WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 04-10-03:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw
Position overview . . .
Our March 20th newsletter forecasted that the DOW would resume its bearish trend with an expected trading range of between 7,500 and 8,350. The uncertainties of the War with Iraq created a larger trading range than expected with an intra-day low of 7,416 and intra-day high of 8,522. We further projected that the US dollar would resume its bearish trend and were forecasting a decline to euro fx (foreign exchange) $1.09 or $1.10. The timely release of the newsletter on March 20th represented the near-term high for the US dollar, which declined to our projected level of euro fx of $1.09 over the next week. We anticipated that the US treasuries would continue it’s “flight-to-safety” rally and suggested the purchase of short and medium-term maturity bonds (STRIPS) while reducing the Inflation-protected Index bonds (TIPS) to lock-in an effective yield of 3.5%. This adjustment in the suggested US treasury positions proved to be timely with the lows being placed at March 20th and rallied over the remainder of the month.
Looking forward . . .
Our wave pattern technical analysis is projecting the DOW to continue its bearish trend with an anticipated trading range between 7,450 and 8,525. The War on Iraq has now been factored into the marketplace and the true weak growth picture of the US economy is becoming more readily apparent.
We are projecting that the US dollar will continue its bearish trend from a present level of euro fx 1.08 to 1.11. The US current-account deficit has narrowed slightly to 4.8% of our Gross Domestic Product (GDP); however, to eliminate this imbalance, the US dollar will have to decline further. Since February 2002, the US dollar has declined over 20% to the benefit of other global currencies. During this time period, the euro fx has appreciated 25%, the Japanese yen 17% and the Canadian Dollar 7%.
We would suggest that US investors consider hedging their US investments through our standard trading model — invests in foreign currencies, US treasuries and stock indices — as offered through our private account management services. The decline in the US dollar means that all US investors saw their net worth’s deminish by 20%. The decline in US interest rates (fed funds rate at 1.25%) has caused housing prices to rise in the near-term offsetting part of the US dollar decline. However, this is a short-term aberration since interest rates can only be cut by another 1.25% if the US economy remains weak. Once the refinancing boom runs its course, the US debt burden on consumers and corporations will cause residential and commercial housing prices to decline. The February 2003 newsletter further discusses “the debt boom soon to burst” in greater detail, and is available upon request.
It is important for investors to remember that there is a direct correlation between debt burden and housing prices. In the mid-1970s, the US had the lowest level of US debt relative to our GDP. This also coincided with the bottom in housing prices. However, today, we have a record level of US debt relative to our GDP, which will hamper future US consumer and corporate levels of expenditures, causing housing prices to decline. Our May 2002 newsletter discussed the “housing bubble poised to burst” in detail, which is available upon request.
The US treasuries should continue its rally in anticipation that the Federal Reserve will cut it’s fed funds rate of 1.25% by 50 basis points (1/2 of one percent) to 0.75% at either their May or June 2003 FOMC meeting. The US economy remains weak even with the War with Iraq proceeding as planned and the fed knows some course of action may be required. They may choose to us an alternative means of dropping interest rates buy purchasing US treasury notes or bonds instead of cutting the prevailing fed funds rate. This type of action has been performed in the past, but with limited success in stimulating the US economy.
There is a country that has gone through the current type of economic business cycle in the past, which is Japan. In 1989, their stock market, the Nikkei, topped at nearly 39,000 and proceeded to decline. Over the next three years, the Bank of Japan, cut their prevailing interest rates from 6.5% to 1.0%. The reduction in interest rates did not effectively improve the Japanese economy, but caused residence to refinance their residential and commercial real estate holdings. This process caused their real estate values to rise as the lower level of interest rate made housing more readily affordable. The Bank of Japan suspending their interest rate reduction process since it was not effectively revitalizing the Japanese economy. Today, the Nikkei is trading below 8,000, Japan’s prevailing interest rate is at 0.5% and real estate values have declined by 50% to 85% from their peak levels reached in 1992. They are currently faced with a record level of real estate foreclosures throughout all of Japan, just 11 years later.
In conclusion, it is important for investors to not be complacent, thinking that real estate will be a safe haven investment vehicle, going forward. In reality, it could become an “illiquid depreciating asset” due to the bursting debt bubble, the end of the refinancing boom, and the declining US dollar.
Our allocations have not changed as compared to our prior newsletter. We still believe that “reflation” will occur, but in the near-term, a flight-to-safety could continue within the US treasures. Therefore, we are suggesting a combination of zero coupon bonds (STRIPS) to capture profits with a continued rally and inflation-protection index bond (TIPS), which can generate profits as the bond market declines and yields rise. This combination is a conservative investment strategy, which will lock-in an effective yield of 3.5% as compared to a stock index fund allocation that has the risk of declining in value with a continued bearish stock market. Hence, we are suggesting the following investment allocations:
1) A 25% allocation into 2 to 5 year maturity of US Government bonds;
2) A 10% allocations into 20 to 30 year zero coupon bonds commonly referred to as STRIPS;
3) A 35% 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. This is far more a conservative investment vehicle than stocks or equity mutual funds and provides an effective between 4.0%-5.0% yield and possible price appreciation as the bond market declines.;
4) 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;
5) 15% 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.;
6) 15%-20% in the futures/derivatives markets (Note: This will help provide investors a means to hedge as well a further diversify their investment portfolio during either a bullish or bearish stock, bond and/or currency market as offered through our private account management services).
If there are any questions regarding the information discussed within this newsletter or our private account management services, please call the number provided below or e-mail us and we would be willing to provide further clarification.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400