WAVETECH ENTERPRISES, LLC
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw
Position overview . . .
In the July 8th newsletter, I wrote that the DOW would hold the top reached on June 5th at 10,863 and projecting the next move down to between 9,400 and 9,700 would begin on Monday, July 10th, and be completed by late-August 2000. The actual result was that the DOW topped 10 days later on July 20th at 10,874. On July 11th, indicators showed that the forecast was too early, so a DOW/S&P 500 spread was used to protect the DOW equity short position and minimize any form of risk exposure. The exposure would have been around 2% before the DOW proceeded lower.
Since the DOW remained in a 300 point trading range for the month of July, the DOW short position profit potential was limited to between 1.7% to 2.5%. However, there were several productive currency spread trades used to ratchet the monthly return up to the 8.6% to 10.6% level, depending on the submitted client profile form. This brings the cumulative year-to-date gross return on management services to between 57.6% to 83.6%. This compares favorably with the single digit performance (and loss) that majority of individual US stocks and mutual funds have posted. Additionally, of the 36 countries which have their own major stock indices, thirty-one (86%), are in a loss position. Only six have a year-to-date positive rate of return. They are: Switzerland + 0.29; Denmark +2.20%; Hong Kong + 6.19%; Canada + 22.23%; Venezuela + 28.15%.
Looking forward . . .
In this rapidly changing global environment, it is increasingly important to maintain a properly balanced asset allocation between stocks, bonds, and foreign currencies. This enables positive return rates to be generated by either going long or short as is possible in the derivatives/futures markets. This kind of flexibility is essential whether we witness the resumption of a bull market move or a continued stock market correction.
Currently, the wave pattern analysis shows that the DOW tops on both June 5th and July 20th should hold at 10,863 and 10,874, respectively. If the DOW closes below 10,300, we should see it decline to my former objective of between 9,400 to 9,700 by late-August 2000. Profitable opportunities will continue in the month of August by shorting the DOW and/or foreign currency spreads. Current intentions are to continue accumulating a larger DOW short position on any type of rally while using the S&P 500 spread as a means to protect profits. Diversification into the foreign currencies and the bond market will also prove a useful tool in augmenting profits in the event the DOW remains “range-bound” until after the November 2000 Presidential Election
Two additional catalysts that could further effect valuations of US stocks and the various indices are:
THE RESUMPTION OF STRONG ECONOMIC DATA:
Even though the last two months of economic data has shown the possible signs that the economy was starting to slow, we are, again, seeing a slew of stronger-than-expected data suggesting the economy isn’t slowing as much as hoped. The market’s ability to move higher is limited by concerns the economy remains too exuberant for comfort at the Feds. Greenspan’s comments to the House Banking Committee two week ago suggest he’s in no hurry to raise rates at the August 22nd FOMC meeting. At the same time, lots of data will be released prior to the meeting, and policy makers will scrutinize them for “signs of strains” in the economy.
The problem is that the data has changed from surprisingly weak to unexpectedly strong. For one thing, tight labor markets, just as Greenspan fears, are putting upward pressure on wages. Employment costs rose 1% in the second quarter, bringing the year-over-year rate to 4.4%, the fastest increase since 1991. Benefits costs, which restrained overall wage gains in recent years, advanced 1.1% between April and June, thrusting the year-over-year rate to 5.3%.
At the same time, the economy continues to zoom along, as evidenced by the 5.2% yearly rate of gain in the second-quarter gross domestic product and 2.8% jump in existing home sales in June. The conference Board’s barometer of consumer confidence, meanwhile, rose to 141.7 in July from 139.2 in June, and durable goods orders jumped an eye-popping 10% in June.
This kind of news has analysts and bond investors wondering if the American consumer, the undisputed driving force behind the economy these days, is indifferent to the Fed. After six hikes in the Fed funds rate to a current level 6.5%, analysts are struggling to find convincing reasons why consumer spending might move onto a more moderate and sustainable path.
JAPAN AND IT’S ZERO-INTEREST-RATE ENVIRONMENT COULD FURTHER EFFECT THE DOW:
On Monday, July 17th, the Bank of Japan left their interest rates unchanged even with recent improvements in economic growth in Japan. The reason for the conservative posture was that, just five days prior, Sogo, a major department store operator in Japan, applied to reorganize under court protection. Sogo had asked lenders to forgive 630 billion yen (about $5.75 billion dollars) in debt in a planned restructuring that included partial taxpayer bailout. The bailout plan was initially supported by the coalition government, however, after widespread criticism, the government urged court protection.
If would be difficult to see the Fed stepping in to save Macy’s or Bloomingdales, but the Bank of Japan is facing a spotty recovery and fears of rising bankruptcies. The month of June saw 1,560 bankruptcies in Japan, up 21.2% from a year ago. The total debt rose 1.8% to Y1.87 trillion (about $17 billion) and there are reports of an “upsurge in large-scale bankruptcies.” Also, the Standard & Poor’s (S & P) is warning that “a sharp withdrawal of credit from Japanese corporate sector could cause a further erosion of credit quality.” Furthermore, the S & P sees bank consolidation accelerating the trend of large corporate bankruptcies and loan forgiveness requests. Obviously, smaller companies won’t escape unscathed.
The Nikkei, since it’s peak of 38,915 in December 1989, has been in a down trend with a near-term bottom placed in October 1998 at 12,787. It made a recovery to 20,833 in April of this year before resuming the downtrend. With it’s most recent trading range between 15,000 and 16,500 and the concerns outlined above, it appears that the Nikkei will continue lower to 14,000 or possibly retest the lows at 12,787.
As Sogo continues to unwind crossholdings and selling shares that collateralized Sogo’s debt prior to it’s midyear September 30th time period, we could see another round of [related] business failures in the next several weeks. This could lead to more sales of Sogo’s equity collateral.
Since Japan has few policy options, given its zero-interest-rate environment, there is a very high probability of a contraction of credit. Faced with this, banks in Japan could start withdrawing capital from foreign markets like the US, which would put further pressure on the DOW and other domestic stock indices.
SUMMARY AND CONCLUSIONS:
We are now in the middle of the second-quarter earnings-announcement season. So far, the average stock has posted over 20% annual earning growth, compared to the same quarter one year earlier.
Unfortunately, in the month of August, the strong earnings announcements could start to slow down. There is a good chance that the stock market will weaken considerably in August, especially as a new wave of anxiety surrounds the Federal Reserve Board’s next FOMC meeting on August 22nd. This fundamental reason would further confirm the wave pattern technical analysis provide earlier for a stock market decline.
Furthermore, despite the news that the US economy might be slowing down, and far fewer jobs are being created, the key to whether or not the Federal Reserve Board will raise the Fed funds rates depends on whether or not the core rate of inflation (excluding food and energy) is still rising. We should know more on inflation with the release of Producer Price Index (PPI) and Consumer Price Index (CPI) prior to the FOMC meeting. Until investors are convinced that inflation is dead, the stock market will likely remain very nervous and/or defensive.
In conclusion, there are domestic and international reasons continuing to form which will further justify a stock market decline with either a strong or weak economy. As fundamentals continue to unfold, the wave pattern price projections will be further confirmed for a decline in equities.
Comments and/or further interest . . .
This newsletters sole purpose is to assist existing and potential future clients in both their current and future investment strategies. Comments and/or questions regarding it’s content would be greatly appreciated, since we want to continually improve the information provided on a monthly basis.
Also, if you have additional interest and/or questions regarding the investment management services discussed, upon request, further clarification and/or material can be provided, which outlines the services in detail.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Market Alert – Top Revision on 8-14-00
In the August 2000 Newsletter, I stated that the DOW should hold the tops placed on June 5th and July 20th at 10,863 and 10,874, respectively. With the recent release of a benign inflation number from the PPI on Friday, August 11th, the DOW has started a minor extension rally, which should end in a few days. Prior to the release of the PPI, I placed another hedge on with the S&P 500 to protect DOW short position profits and reduce equity exposure.
The revised projection for the DOW is to top on either August 15th or 16th at around 11,170 before resuming a downward trend. One of these two days will offer a great opportunity to further reduce US stock holdings and diversify into a more flexible trading instruments like offered in the derivatives/futures markets. This is also the time period that I will remove the hedge with the S&P 500 to generate profits on a stock market decline.
Should you have any questions on this DOW revised projection, please either call or send and e-mail with your question.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400