Private Account Management Services
Newsletter Issued 08-08-01:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Position overview . . .

In the July 12th newsletter, we projected that the DOW would be range-bound between 10,000 and 10,500, with key support at 9,980. We also expected that the Fed would continue to cut interest rates. Well, the DOW did remain range-bound, albeit at a slightly higher level between 10,120 and 10,679. We were able to squeeze profits by trading this narrow range on both the long and short sides. As for interest rates, the various treasuries rallied in anticipation of further rate cuts and allowed us to generate a reasonable level of return in the one-year T–bill equivalent in the futures/derivatives markets.

As a result of the DOW range-bound trades and the accuracy of the treasuries rally, we were able to generate a positive rate of return for all clients in both trading models. Depending on which of the five standard trading models used, the net return on investment (including fees) for the month of July 2001 ranged from 8.5% to 18.8%. Cumulative year-to-date net return on investment for our private account management services is now 44.2% to 76.5% for our standard trading models. Additionally, the new conservative trading model (restricted to trading treasuries only) was also profitable with net returns (including fees) of 7.3% to 14.1%. This brings the year-to-date performance to between 28.3% to 39.4% with the more aggressive models achieving the greater rate of return on investment.

Looking forward . . .

We feel that the DOW will continue to remain range-bound between 10,280 and 10,600 until the Federal Reserve meets on August 21st. One caveat would be a possible retest of support at 10,000 if either the Japan or South American situations deteriorate further. After the rate adjustment, we should begin a bear market rally that could extend into the fourth quarter before resuming the primary downtrend either late this year or early next year. This countertrend rally should occur for reasons outlined later this section and in the section on an improving economy. The magnitude of the rally will be determined after the
DOW closes above 10,600 and will be discussed within the September 2001 newsletter. The key to investment profitability over the near term seems to continue to be diligent monitoring of key factors coupled with high liquidity and reactionary flexibility!

With the fed-funds rate currently set at 3.75%, we are expecting a 25 basis point cut to 3.5% at the August 21st FOMC meeting. A simultaneous cut in the discount rate from 3.25% to 3% is also anticipated, with this possibly being the last rate cut in the near-term. Therefore, we see a top in treasuries prices occuring today or tomorrow, just two weeks prior to the FOMC meeting.

One of the best interest-rate predictors is the relationship between policy-set rates like the fed-funds rate and the discount rate as compared with the market-set rates such as the T-bill rates. When T-bill rates trade above the discount rate, easing is over. In the past couple weeks that has been the case for the first time since this round of easing began. With the three-month T-bill trading near 3.5% and giving signs of remaining stable or even going higher while the discount rate is at 3.25% and looking lower, it seems this cycle of easing is nearly over. Markets can and do change these relationships, but confirmation by the fed-funds futures, which suggest a fed-fund rate of 3.5% at year-end, suggests that the current T-bill/discount rate relationship is correct, at least through the end of this cycle of easing.


The inventory correction appears to be at an advanced stage, the number of workers filing new claims for unemployment benefits declined last week to the lowest level in almost five months, and credit markets remain supported.

We could be forming a bottom, but one cannot feel that the worst is behind us until corporate profits stabilize, which has certainly not happened yet. The squeeze on corporate profit margins has translated into a gradual deterioration of the labor markets. Corporations continue to aggressively slash outlays by focusing on “variable” costs (especially payrolls), which outweighs the fact that rebate checks are coming and energy prices are falling. Keep in mind that corporations do not historically announce staff reductions if they are anticipating a recovery within the next 6 – 9 months, as the reacquisition costs will greatly overshadow any temporary payroll reduction.

One of our major concerns is that the global situation might take our economy down another notch. The Bank of Japan and the European Central Bank, for
various reasons, are “unable and unwilling to do much” for their economies. The short term success of two substantial South American economies seems tied to the willingness of international bankers, primarily US based, to underwrite their deteriorating debt positions. These issues could further undermine US exports at a time when they have been reeling from the effects of a strong dollar.

Nonetheless, there are encouraging signs for the US economy. During the first half of the year, businesses made massive inventory liquidation’s totaling $53 billion, while the Federal Reserve’s six interest rate cuts totaling 275 basis points (2.75 percentage points) kept the consumer/household sector resilient.

What is frustrating to most is that this is not a classic recession simply because of the aggressive Fed action. Home sales are at record highs, auto sales have been buoyant, and the financial system is in fact in good shape We also do not have a credit crunch, at least not yet. What we have is a “lack of profits” recession – not an economic one.

This is the price we have to pay for the excesses of the late 1990s, which are being cleaned out right now with assets moving from weak to strong hands.
And, the Federal Reserve is making liquidity available to fund these transactions. However, there is only so much monetary policy can do to correct the problem. In all likelihood, we will unwind the excesses but it will, as always, take time. In terms of the US economic growth rate, many economists see a gradual rise over the next three to four quarters before it can get back to a “trend” growth rate in the vicinity of 3.5%. This still seems unrealistic and premature to us.

The cyclical aspect of productivity growth will pick up a bit as output begins to grow. The big downward pressure on productivity growth was due to declining output. So, output is key, and in that respect the end of the inventory correction combined with firmer consumer spending as the second half progresses should be helpful. The US economy will remain below trend growth for some time, but that does not mean productivity growth cannot accelerate.

We forecast a 1.7% growth rate in the third quarter, up from 0.7% in the second quarter. Final sales growth is forecast at 1.0%, compared with 0.7% in the second quarter. A diminishing drag from inventories will play an important role in the modest acceleration. Otherwise, it is going to be a pretty weak quarter before the fiscal stimulus kicks in, mainly in the fourth quarter.

Editorial by Chief Editor: John Allen

While editing some of the earlier sections of this newsletter, I came across the term high liquidity. “Hmmm, surely EVERYONE has this one down,” I thought. “Or do they . . . ” A quick canvass of the building was in order. It did not take long to determine that there is some confusion here.

First, liquidity does NOT refer to Coca Cola, Expensive Stocks (whatever that means), or an investment’s uncanny ability to run through your fingers. It refers to the relative ability of an investment to be liquidated quickly and without affecting the market for that issue. Keep in mind that it is a relative term. If Fidelity decides to sell a small position of, say, 10 million shares of XYZ and that issue has an average daily volume of 2 million shares, only half of the transactions would be initiated by sellers (assuming the price is stable). Therefore, the sale by Fidelity would represent a 100% increase in selling pressure over a period of 10 days – 50% if stretched out over 20 days. They would unquestionably cause the issue to drop if the amount of buyers remained constant. This is the dilemma that large funds constantly deal with. The stock in this example is not particularly liquid for them. While you or I could trade a thousand shares without being even noticed, they must either arrange a block trade to transfer all the shares at once to a new large investor or entice analysts and promoters to increase the activity on the “buy” side. Lastly, they could filter out over an extended period of time. The search for liquidity, not portfolio protection, is the principal reason you find such diversity in the holdings of many funds.

For us the liquidity is high, for the large fund it is low. The larger the fund the more this is a problem and the less “nimble” the fund becomes. It is important to remember when listening to advice from people associated with large groups that the reason they are still recommending a particular stock or issue or even sector that has already had a considerable movement, may be that they need an “exit” position. Let’s face it, they didn’t tell you to buy while they were buying. You can bet on that! Also, you will never hear an investment advisor or company associated with large investors ask you to consider a small cap issue that may explode simply because is too small for them to be able to enter and exit themselves. Therein lies the most significant advantage the smaller investor possesses — nimbleness. They can pick and choose from a wide selection of issues and enter or exit at will, IF he has the knowledge. Remember, the suitability of a particular issue may be quite different for that of the individual investor than for a large group.

The second thought I have is . . . PAY MORE TAXES! Yes, there it is. I said it. Investment heresy. Let’s play a game. You are a gold digger and your quest is to find the richest mate available, Naive guy 1 tells you proudly that he paid almost no tax last year. Naive guy 2 bemoans the fact that Uncle Sam nailed him for a couple of hundred thousand. You pick.

I have actually heard people whine about not having anything (read losses) to offset their substantial gains. I know some CSCO and Lucent shareholders that would help them out. Worse, normally clear thinking individuals with good investment experience say they would like to sell while the investment is so high, but they can’t because of the tax burden! HEELLLOO! Tax burdens, assuming a relatively equal ability among investors to not make a gift of it, are usually a sure sign of success and all its trappings. Holding on to an investment too long is one of the primary reasons windows in Manhattan no longer are allowed to open. Tax considerations seem to be the single greatest catalyst to this building code anomaly

By Chief Editor: John Allen

Throughout the past years we have tried diligently to provide both our clients and independent investors alike with candid, timely observations of current market trends. We have openly reported our results on a short term basis (considered unthinkable by most in our industry) whether they were positive or negative. We have attempted to take the starch out of Wall Street “shirts” and translate hyper financial gobbledygook to readable English. Now we would like, with your sage advice and unerring counsel, to take things to the next level.

Please read through the questions here and try to answer a few, or throw them away and just e-mail us back and say SOMETHING – ANYTHING! Tell us what you like — or don’t like. Be assured that if you do you will be guaranteed a FULL YEAR of strong financial results! Well, at least this newsletter for a year anyway. . . Thank you in advance for your valued help.

1) How long have you been a reader?

2) How many people do you forward this newsletter to?

3) How have you found its accuracy and timing?

4) Do you find it easily understandable?

5) What do you like best?

6) What would you change?


With the possibility that the Feds could withhold from further rate cuts after the August 21st FOMC meeting, we would now suggest the following investment allocations:
1) 50%-60 in US Inflation-protection index bonds. (If the standard US Government bonds start to sell off in price and produce higher yields, this type of bond will generate profits in this type of environment);
2) 10%-20% in individual old economy “value stocks” with P/Es of 8 or less;
3) 15% in cash, T-Bills, CDs or money market funds;
4) 10%-20% in the futures/derivatives markets.
As mentioned before, we would suggest avoiding any mutual funds or annuities with high commissions and fees.

In the futures/derivatives market profits maybe generated with a bull or bear market. This type of flexibility can provide stability to an overall investment portfolio as market conditions change from a bull market to a bear market and back once again. If there are any questions regarding the information discuss within this newsletter or our private account management services, please either call the number provided below or e-mail us and we would be willing to provide further clarification. Also, your response to the “reader’s survey” would be greatly appreciated so that we can further provide the information most preferred on a monthly basis for our readers.


John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400

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