AEGEANCAPITAL GROUP INC.
STOCK MARKET REPORT

 Publisher: AegeanCapital  Group, Inc.,    Report#26,    10-21-2001,  6:30pm PST ,  Page 1of 14

Secular Or Cyclical?

We concluded last month's newsletter by saying: 

" The current decline is going to be interrupted by a rather sharp and furious counter-trend rally, it will be a rally to unload problematic long positions, and one to establish new short positions."

Has anything taken place since then, to make us change our minds? In our editorial "Hurrah To The Market" we noted:

"How about all the stimulus, and the liquidity coming into the economy, isn't that going to help?" We do not dispute that in the end, the U.S. economy will recover. However, we have no evidence yet, that such recovery is indeed taking place. When we have solid evidence, we will act upon it. The  notion advocated by financial  charlatans in the media that "if you wait for evidence it will be too late, the train will have left the station" is silly and intellectually bankrupt!  The same charlatans, have urged investors to jump into the market during every one of the past eight bear market rallies for the same reason. The market has rallied eight times in the past 18 months because it anticipated a recovery that never materialized! If investors had listened to the advise of the charlatans, and had gone long, during any of those rallies, if they are still holding their positions, they are sitting on huge losses. The best advise we can give is this: you will miss nothing by  waiting for some real evidence, except perhaps portfolio losses, which we are sure you can live without. Buying on hope, and neglecting reality is stupid. Below are the eight rallies that were based on "hope" they have all resulted to lower prices, and despair to those who bought them!

Fourth, investors need to recognize that 20 some years of the greatest bull market in our nation's history has produced  ".. an army of Wall Street "experts" with a very large ego, and very little, or no, actual talent and market knowledge at all!"

For us, the question is  whether this bear market is a cyclical one, or a secular one, rather than whether we are seeing the birth of a new glorious bull market. The evidence that we have at hand, leads us to believe that we are dealing with a cyclical bear market, which will run its course by sometime next year, and that is again consistent with our forecast 18 months ago, on 8-25-00.(See weekly reports for Q3-2000) The current stock market rally is based on the false premise that we have seen the bottom in terms of economic activity, and the market is rallying -correctly- in anticipation of improvement in the economy. Advocates of this view point out to the following reasons for immediate optimism:

 a) any remaining inventory overhangs will be concluded by year end  b) the 9 interest rate cuts, which lessen the cost of debt service, will free funds for spending and investment and  c) the massive fiscal stimulus which probably amounts anywhere between 1.25% and 1.75% of GDP.

The first reason for cautiousness, should arise from the fact that the calls for bullishness come from the same shameful people who have been staunchly bullish the last two years, such as Abby Cohen, Al Goldman, Joe Battipaglia, Jeff Applegate, Thomas Galvin, etc. (just to name a few of the Street's best and brightest who are getting paid millions, to get it just plain wrong! By the way, all  the aforementioned were in our minds, when we talked in our editorial "Hurrah To The Market" about "... an army of Wall Street "experts" with a very large ego, and very little, or no, actual talent and market knowledge at all!")

The second reason for cautiousness comes from the fact that all the evidence we have, points to the following:

a) The source of the current economic malaise comes from the imbalances that were created during the second half of the 90s. Companies are still over-leveraged due to  over-investment in dubious projects that are currently yielding a negative rate of return. Consumers, on the other hand, have over-borrowed as well, consequently, tax cuts may end up being saved, or, used to pay down debt, rather than being spent.  

b) Fiscal stimulus by the Federal Government will be offset by cuts at the State level. States can not print money, thus, when revenues drop, they have no other choice but to cut spending in order to balance their budgets.

c) For the first time since the 30s, the world's major economies  have entered an era of economic slow-down in tandem.

d) In every recession since WWII, as credit became scarce due to tightening in lending standards by lenders, companies were forced to finance projects thru internal funding. Sliding profits result in less internal funds available for capital spending. Consequently, at the very minimum capital spending can be expected to decline by an additional 18% to 25% in the next six to nine months.

Thus, for all the above reasons, we believe that the elusive recovery will arrive later rather than sooner. In our estimate, "later" means 3rd or 4th quarter of 2002. If the market begins to rally in earnest 4-6 months in advance of that recovery, then we should see a bottom sometime between the middle of the first  and second quarter of 2002.

Last but not least: Valuations! The same ignorant morons who have been urging the investing public to buy "because stocks are cheap" for the past two years, they are gain making the same sales pitch. This is what we unequivocally believe:

Stocks have gotten less expensive, but by no means have they gotten cheap!  Any value oriented investor will tell you that cheap means:  P/Es  ranging between 10 and 15, and  Enterprise Value to Sales ratio ranging between  0.5-to-1.0. We challenge any charlatan who's telling you the market is "cheap" to find more than 200-300 companies in a universe of over 8,000, that meet the above criteria!

Thus, for all the above reasons we believe the current rally is nothing more but a bear market rally. It probably has more to go. However, from a trader's point of view, the technical indicators we discuss in the following pages show, that the odds are equally divided between higher and lower prices in the immediate future.

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

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Our Market Positions:
Dow: Neutral,SP500:Neutral
NASDAQ:Neutral 

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