AEGEANCAPITAL

WEEKLY COMMENTARY Q3-2001

INDEX 1999 -PRESENT

UPDATE FOR WEEK ENDING 11-16-01

Charts: This week's conclusion is pretty straight forward, because both the price charts, and the indicator charts are saying the same thing loud and clear:

The current rally, so far, is identical to the rally from the March-April lows, and it is at the point where that rally turned down and never looked back. Will this one do the same? Judging from the massive divergences that are illustrated by our indicators, the answer should be YES. The only other time, that similar divergences developed and the markets moved higher, it was in November of 1999, which lead to NASDAQ's 100% advance in 4 months, and its subsequent demise.

SPDRs/Sectors: Over the past 3 weeks, oil and utility stocks have been "reliable under-performers." We see no change in that any time soon.

UPDATE FOR WEEK ENDING 9-28-01

Charts: The charts have made clear two things:

a) The WTC tragedy, only accelerated and aggravated a decline that had been going on since early summer. The markets had been seriously weak due to recognition that the much advertised "second half recovery" had no intention of arriving in the second half. Market insiders knew that, and they had spent all Summer selling short, in anticipation of a decline in the Fall.

B) At the moment the markets are trying to form a bottom, and they are about half-way there. Any bottom -after such horrendous decline- should be characterized by positive divergences. That means we need to see the markets re-testing, or, exceeding last Friday's lows, while the technical condition does not deteriorate equally. We have not seen that yet. Without it, we would not dare call anything as a bottom.

UPDATE FOR WEEK ENDING 9-7-01

Charts: We are at a critical point here. On one hand the markets could be forming indeed a bottom, or, they could be starting another leg down. In the end what really matters, is not what will happen, but that you are aware of both scenarios, and thus you prepare your strategy accordingly. Let's examine why either event could take place.

A) The charts are indicating that the markets are in "oversold" territory. At the same time they happen to be near the March-April lows. Given the deeply oversold condition the markets are in, they will experience a sharp rally anyway! Thus, the danger is that people misinterpret a reflex rally from a deeply oversold condition, with a "successful re-test" of the previous lows. Thus, they get suckered into a "suckers' rally" like last fall.

B) After the rather sobering employment report, the FED may decide to act more forcefully by lowering rates by 50 basis points in the coming days, and by another 50 basis points after the October FOMC meeting. Such an event could be dicey. People could simply dismiss it because the previous cuts have not done much. However, those who are making decisions based upon the difference between bond yields and P/Es will probably find some sectors of the stock market attractive. In that case we can have a rally that will be a lot more than just a reflex rally.

Bottom line: Be very skeptical of any rally that develops over the next few days. However, if the FED moves aggressively and the market responds positively, do not dismiss the rally, it could be a good one.

SPDRs/Sectors: For the second week in a row, cyclical issues lost substantial ground, while defensive issues gained ground. The "message" of the market is that there will be no recovery in the second half of the year.

UPDATE FOR WEEK ENDING 8-31-01

Charts: We have always said, that stable markets are characterized by uniformity between the technical condition of the market and its fundamental outlook. More over we have stated categorically in many occasions that most of the time, if the fundamentals do not hold, neither will the technicals. For example, just because a stock reached its 200 day moving average it does not mean that it will rally, in fact it won't if the fundamental continue to deteriorate. Last week, SUNW again proved our point. The $13-$14 had held in the past, and many Wall Street "analysts" had made profound statements that the stock had reached "bottom" However, SUNW promptly made fools out of those "analysts" by announcing that more likely the company will have a loss for the quarter instead of an expected profit. Along with the vanished profit, so did the "support" at around $13-$14! And that brings us to our next point. Over the next two to three weeks we will get more pre-announcements from companies and more data about the economy. Our research shows that both will be worse than expected. We must admit that our conclusions have not been correct 100% of the time, but they have been correct most of the time! So, if on one hand, we have deteriorating fundamentals, and on the other, we have not even reached a genuine oversold position by any measure, then the logical expectation should be that there is more troubled waters ahead. Maybe, not necessarily immediately, but definitely in the next few weeks. It should be noted that lately the market has ignored any good news, and it has fallen on bad news -which is a characteristic of bear markets- we are afraid that sometime around mid-September the majority of the news will be rather negative, in fact more negative than anticipated. Thus we continue to believe that "risk-averse" investors should remain in cash, while souls of more venturesome pedigree may consider shorting any upcoming rallies!

SPDRs/Sectors: True to their character and recent history, NASDAQ related sectors had the honors of being the worst performers of the week, which reaffirms what we have been saying to you for the past 8 weeks: either short NASDAQ or stay in cash (we prefer cash) but being long NASDAQ is equivalent to asking for trouble. Something that requires attention however, is the underperformance of Hospital and Biotech stocks on Friday. It could be just a "one day thing" but if it continues, it will confirm our suspicion that investors are unwilling to trust the market as a whole, and they are taking profits where they still have them.

UPDATE FOR WEEK ENDING 8-24-01

SPDRs/Sectors: Gold stocks, Biotech and Semis set the trend this week, exhibiting the best relative strength. We expect this to continue in the following week.

UPDATE FOR WEEK ENDING 8-10-01

Charts: We are back where we started last week! We have had seven consecutive weeks of sideways action and low volatility. The FED cuts seem to have created a floor for the markets, while the unrelenting barrage of negative news seems to have created a ceiling, thus getting a boring trading range, of whole lot of turning and tossing around and going nowhere fast. One thing to keep in mind is that can't go on for much too long. Some time in September, we will begin to see more clearly whether there is indeed a recovery coming in the second half of this year, or some other distant year! At that point, either the ceiling will be lifted, or, the floor will cave in. In either case we should see a 15% to 20% move in a matter of 7-12 trading days. The market should move like a 'high speed train" the question for us is this: "from a risk/reward point of view, when the train takes off -it hasn't yet, no matter what the morons are telling you on CNBC!- do we want to find ourselves in front of it, or, do we want to find ourselves on it? The obvious answer should be "on it" not "in front of it" In other words, there is no reason to make any serious commitment to the market right now, if you are wrong you can find yourself standing in front of a high speed train. Wait until you know which way the train is going and then jump aboard! Some of you will say " how about if I miss the first 5%-7% of the move?" Here is our answer: Professional investors are primarily concerned with preventing real loses of 5% to 7% , instead of missing 5% -7% of potential paper gains. It's the preservation of capital that professional investors are focused on!

SPDRs/Sectors: Gold along with hospitals were the only clear winners this past week. Both of these sectors are "defensive" The trend was to abandon "speculative" NASDAQ issues and to move into safer harbors. A continuation of this trend will mean further erosion in prices in NASDAQ issues (the poor thing is becoming the "Rodney Dangerfield" of the investment world, it can't get any respect!)

UPDATE FOR WEEK ENDING 8-3-01

Charts: There are two areas we would like to discuss this week with regards to charts:

A) The popular Indexes rallied from where they should have found technical support -the lower 50 day Bollinger Band- and came right up against their 50 day EMA, where on Friday they were turned down. Is this normal? Absolutely yes, for a market that is range bound. Assuming, the market continues to behave as it has the past 7-8 weeks, then the logical thing to expect would be another attempt to break above the 50 day EMA on Monday, or, on Tuesday, maybe another turn down, a visit near the bottom of the range(SP500:1180, NASDAQ:1950), and then one more rally toward the upper limit of the range (SP500:1280, NASDAQ:2250), which should complete the "Summer Rally" and then we should see some more weakness going into the fall, as the market will have to reckon with continuing weakness in corporate profits (with or without economic recovery)

B) The weekly charts are showing striking similarities with the pattern that developed the preceding 6 weeks prior to the meteoric ascend of the markets between October 1999 and March 2000. Has the market set itself up for a repeat performance?. Can NASDAQ rally to 3000, while the DJIA and the SP500 make new highs over the next three months? Experience and logic say no, because nothing -fundamentally- supports even current price levels. However, the market was already grossly overpriced in October of 1999, that did not stop NASDAQ from advancing 90% in four months! The reason for that -has always been our humble opinion- is because many of the people running money now-days, have neither logic, nor, experience! Since, the vast majority of them are still running money, if given the excuse, they will repeat the act. We already see the same underlying silliness with regards to "metrics" creeping up in the reasoning of "experts" only expressed in a a different way. In early 2000, for example, we learned that things such "eye balls" and "unique visitors" should be substituted for net cash flow. Now we are told, that, what we should concentrate on is the "rate of range" For example, if new orders were down 30% in the second quarter, but they will be down only 20% in the third quarter, then we should rush and buy stocks because things are getting "less bad" Silliness is silliness, and bogus metrics are bogus metrics any way you look at them! However, as we already said, given that people want to believe that "good times" and "easy profits" are back again, regardless of reason and experience, we will not be surprised to see a rally lasting 3-4 months supported by the belief that the economy has bottomed. Confirmation of this scenario will come if NASDAQ breaks above 2350, and the SP500 above 1300.

UPDATE FOR WEEK ENDING 7-13-01

(We apologize for the very short nature of this weekly report, we are changing its format to make it similar to the daily "ChartReview" We should have it ready by next weekend. 24 charts individually explained, plus "trading ideas" for the entire week) Last week's action has set the stage for what we think will be the resolution of the argument whether the intermediate down-trend is about to end. As you can see from the two weekly charts below, both NASDAQ and the SP500 appear (the emphasis on "appear") to have formed similar formations to the ones that they had formed in October of 1999 prior to the spectacular 5 month run-up during which NASDAQ advanced by 90%. Are we at a similar point? We don't know! Experience and logic says no! However, many market participants now-days have neither experience, nor, logic! There was no fundamental reason supporting NASDAQ's 90% advance to 5000 between October 1999 and March of 2000, yet it did! Despite what the "talking heads" are saying on CNBC, CNNfn, etc., the truth is, retail sales are down, the semiconductor sector is not improving, and the unemployment rate is ticking higher like a ticking bomb! The "great" earnings from Yahoo! and Microsoft are hardly re-assuring. We are indebted to Mr. Eavis for his superb analysis of the Yahoo! earnings. Mr. Eavis says:

"The Web giant showed traffic growth slowing, revenue slumping and profits evaporating. Yet Yahoo!'s costs continue to creep higher... Second-quarter revenue of $182 million was 33% below the year-ago period. Yet total pro forma costs rose 6%, to $191 million. Cost of revenues jumped 7% from a year ago, while overhead and product costs each rocketed at least 20%...The company made it into the black only by booking $25 million in other income, mainly via returns on cash and cash equivalents. Yahoo!'s operations showed a pretax loss of $9 million, or 2 cents a share...The stock may be soaring in after-hours trading Wednesday because the company beat analysts' revenue and earnings forecasts, but the market won't long support a 2002 price-to-earnings ratio of 120 -- not to mention 2001's 450 ratio."(Expensive Tastes, Now Haunting Yahoo!, By Peter Eavis, 6:56pm EST, 7/11/01, Realmoney.com)

On the other hand, Microsoft always included in its income statement capital gains, this time chose not to include losses in its investment portfolio of $3.9b. It seems appropriate that if something is counted on the income statement as gain -when it represents a gain- it should also be counted as a loss -when it represents a loss! Of course, all that is just too un-important for people to be paying attention to, just like the stuff in early 2000 about net companies sporting capitalizations bigger than Walmart's without ever having turned a profit! The point here is this: fundamentally current prices are un-justifiable, however, that does not mean the market can not go higher, it can, and it does NOT pay to fight it! So, let's see if the current chart formation results in a bullish resolution, or, last week's rally turns out to be just a short stop, on the way further down.

For quite some time we have criticized the FED for not being aggressive enough, and for being behind the curve. In several occasions we have steadfastly stated that short term interest rates need to come down by at least 100 basis points, so naturally we should be happy with the surprise interest rate cut the "benevolent" FED gave us. Well, we are NOT! We are happy to see rates coming down, but we are very unhappy to see the FED playing dangerous games with the financial markets, especially, during times of distress. The FED's mission should be to maintain stability, not exaggerate unwarranted price swings, whether they are on the downside, or, on the upside because both, in the end, cause losses to the average investor. Although the average investor may be unaware of the inner workings of the equity markets, the FED is not. So, allow us to elaborate why the "surprise" element of the rate cut -NOT the rate cut itself- is so dangerous. First of all, the FED knew that the last two weeks of March, sentiment had deteriorated considerably, and it had resulted in heavy put buying by the public. Put option sellers, have to sell short in order to hedge against the put options they sell. That is a legitimate practice. Therefore, going into options expiration week, there was a huge aggregate short position that would have to be covered, if the markets suddenly rallied. Second, there are about 3,000 to 4,000 hedge funds currently operating in the U.S. They have about half a trillion dollars in assets, but due to leverage, the actual trading firepower possessed by these funds is approximately anywhere between 1.5 to 4 trillion dollars -that's a staggering amount. These funds collect fees both on an absolute and a relative performance basis. In layman's language it simply means this: not only they have to generate a return for their clients (absolute performance) but also they have to outperform the market (relative performance) by a certain percentage. In other words, if the fund is up 20% for the year (absolute performance) but the benchmark index (for most funds the SP500) is up 22% then the fund can NOT collect fees, because it under performed relatively to the market! So why should the average investors care about that? They should care because, given the number and the size of trading firepower possessed by these funds, they can cause tremendous short-term moves that are not backed by fundamental economic conditions. Because these funds must outperform the market in order to collect fees, they use trading models that are designed to provide entry and exit points based on relative performance. You can see such a model near the bottom of this page. Keep in mind that although each fund uses its own proprietary system, the goal remains the same: outperform the market, so the fund can collect fees! These models move relatively to the markets and they create buy/sell/neutral signals that are designed to outperform it. Going into last week, most of these models had generated a "sell short" signal. Thus, many hedge funds Monday and early Tuesday, opened short positions, in addition to the short positions that were already open by put option sellers! Thus creating a "melt-up" when the FED surprisingly lowered interest rates! Why is this "bad?" it's bad because when all these major market participants who had sold short equities and bought bonds tried to reverse their positions, bonds PLUNGED, and stocks artificially were pushed to levels that can not be supported by fundamentals. The result was mortgage rates are now HIGHER than they were BEFORE the rate cut, and companies like JNPR, BRCD, CHKP, CIEN etc., are now selling -again- at multiples in excess of 80 times p/e, which is what got the market in trouble in the first place! Most of the models are now in an area that is pretty close to the "buy long" zone, which can make things even worse. As we mentioned earlier hedge funds must outperform the market, by getting in front of it. That means it is conceivable that another rally of 300-400 points can take place in NASDAQ in the next few days, as hedge funds plunge into the market in order to avoid being left out, causing another artificial, and unsustainable vertical advance Our tentative target is 2300-2400, we will issue a more precise target in the next 2-3 days). In the mean time -as shown by the Ameritrade Index- the small investor has not been buying yet, we assure you that another artificial advance will get the blood boiling among individual investors to "get in" before the market leaves without them, thus buying at the TOP all over again! We have NO problem with the market moving 30%-50% or even 100% in a reasonable time frame, while the fundamentals of the economic environment justify the advance. However, when the market moves unjustifiably in a short period of time -like it did between Oct. '99 and March '00, 80% in 4 months- then the result is disaster. The FED was partially responsible for creating the bubble last year due to its ridiculous easy monetary policy, it is partially responsible for the current economic slow down due to its ridiculous restrictive monetary policy last year, and it will be totally responsible if the market rockets higher from current levels , coming down just as hard later on, taking with it, the investors who got in near another top thank's to their own ignorance, and thank's to the FED's idiotic and reckless policies engineered by the pickle head who happens to be its Chairman. Since he took over as Fed chief in August 1987, the Chairman has been very busy trying to correct the fiascos that he himself created in the first place. TheStreet.com, in an excellent article chronicles the sins of Mr. Greenspan in an undisputed factual manner. We encourage you to log on to "The Street.com" and read the entire article. "... Greenspan is repeating past dysfunctional behavior. In 1987, he slashed rates to bail out an overheated stock market, only to raise them aggressively the following two years as inflation got out of control. In 1994, he ratcheted up the cost of money, contributing to Mexico's currency collapse. The Treasury bailed out Mexico -- a move the Fed aided with lower rates -- and the emerging markets bubble continued to balloon until the Asian crises of 1997-1998. In 1998, Greenspan brought down rates rapidly to ensure that liquidity was pumped back into the financial markets after the near collapse of Long Term Capital Management. Money supply soared. Greenspan primed the pump some more ahead of the Y2K changeover, and, almost like clockwork, inflation was moving up quickly by early 2000. That led to the rate hikes of last year. And it was these that caused the collapse in the Nasdaq and capital spending. A bold pattern emerges: panic-cut-hike-panic-cut-hike-panic-cut-hike. Whatever medical term one might use to label this type of behavior, it's clearly no way to run a central bank..."(by Peter Eavis, "Another Panic Cut Sets The Stage For Rate Hikes Next Year", The Street.com, 4/18/01, 3:06 PM EST) We could not agree more, this FED, and this Chairman are DANGEROUS to your financial well being. The FED knew the short positions that were present in the market, it could have elected to lower rates after options expiration to avoid panic buying, yet it recklessly chose not to, creating an artificial move in the market. In conclusion, last summer our subscribers remember how we said repeatedly that paying $200 for JNPR, or $100 for BRCD was plain silly. We make no apologies for our current opinion, but we believe that paying for JNPR $69 now, is just as silly as it was paying $200 last summer! Although it may go even higher for a short time- recent history has proven there is an abundance of silliness- if you think it is actually worth that much, you are in for a painful surprise, again!
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