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We
ended last month's newsletter stating that
"Technology is cyclical as well! If indeed the
economy has slowed to about 3.5% in the third quarter,
corporate profits will show it!" Given that we have
had one earnings disappointment after another, it is
safe to conclude, our position was correct. We would
like to add the following: As companies keep announcing
earnings shortfalls, Wall Street analysts keep saying
that the problems responsible for these shortfalls are
not widespread, but they are rather company specific,
these analysts continue to insist that most earnings
will be on the positive side. They point out AMCC, PMCS,
GTW, JNPR to support their point. We strongly believe
that the positive earnings results are company specific,
the negative earnings results are, to the contrary,
widespread.! In other words, the good news , this time
around, is the exception, while the bad news is the
rule. (What a difference a little dose of reality makes)
Furthermore, for people to continue to insist that
NASDAQ is still in a bull market, they must be either
from Mars, or, related to Henry Blodget (the Merril
Lynch "Internet" analyst who repeatedly
recommended ETYS at $90.00, and PCLN at $102.00 as
both "must" and "core"
holdings in everybody's "Internet portfolio.
Nevertheless, given the carnage that has taken place the
past five weeks, we believe the market, especially
NASDAQ is about to embark on a "reflex" rally,
which it is probably worth participating into, but it is
still nothing else but a bear market rally. In fact as
of October 13th, we changed our position from
"neutral" to "trading buy." We wish
to emphasize, that we do not view Friday's strong rally
very favorably. We would have preferred a rally of less
magnitude. The veracity and furiousness of the advance
were typical of bear market rallies. One more day like
this, and from fully "oversold" the market
will be fully "overbought." The lack of
wide participation is also a reason for concern. If the
market continues to rally into options' expiration on
Oct. 20th, the real test will come after the expiration.
The problems that have plagued NASDAQ are not to go
away. The 30 biggest stocks in the NDX still have a P/E
of 96. Since these companies have an average estimated
growth rate of about 32%, it does not take a genius to
realize that these numbers
do not compute or justify each other. In addition,
all these companies -along with many other high-tech
beauties- derive a sizable chunk of their earnings from
Europe. Unfortunately, about 82% of the European
population lives above the 42nd parallel, and over 65%
of the population, lives above the 50th parallel. That
means, that around October when it begins to get cold,
over 82% of Europeans must turn the heater on! They've
got no choice. Thus, within 2-3 weeks, Europeans, not
only will have to put up with high gasoline prices, but
also, they have to endure high heating oil prices. The
combination of the two, will take a big bite out of
disposable income. Add to the mix, high interest rates
-which the ECB has to maintain, in order to keep
euro alive- and you have a very good recipe for a rather
dramatic slowdown in demand Weak demand from
Europe, and an even weaker euro, will take another bite
out of the profits of American companies doing business
in Europe including the sacred high-tech ones. Also, we
would like to dispel the silly myth regarding capital
spending. The vast majority of "analysts"
insist that companies -especially telcos- have no choice
but to keep -or even increase -current levels of capital
spending. We would like to remind you, that many of the
same "analysts' last year were predicting the
demise of any "brick and mortar" without an
"Internet strategy." Internet strategy was
another "must." Less than a year later, the
Internet companies are the endangered species, not the
brick and mortar ones! The same holds true for
capital spending levels. When companies make less, they
spend less! The proposition that they have to spend
more, is based on mythical assumptions, shared only by
"analysts." Consider this: telcos have been
getting one dollar in return, for every three dollars
they have invested, their profits are slowing, the
capital markets have turned sour on them, and their
stock price has been pulverized. If a company can't
raise new capital, is faced with declining cash flow,
where is the money going to come from, to continue
current levels of capital spending? We will let you come
up with the answer!
Our
Market Positions:
Dow: Bullish ,SP500: Bullish
NASDAQ:Bullish
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AEGEANCAPITAL
GROUP INC.