AEGEANCAPITAL GROUP INC.
STOCK MARKET REPORT

 Publisher: AegeanCapital  Group, Inc.,    Report#27,    11-24-2001,  6:30pm PST ,  Page 1of 14

Let The Good Times Roll!

Over the past two weeks the main stream media, announced to anyone who may have failed to notice, that the market was 20% off its lows and thus a "new bull market had arrived!" Normally, we do not bother to comment on silliness, but this one, is so silly we can't ignore it! It takes more than just a 20% rally to signal the birth of a new bull market. In case you have any doubts consider the following charts

The chart on the left, is the NDX over the past 18 months. We had -at least- three rallies in excess of 20%, yet the NDX continued to collapse. If the notion that a 20% advance constitutes the birth of a new bull market is correct, then over the past 18 months, the NDX has had not one, but at least, three glorious bull markets, and your brokerage account balance should reflect the "gains" made in these three bull markets! However, our   guess is, that most investors' statements reflect exactly the opposite. The chart on the right, is the NIKKEI over the past twenty years, as it can be seen very clearly between 1992 and 2000, the index has had three monster-size rallies in excess of 20%, yet just six weeks ago, it made 17 year lows! The point is this: markets can rally and fall, for the right reasons, as well as, for the wrong ones. If there is one thing that by now should clear to investors is the fact that  Mr. Market is not always right, in fact the past two years he has been ridiculously wrong!  Could it be right this time? MAYBE, BUT NOT CERTAINLY. Be open-minded but do not get trapped by trusting the market 100%. 

Now that we got that out of our system, let's  examine critically whether the economy has indeed bottomed. Our own research -as recently as- three weeks ago, was indicating that any recovery, would not begin to take place until late 2002. However, over the past three weeks, some of the data that have come out, show credible evidence that indeed the recovery may start earlier. One of our most trusted indicators, is the ECRI's  Weekly Leading Index (see http://economy.com) As we can see very clearly, the economy has been in a sharp downtrend since mid-2000.  We have had two previous instances, in which the Index rose , to only collapse later. At the moment, it is experiencing the third such rise, will it hold this time? The truth is, WE DO NOT KNOW WITH ANY CERTAINTY, however, we are

certain, that nobody else does either!, especially, the silly talking heads who steadfastly claim that they do. For sure there are positive signals coming from other corners -besides the equity markets- Yields on junk bonds, have fallen over the past two weeks, the spread between investment grade bonds and junk bonds have narrowed as well.  The Federal Funds futures indicate a less than 30% probability, of another rate cut at the next FOMC meeting. Last but not least, copper is up nearly 10%, in the past copper has been a rather reliable leading indicator. In addition, it looks that consumer spending may hold going forward. Consumer confidence has been rising, energy costs are lower, low interest rates provide not only more disposable income, but also support for the housing market, and last but not least, the consumer will get another boost from additional tax cuts. So, one can make the case that the resilient American consumer, much like the "Energizer Bunny" will keep on going.  The government's hope is that the consumer will keep on going, until the corporate sector finally rids itself of the excesses in capacity, and it catches up with the consumer sector. On that front, we are not very optimistic.

Until, companies that should not be in business, are no longer in business, the U.S economy will not grow at its full potential. Instead, it will be "saddled" by dead weight, causing it to grow at a "sub-par" rate.  Ten months ago we commented: 

"...If this is the scenario currently unfolding in the U.S. we would expect prices to initially continue modestly higher -as investors mistakenly convince themselves that downturn is cyclical, not secular- However, later in the year, as it becomes evident that what we are dealing with is a secular trend, equity prices will head back down again. In such case, NASDAQ will easily penetrate its recent lows, and we would expect it to reach 1800-1400 before year’s end" (See January 2001 Newsletter "Half Empty Or Half Full?"  1-15-2001

So far, our predictions and forecasts have been rather accurate. Of course, that does not guarantee "perpetual accuracy" but  it does give our forecasts credibility.  Compare our opinion of the economy and the markets on 1-15-01, to the opinion of Mr. Battipaglia, Chief Investment Strategist of Grunthall and Co. just 13 says earlier.

"1/2/01-As investment in technology grows in terms of its contribution to the overall economy, I expect to see continued gains in the non-cyclical component of the productivity data.

My own estimate for earnings growth still calls for a 14 percent year-over-year improvement in S&P 500 operating earnings for 2001.

Accordingly, I am raising my sector rating on transportation companies from "neutral" to "outperform" at this time.

As demand for U.S. made products rises, our trade and current account deficits should ease. Also, rising exports should be additive to overall GDP growth.

Look for 2001 to be a year of positive surprises. We are adding transportation companies to our "outperform"-rated sectors, alongside financials pharmaceuticals, and technology. Our 2001 year-end targets remain 12,700 on the Dow  1,625 on the S&P 500  and 4,300 on the Nasdaq" (source" www.capitalstool.com)

It should be noted that Mr. Battipaglia is again wildly bullish! he scary part is that most Wall Street Strategists, are sharing his view.We are just skeptical. It would make us very uncomfortable, if by any chance, we found ourselves sharing the same views.

It should be noted that in a little publicized research paper,  Merrill Lynch reported that the consensus equity allocation among Wall Street strategists is now 76%, "truly unbelievable", and an all-time high. The report notes "there was never a subsequent 12-month return that was negative when readings were below 50%. By contrast, subsequent 12-month returns were positive only half the time when readings were above 60%, and never outperformed cash when readings were above 61%." The indicator projects a 12-month market loss of more than 25%. (source: http://www.hussman.com/hussman/members/updates/latest.htm)

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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