,  Page 1of 14

To Buy Or Not To Buy?

Ike Iossif (President/C.I.O. of Aegean Capital Group, Inc.) talks about the DJIA, the current rally, the economy, and all of Aegean's proprietary market indicators. 

 MARKETVIEWS.TV

Interview with Ike Iossif

By Dan Bistline

03/09/2002 6:30 PM PST

D.B. Hi Ike, on 3-09-01 you did an interview with Kristen French of "TheStreet.com" You, along with some others who are considered  real "Wall Street Heavy Weights" such Mr. Canelo form Morgan Stanley, and Mr. Richard Bernstein of Merrill Lynch were asked to pick the index that would outperform the rest over the next six months, and over the next ten years. You were the only one to pick the venerable Dow. Six months later, and it turns out you were right on the money! What made you pick the Dow?

I.I. Hello Dan, let's clarify two things before we go any further: a) I am not a "Wall Street heavy weight!" the rest of the people whom Ms. French interviewed for that article, are "heavy weights" but  I am not! For God's sake I am in L.A., far and away from Wall Street!  I was flattered and surprised by the fact that Ms. French thought  my humble opinion was worthy enough to be mentioned along the opinion of strategists of  such  overwhelming statue  as Mr.  Richard Bernstein, for whom I reserve my outmost respect and admiration. b) We still have to wait another 10 years to see if the second part of the prediction comes true, so, let's not open the champagne bottle yet!

Having said all that, I'll give you my reasons for picking the Dow. Back then I reasoned that short-term investors will gravitate around Dow stocks for three reasons:

1. Before the economy begins to show signs of recovery, the early believers would buy the cyclicals any way. Once the economy begins to show tangible signs of recovery -as the recent data suggest- the non-believers will jump in as well, because you can't afford to be a mutual fund manager and not own CAT, or, GE, or, IP, if the economy is recovering.

2. I also thought that in an uncertain environment investors will gravitate around companies with real tangible assets, less controversial balance sheets compared to others, and proven ability to withstand tough times. After all, no one doubts that BA will be around 10 years from now.

3. If the market turned down, the Dow would go down less.

In the long-term, I also chose the Dow, because a) I believe that globalization is irreversible. No other company is better positioned to benefit form expanding markets than U.S. multinational corporations. Even in countries where we are "hated" people still drink Coke! Can you fault Warren Buffet who views Coke stock as a "core" holding? and b) If I was constructing a portfolio, which I would not touch for ten years, it would be full of Dow stocks also because of safety. As I mentioned earlier, no one doubts BA, or, GE will be around ten years from now, I do not think you can say the same for Sun Microsystems! 

D.B. Good enough! Let's change the subject. How about this rally? What do you make of it?

I.I. Our subscribers -who read our daily reports- know that all of our indicators -which I'll discuss in detail one by one later- not only turned positive, but also, broke their downtrends on 3-1-02. For people who make decisions strictly on momentum and trend, that was a buy signal. Look for example at the "Quantifiers" which encompass pretty much all of our indicators.

However, you can also notice that we had a similar surge last August and then the market collapsed! It was a complete fake-out. Therefore, risk averse investors may want to wait until we have a pullback, if the quantifiers remain positive while the market pulls back, then that will be the proof that the rally is for real and it will last for several weeks.

D.B. What areas can you point at, that suggest this rally may not be for real?

I.I. First of all, look at the Dow -which happens to be the best performing index- it is still moving sideways, but with a negative bias. Second, the similarities between the market action in early 2000 and now are eerily striking. Two years ago, the SP500 topped out in early January, had a spectacular 10 day rally in March, and then went nowhere but down.

We see two scenarios taking place from here, let's take a look at the charts below:

 In the next page, we have the exact probabilities for each scenario -as calculated by our forecasting models- I'd rather get into the details when we get to that part. For now, I think risk-averse investors need to at least consider the possibility. If the rally is for real, it should last for several weeks, thus there is no reason to chase it. Let's assume you're trading the QQQ. The last multi-week rally we had, it gave you three opportunities to get in, if  that is what you wanted to do.

So, I really see no reason to jump in right at the "very bottom" of any rally.  If the present one is for real, there will be plenty of chances to go long, and if it is not, you can always short it, when it fails! All of our indicators have turned positive that's a short term buy signal. For risk-averse intermediate term traders/investors we will have a buy signal when the market pulls back, holds at support and the quantifiers stay above zero. A couple of things that bother me are a) low VIX/VXN readings and b) as I will discuss later, all the major markets/indexes are coming close to formidable resistance clearly illustrated in the monthly charts. So, far the rally has been exceptionally strong, but the charts show that the indexes are rallying back to the long term support levels -which now they represent resistance- which were violated in the course of the bear market the last two years.

D.B. You talk to lot's of people who are in the business, what type of feedback are you getting?

I.I. I have made three  interesting observations: a) I do not hear anyone trying to pick the "top" to go short in contrast to what we saw during the rally from the September lows b) I do not hear too many people saying that they intend to sit it out either, they plan to go long, and c) very few -even among those who are long, or,  are planning to go long- believe we are witnessing the dawn of a new bull market. I find it particularly interesting that all the commercial traders I talk to are net short and rather bearish. Of course you got to keep in mind these guys build positions over the course of a several weeks, so, the market can go up for several weeks while they are building short positions.

D.B. What's your upside target?

I.I. On 3-4-02 (see daily report)  we told our subscribers that our first target was the 1880-1920 level for NASDAQ and 1175-1185 for the SP500. I'll cover the rest of our targets when we get to our forecasting models. 

D.B. Anything to worry about on a "macro" basis?

I.I. Interest rates are rising, oil prices are rising, consumer and household debt levels are higher now than at the beginning of the recession, the SP500 still trades at 44 times REAL  earnings, and there is still plenty of uncertainty in the Middle-East. Thus, a bit of cautiousness is a matter of prudence at this point. 

D.B. Ok, let's switch subjects one last time. What is your opinion on the economy?

I.I. The Weekly Leading Indicators Index from E.C.R.I has been rising for several weeks, and the economic data that we are getting every day point to an improving environment, thus it is rather irrefutable that the economy is  presently recovering. I think the jury is still out with regards to a) how sustainable the recovery really is b) how strong it will be and c) will corporate profits recover along with the recovery.

D.B. What do you think?

I.I. Last year in the January 2001, newsletter titled "Half Empty, Or, Half Full?" I  opined that NASDAQ will trade down to 1400 by the end of the year, and that we will have several quarters alternating between sub-par  and negative  economic growth. The events of 9-11-01 brought about more stimulus and thus a more robust recovery in the short-term.  However, in the intermediate term, I do not see anything that will change my mind. 

D.B. Why?

I.I. Because the debt bubble -another courtesy of one the most irresponsible and inept Federal Reserve Boards this country has ever seen- is just beginning to burst. One of the most useful functions of a "recession" is to allow corporations and consumers to re-liquefy their balance sheets. Consider the following : According to a  Caldwell & Orkin  report "total household debt stands at $7.9 trillion(77.7% of GDP) as of of the end of Q3 2001, U.S. non-financial, non-farm companies had a total debt of $4.9 trillion(48.1% of GDP) In fact since the beginning of the recession in March of 2001, U.S. have issued $137 billion in new debt" ( January 2002, pg7-8) I continue to believe that the economy has not been purged by the excesses of the 90s, and therefore it won't be able to fire in all cylinders. 

D.B. Ok, let's move back to the equity markets and talk about their technical condition.

I.I. The first thing we got to talk about is our forecasting models.

Now let's take a look at the technical condition of the equity markets.

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