WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 04-09-01:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw
Position overview . . .
The March 10th newsletter, we again forecasted an opportunity to reduce stock holdings at a short term high of either 10,880 or 11,035 in the DOW. The day prior to the newsletter release proved to be that high at 10,859, followed by a brutal selloff to 9,106. Our timing was less precise as we were anticipating this selloff after the March 20th FOMC meeting. As the DOW was close to our price objective on March 9th and 12th, a modest short position was placed which produced positive results for the month. We also forecasted new near-term lows in all the major indices as additional earnings warnings were issued during the course of the month. Obviously we were quite on target in this respect. The treasury spreads performed during the month proved vexing at best as unusual technical trends resulted in a small loss.
As a result of the DOW short position accuracy, its profits more than offset the small treasury losses during the month. Depending on which of the five trading models used for our various clients, the net return on investment (including fees) for the month of March 2001 ranged from a low of 4.9% to a high of 11.8%, with the more aggressive models capturing the higher levels of return. Cumulative year-to-date net return on investment has now reached 21.8 to 39.7 percent for our standard trading models. Additionally, the newly introduced conservative trading model (restricted to trading treasuries only) sustained a small loss of 1.5% for the month and now brings that model’s year-to-date performance to 8.0%. Projecting April, we anticipate a return more in line with the annualized rate of 32% in place for that model.
In comparing our private account management service performance to the first quarter performance of over 9,000 public mutual funds and hedge funds, our first quarter returns for both the standard and conservative models place us in the top one percent due to our flexible and responsive trading strategy. It appears that the futures/derivatives markets have proven to be the instruments of choice during these volatile market swings and unpredictable world news events.
Looking forward . . .
During April we are expecting the DOW to remain within a wide range of 9,450 to 10,280. The higher end of this range should be reached on either April 10th or 11th. Discouraged investors, who have just received their first quarter mutual fund performance summaries, should use this rally to substantially reduce their holdings if still vested heavily in stocks and/or stock mutual funds. With the DOW declining to nearly 9,100 in the month of March 2001, it further confirms that we are in a bear market; however, with the current oversold condition, we should remain range-bound for the next several months before breaking to new lows either in the month of June or July 2001. This should hold true for all three major stock indices with the technology stock laden NASDAQ remaining the weakest of the group.
With the Labor Department reporting its largest decline in payrolls since November 1991 on Friday, April 6th, economists are now expecting another half-point cut from the federal-funds target rate of 5%. There is even a possibility that this action could occur before the next FOMC meeting on May 15th if additional economic data continue to show accelerated deterioration. Further confirmation of economic weakness could be provided at the next increment of crucial economic reports, which start with retail sales and producer price data scheduled for release Thursday, April 12th. On the following Tuesday, April 17th, the consumer price, housing-start and industrial-production figures will be released. These have also become doubly important since it will provide the Fed with a broad assortment of economic data to make an intra-meeting interest rate adjustment, possibly the same day, to help prevent further economic weakness.
The truly extraordinary thing about the current stock market decline is that the US dollar has remained strong. Historically you would expect to see accompanying weakness in the currency, as you have in Japan, with the yen coming under pressure along with Japanese stocks. The greenbacks strength suggests that the US dollar is being seen as a safe haven. It also suggests that it is still believed in, perhaps excessively so, and that it too must come under pressure before the bear market cycle ends. This decline will effect all US holdings from liquid assets of stocks and bonds to illiquid assets of real estate and equipment. Therefore, it will become even more important to have a properly balances portfolio where your investments can be hedged from this decline.
WITH A COMPARISON TO PREVIOUS RECESSIONS — WE ARE IN ONE NOW!
In a recent survey of 51 major economists, it showed a consensus forecast that gross domestic product would grow at an annualized rate of 0.7% in the first quarter, and 1.7%, 2.8% and 3.4% in subsequent quarters. Thus, the consensus is for no recession. But this view seems overly optimistic, in part because the Federal Reserve — even though it has cut rates aggressively by its customary standers — might be further behind the curve than some believe.
Provided below for comparison, there are 13 economic indicators, when related to past recessions, each has fallen to its current or very recent level:
1. Non-Farm Payrolls are up just 1.3%, year-over-year. The past five times growth was this weak, we had recessions. This indicator, like all but one of the others cited, did not miss calling any recession over the past five, dating back to 1970.
2. The most recent household employment number was down more than 30,000. Its year-to-year change is just 0.5%. Five of the prior six times it produced such a reading, a recession struck with the only exception in late 1995.
3. Hours worked are just 0.3% above their corresponding 2000 level. Five of the past six times the increase was this weak, the US had a recession.
4. Growth in temporary employment is down to minus 2.1%, year-over-year. We have had a recession on each of the previous four occasions that it dropped into negative territory.
5. The help-wanted index is at minus 15.6%, year-over-year. All five times since 1973 when it has skidded below minus 15%, recessions occurred.
6. The Purchasing Manager Index (NAPM) is 43.1. The past five times it fell to 44, we had recessions.
7. The Philadelphia Fed Index recently dropped to about minus 36 and is still a poor minus 23.5 average. On the past five occasions that it dropped below minus 30, recessions occurred.
8. Capacity Utilization is down to 79.4%. In four of the past five stretches when this measure of factory usage dropped to 80 or below, an economic slump developed.
9. Industrial Production has fallen for five consecutive months. On each of the five prior occasions when this happened, there was a recession.
10. The OECD index of leading indicators is 2% below its year-earlier reading. In five of the past six cases when such numbers were reported, recessions ensued.
11. Consumer Confidence has fallen by almost 40 points. On the five previous occasions when it dropped at least 30 points, we had recessions.
12. Consumer-confidence expectations slid by more than 50 points. The past three times they have dropped by at least 40, this heralded a recession. This is the only one of the 13 indicators that missed calling one of the most recent five recessions; it failed to point to the 1982 recession.
13. When the current yield curve of Treasury-bill yields are divided by 10-year T-Note yields equals .99 or higher (signaling a “flat” or an “inverted yield curve”), it has sent a danger signal — one that correctly called the past five recessions. This ratio hit a recent high around 1.18. It is now in the mid-90s. However, it has always fallen to the current level or lower in the ensuing recessions.
Overall, in the periods surveys, the 13 indicators correctly identified recessions 62 times, gave false signals four times and only once failed to flag a recession.
Our major concern is that the “long-term” mantra continues to be espoused by guests on financial networks. They are all too ready to commit other people’s money to Wall Street’s infamous black hole. If history has shown anything in the clear light of logic, it is that the long-term does not always play out to investors advantage. Japan is a perfect example of what can go wrong in the long-term, still down 67% after suffering their own mania and all-time peak in December 1989. As Wall Street strategists continue to infect the flock with optimism, it will likely take some time for the mad DOW disease to run its course and remove complacency from the market.
If investors remain in a “hope” mode much longer, they could see the complete reversal of the created wealth effect over the past bull market. We would be willing to offer our assistance in reviewing corporations and/or individuals current investments and make alternative investment suggestions for a much more defensive posture investment strategy, which will be required as we proceed through this 5 to 8 year bear market. There maybe tax consequences involved in these adjustments, however, they can be offset by gains in more constructive investments over the remainder of the year and the years to come. Should there be any questions regarding the information discuss within this newsletter or our private account management services, please either e-mail or call the number provide below and we will be glad to assist with further clarification.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400