To OTC Journal Members:
 

What's Going on With the Economy?

There is a nearly unexplainable dichotomy occurring in the economic numbers coming out these days. Public companies, particularly in the technology sector are screaming doom and gloom as company after company announces severely reduced forecasts for the remainder of the year. We are getting very tired of hearing from management about cutbacks in IT spending from all of their customers. The latest buzz phrase to describe this slowdown is "lack of visibility", meaning they have no idea what will happen for the remainder of the year.

In spite of the virtual black hole in the technology sector, trailing economic numbers suggest a minor slow down, but give no indication of the hard core, long term recession being priced into technology stocks.

Housing starts and home resales continue at a brisk pace. The consumer, who represents 2/3 of economic activity, is still spending at historically high rates. Friday's unemployment report provided the first true glimpse of a slow-down, with unemployment coming in at 4.3%, the highest in 20 months.

Spokespersons from the Federal Reserve continue to boldly predict a recovery in the second half of the year, perhaps in an effort to justify the FED's stubborn refusal to accelerate lowering interest rates to stimulate the economy.

The big question- How can the economy be holding up so well while the technology sector is in a full blown recession? In our opinion, the answer can be found by looking back at the last five years and using your common sense. Very simply- It's Wall Street's fault.
 

The Greatest Bull Market In History- Greed Drives Wall Street

1995 through March of 2000 could arguably be called the greatest bull market in history, fueled by a revolution in technology, and led by the emergence of the Internet.

Trillions of dollars were raised in thousands of private placements, IPOs, secondaries, and debt instruments. Dozens of companies with nothing more than business plans were receiving hundreds of millions of dollars in funding.

It was all working because the market was going straight up and the fees being generated were beyond Wall Street's wildest dreams. As we all learned in the most painful way possible, Wall Street was providing billions for companies with flawed and unproven business models simply for the fees.

Where does this leave us today- The trillions invested in these technology companies led us to an excess supply of new technology. Wall Street's enthusiasm to fund every technology idea when the fees were there for the taking has led us to a huge excess supply.

As usual, the free market economy works perfectly. An excess supply, coupled with decreasing demand, results in much lower prices and lower demand for products and services, which leads to much lower stock values.

So why does Greenspan seem unconcerned? Because he believes the bubble of excess technology will be absorbed in the first half of 2001 through reduced sales, cutbacks, and layoffs. Once we have completed the painful process of eating through the excess supply, business can stabilize and things will return to normal.

What does all this mean to the the average investor? For the first time in 10 years we have a market climate with GARP.
 

GARP- The Best Environment for the Long Term Investor

For the first time in 10 years the market is providing GARP opportunities- Growth At a Reasonable Price. Small cap stocks are holding their own in this blood bath environment. While analysts are struggling with sales and earnings projections for the large cap names, many small stocks have finally stabilized and seem to be establishing low volume bottoms.

The OTC Journal has focused its energy on three micocap stocks this year, and all three are outperforming the market. We added a fourth last week, but it is a little early to gauge performance. Here is a comparison based on Friday's closing prices:

• Envoy Communications (NASDAQ: ECGI): Down 20% from January 2nd while NASDAQ is down 25%. Last quarter sales were up 71% and earnings were up 114%. The company is on track to achieve nearly $100 million in sales this year, and currently trades with a market cap of $45 million (less than 50% of sales), which is ridiculous. This is a prime example of GARP at its best.
• MedGrup (OTC BB: CODX): Up 87% from January 2nd while the NASDAQ is down 25%. Sales and earnings nearly doubled from 1999 to 2000. The company should double again this year to annual sales of about $8 million. The company currently has a $14.6 million market cap. Again: GARP at its best.
• Energy Power Systems (OTC BB: EYPSF): Down 7.2% since introduced on February 10th. NASDAQ is down 30% since that day. Likely to hit $25 to $30 million in sales this year. Expanding through core business, acquisitions, and power plant development projects in India. $14 million market cap (50% of sales). GARP at its best.

XML Global Technologies (NASDAQ: XMLG): Just added last week, is still trading at our profiled price. The market is allowing you the opportunity to invest in revolutionary, leading technology in XML at a mere $25 million market cap. This is a GARP stock.

Where's the Market Headed?

We don't know. Probably lower in the near term. The good technicians we know believe there will be a double bottom established at 1500. However, most investors don't seem to care anymore, and debate surrounds not how low we will go, but when we will turn back up.

While there is currently little indication economic conditions will drive stocks back up, there is enormous pent up demand buy side demand from the astronomically huge short interest. Investors who are long can hold forever. Short positions must be eventually be covered. Short sellers believe they are as bomb proof as the longs believed they were at NASDAQ 5000. 

Nearly one year after Alan Greenspan accused the market of having "Irrational Exuberance" he turned out to be right. We believe we are in a climate of Irrational Pessimism. It will be a learning experience to see where we end up in one year.

Next Week: News is likely from some of our favorites.

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