Private Account Management Services
Newsletter Issued 08-08-03:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Position overview . . .

Our July 8th newsletter forecasted that the DOW had completed it’s bear market rally and were anticipating a trading range for the month between 8,225 and 9,285. The actual range fell between DOW 8,871 and 9,361 with a narrower and unexpectedly supported trading range. We further projected that the US dollar would continue it’s bearish trend and expected a trading range between euro fx $1.13 and $1.18. The projected range proved to be more bearish than expected, with the actual trading range between euro fx $1.1119 and $1.1585. We also projected that the US treasuries would continue to be supported for the next few months, but cautioned investors that the US treasuries would eventually top in price and bottom in yield and forecasted that the US treasury 10-year note yield could easily rise to a 6% yield over the next two to four years. The actual result was the US treasuries started their drop in price and rise in yield sooner than expected. There was a strong level of mortgage-backed related securities selling since the level of demand for refinancing has started to decline. This was the major catalyst for the sharp decline in bond prices and rising yields in such a short period of time with the US treasury 10-year note rising in yield from 3.11% to 4.50%. The magnitude of the US treasuries sharp and quick selloff has not occurred since 1987 as well as in 1939, showing the rarity of such a rapid decline in a short period of time. However, our suggested purchase of US treasuries 2 to 5 year note positions in the May 2003 newsletter, still are in profits and the suggested 20 to 30 year STRIPS are only slightly down. We intend to suggest liquidating these positions over the next few months as the bond market performs a retracement rally.

Looking forward . . .

We still continue to remain a skeptic of the conventional Street wisdom that the sharp rally in stock prices is signaling that “the long nightmare is over” and “a full blown cyclical recovery” is in the offing. This seems to boil down to a classic policy bet and we are concerned that it is destined to prove a bad bet.

What the bullish contingent is wagering is that 13 interest-rate reductions and two monster tax cuts will be the stimulus for a solid economic revival. The mistake they making is that they are assuming the business-cycle is normal. We contend that this cycle is anything but normal. Instead, we believe the economy is firmly in the grip of a “unique post-bubble business cycle, where standard policy multipliers (tax cuts and monetary easing) are largely dysfunctional — having all but been neutralized by excesses of the past eight years.

The bullish case for the economy does not rest on the most credible evidence. More specifically, it rests on soft expectational data from tiny samples of economic actors like the nonmanufacturing purchasing managers’ survey, which covers all of 0.0001% of the full universe of companies. This ratio would not make the first cut in an elementary statistics course.

By contrast, the “hard” data continues to be generally disappointing. Things like capital spending, nonresidential construction activity and, of course, the dire employment numbers.

We are beginning to worry about the strong gains racked up by the stock market in the brisk upswing since the lows of March 2003. It appears to have distinguished itself from the previous false starts and market spin is starting to take over in driving perceptions of underlying economic activity. And that, we remind sorrowfully, is exactly what the bubble gave rise to a constant stream of “new wave” interpretations of the New Economy. This is all starting to have an eerie sense of dééjàà vu.

The month of August is anticipated to have a DOW trading range between 8,275 and 9,250 as the various stock indices start to trend lower. Under normal conditions, the bond market decline of 19% over this past month would have seen the stock market advance as investors liquidated their bond positions and placed those funds in the stock market. However, with limited price appreciation available within all the major stock indices, they failed to propel to higher levels. The actual result was a DOW trading between 8,900 and 9,361, the S&P 500 between 960 and 1014 and the NASDAQ 100 between 1598 and 1771. One of the reason for the lack of stock market price appreciation was the latest reading of consumer confidence, expected to be 85.0, but the actual lower reading of 76.6 showed there could be a reduced level of consumer spending in the months to come.

On June 17th, 2003 — both the interest-rate sector and home buildings — may have yelled, “Serious Top!” Now, this interest-rate spike — with a large portion of the bond market selloff occurring last week — has become the catalyst that reverses the mega-bull real-estate market’s 30-year long parabolic run, as a secular real-estate bear market lasting 10 even 20-years unfolds (one prognosis that we hope will be completely wrong, but has a high probability of occurring). Unfortunately, houses are being bought, at record prices, only to be demolished for a monster edifice. This appears to parallel eerily the NASDAQ year-2000 type lunacy and what was done in the 1929-31s, as the wealthy felt the need to display what they had. At first, money dedicated to real estate will probably get transferred back to the stock market. But then, having trapped both sides, the stock market will continue on in it’s mega-bear slide. It is estimated for every 50 basis points (1/2 of one percent) that the 10-year US treasury note rises in yield that 15% of the home and corporate buyers of real estate will no longer be able to qualify for their desired home or commercial building purchases due to the higher level of monthly mortgage obligation and their fixed or declining level of income. The US treasury 10-year note has risen almost 150 basis points (1 and 1/2 percent) in a very short period of time. Therefore, is it highly probable that 45% of the home and commercial real estate buyers are struggling or failing to financially qualify for their planned purchases.

Near-term, the US treasuries may have put in a short-term bottom in price on Friday, August 1st, and are in the process of performing a bear market rally. We are still suggesting to maintain the various US treasury positions mentioned within the investment allocation section; however, it is highly probable that we will suggest the liquidation of those positions within the next few months. The shorter maturity US treasuries (1-year T-Bills through 5-year Notes) could retest their record price levels and low yields; however the longer maturities (5-year Notes through 30-year Bonds) could only retrace part of the major decline seen this past month and especially this past week. The catalyst for such an advance could be declining consumer confidence, reduced level of refinancing (effecting the amount of available funds for corporate and consumer expenditures), the record levels of both corporate as well as consumer debt, and the continual rising number of bankruptcy filings.

The US dollar is projected to have a larger trading range this month between euro fx equivalent of $1.115 and $1.180. US trade imbalance still continues to hamper any level of major growth for the US dollar and are anticipating a decline of between 15% to 20% over the next 3 to 5 years. Hence, US investors may want to consider alternative investment vehicles to hedge their fixed as well as liquid investments as offered through our private account management services. Conventional investment vehicles of stocks, bonds and real estate could have major difficulties in producing positive rates of return for the next 10 to 20 years for the reasons mentioned within this newsletter and prior ones. We strongly suggest a proper level of diversification and/or hedging with alternative investment vehicles to maintain desired levels of overall net worth and profitability through this long period of under performance for conventional investment instruments.


We have chosen to maintain the same asset allocations from the prior month, but will plan on liquidating the various suggested US treasury positions over the next few months for the reasons mentioned earlier. The uncertainties over the future levels of consumer spending and corporate growth made us conclude that the Fed will not raise interest rates in the near-term until a stable and consistent level of growth reappears within the US economy. Therefore, we continue to suggest a combination of zero coupon bonds (STRIPS) and longer maturity Treasury Notes & Treasury Bonds with no allocation in the inflation-protection index bonds (TIPS). Deflation may not be a concern now, but this conclusion could change in the months ahead depending on the level of inflation, declining commodity prices, and rapidness of the declining US dollar. Hence, we are suggesting the following investment allocations:

1) A 35% allocation into 2 to 5 year maturity of US Government bonds;
2) A 35% allocations into 20 to 30 year zero coupon bonds commonly referred to as STRIPS;
3) 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.;
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

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