WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 04-06-04:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our March 9th newsletter forecasted that the DOW was continuing it’s topping process and projected a trading range for the month between 10,260 and 10,700. We offered key support levels on-a-closing-basis for the DOW at 10,400, 10,000 and 9,800. Both the projected trading range and provided support levels were very accurate, with the DOW actually trading between 10,007 and 10,695. When the DOW closed below support level 10,400, it quickly proceeded to the next level of 10,000, before beginning another countertrend rally.
We forecasted that the US dollar would be range-bound for the month between euro fx equivalent of $1.20 and $1.29. The actual range proved to be narrower, but accurate with regard to the US dollar resistance level, between euro fx $1.2026 and $1.2419. We expected the US treasuries to be supported during the month, due to the uncertain view of the US economy. This proved to be correct as prices rose and yields declined for the entire US treasury yield curve during the month. We took a neutral position in all US treasury positions at month’s end, due to the possibility of a stronger than expected March employment report being released on April 2nd. This proved to be a prudent adjustment, given the employment results, which are reviewed below.
Looking forward . . .
The non-farm payroll number, released last Friday, came in showing 308,000 new jobs. This represented the best job improvement in nearly four years. The manufacturing sector did not lose any jobs, but did not gain any either, for the first time in 44 months.
However, according to the household survey, the March employment situation was far from rising 300,000-plus jobs. By its measure, the unemployment rate ticked up to 5.7%. The proportion of the population working slipped even further, to 62.1%. In addition, there was a big jump in folks who would like to receive paychecks full time, but had to settle for part-time work.
We further noticed that the swelling ranks of part-timers who really want to be full timers, from 4.4 million to 4.7 million, were responsible for most of the March improvement. The average monthly gain over the past eight months has been only 95,000, far below the 150,000 to 200,000 jobs needed to absorb new entrants into the labor force.
There were additional reasons that this robust non-farm payroll number for March was nothing to applaud. They relate to the collapse of the grocery-chain strike in California, as well as balmier weather, providing improvements to both retail and construction employment, which are not apt to be repeated.
Furthermore, the most inclusive assessment of joblessness was less, rather than more, encouraging last month. If you include all marginally attached workers and everyone working part-time because they cannot secure a regular job, the unemployment rate at the end of March 2004 was a formidable 9.9%.
We had liquidated our US treasury positions prior to the release of the employment number, and used the decline in prices after the release as a renewed buying opportunity. We feel, for the reason outlined above and this being an election year, that the Fed will not be raising interest rates this year. There remain too many uncertainties in the US economy and several global situations to justify an adjustment in interest rates. If anything, the Fed maybe compelled to actually either cut interest rates one more time or purchase large quantities of US treasuries.
The US dollar appears to have completed another bear market rally and are projecting a trading range for the month between euro fx equivalent of $1.1950 and $1.24. The lack of decline within the US trade deficit, now reaching 5.6% of US Gross Domestic Product (GDP), should continue to keep the US dollar under pressure for quite some time. Long-term analysis of the US dollar still shows a decline in value between 20% to 25% over the next 2 to 4 years.
The DOW in all likelihood has completed another countertrend rally yesterday and we are forecasting a trading range for the month between 10,000 and 10,560. Key support levels still remain at 10,400, 10,000 as well as 9,800, and will be monitored on-a-closing-basis for future trade direction. Our long-term wave pattern technical analysis of the major stock indices still show this rally from 10,007 to 10,559 as simply a bear market countertrend rally, where we are now resuming the primary bearish trend.
AN UPCOMING KEY “INFLECTION” POINT:
The last few days of June 2004 will be critical for investors, whether they know it or not. June 30th is when the US occupation of Iraq is officially slated to end, with the US-led coalition in Iraq due to hand over sovereignty to a provisional Iraqi government. Whether the transfer of power is smooth, turbulent or even postponed, matters tremendously to US financial markets.
With less than 100 days to go before the handover, one might want to look at the historical backdrop. It took occupation forces seven years to rebuild Japan and nearly as long to resuscitate Germany, which were both tall orders. Failure carries significant risks for the US financial markets, and contributes to our overall level of caution regarding the long-term outlook for major indices. Unbeknownst to many investors, a key inflection point for the markets is fast approaching.
The list of American inventions and advancements in technology, medicine, the arts and science could fill many pages, however, some of the innovations in the financial arena have placed us on the edge of a precipice. In this country, the primary preoccupation seems to be how to pile on more and more debt; all the while deluding ourselves into thinking we have accomplished something remarkable. Junk bonds, mortgage-backed securities, zero-percent financing, nothing-down mortgages, home-equity loans, budget deficits, and many other innovations are now used in common conversation. Few, however, note the growing risks.
Our Federal Reserve Chairman, Alan Greenspan, apparently becoming alarmed at the sheer size of the exposure, recently commented on inherent risks in the operations of Fannie Mae and Freddie Mac. These government-sponsored enterprises now own or guarantee an astounding $3.8 trillion in mortgages.
That amount is so large that even a minor percentage of trouble in their operations would result in problems that would make the savings & loans debacle of the early 1980s look like an appetizer. Yet, it seems virtually inevitable that these agencies will run into such trouble. Already, mortgage foreclosures are at record highs, even with mortgage rates at multi-decade lows. Just imagine what may happen if mortgage rates were to spike higher!
SUMMARY OF SUGGESTED INVESTMENT ALLOCATION OPTIONS:
1. A 75% to 85% allocation of their taxable ordinary funds and/or tax-deferred funds into a conservative as well as flexible investment strategy using various no-load index mutual funds offered through our Private Account Wealth Management Services (Minimum investment: $1 million). This services is ideal for individuals and privately held corporations who have liquidated large stock, bond and/or real estate holdings and are seeking an investment vehicle to generate a positive rate of return between 12% to 19% per year (after fees) through either a rising or declining stock, bond or real estate market;
2. A 15% to 25% allocation toward cash, Treasury bills, CDs or money market funds with short maturities which will allow investors to rollover these instruments and obtain a higher level of return as interest rates move higher.
1. A 15%-20% in the futures/derivatives markets. This will help provide investors a means to hedge as well a further diversify their investment portfolio during either a rising or declining stock, bond and/or currency markets with taxable ordinary funds as offered through our Private Account Management Services (Minimum investment: $250,000). This services is ideal for individual investors seeking an aggressive investment vehicle to enhance their overall portfolio performance, which can provide a rate of return between 20% to 125% per year (after fees), depending which trading model is used and the client’s profile,;
2. A 20% allocation into 2 to 5 year maturity of US Government bonds;
3. A 25% allocations into 20 to 30 year zero coupon bonds commonly referred to as STRIPS;
4. A 0% allocation into inflation-protection index bonds (TIPS). If the US treasury prices decline, this instrument will effectively generate profits as investors reposition out of bonds and back into stocks.;
5. A 0% in stock index mutual funds or large cap growth mutual funds. There is limited upside potential and a majority of stocks provide a low dividend yield with many providing none at all;
6. A 35% in cash, Treasury bills, CDs or money market funds with short maturities which will allow investors to rollover these instruments and obtain a higher level of return as interest rates move higher.
If there are any questions regarding the information discussed within this newsletter, the two investment allocation options mentioned above or our management services, please call the number provided below or e-mail us and we would be happy to provide further clarification.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400