WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 12-09-03:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw
Position overview . . .
Our November 10th newsletter forecast that the DOW was in the process of putting in a climatic top and was expecting a trading range between DOW 9,240 and 9,910 proved to be partially accurate with the actual trading range between 9,585 and 9,903. The complacent level of optimism has been artificially supporting the major stock indices due to the various stimulus packages implemented earlier this year. We forecasted that the US dollar would be range-bound, but stated that a move to euro fx equivalent of $1.20 was possible and could cause US treasuries to be liquidated by foreigners. This assessment was partially correct with the US dollar continuing its decline to euro fx $1.2018. Foreigners have decided to hold their US treasury positions, causing the various T-Bills, T-Notes and T-Bonds to be supported during the month, as initially forecasted.
Looking forward . . .
The economy grew 8.2% in the third quarter, which included the final inventory revisions. The refund checks and the accelerated tax cut boosted after-tax income, allowing consumers to have more disposable income with which to shop. Consumer spending soared 6.6% in the quarter, however, if the impact of the tax cut were deducted from the Gross Domestic Product (GDP), the third quarter growth would have been 3.4%. Automakers offered aggressive incentives, to clear the car lots of 2003 models, boosting sales in the third quarter at a 38% annualized rate. This added nearly 1.2% to the GDP. The net of these two temporary boosts caused the GDP grow only 2.2%.
The US has had a continuous problem with it’s huge annual trade deficit. This unprecedented trade deficit currently represents a record-breaking 5.6% of GDP. The US is currently able to profit from a number of the world’s economies desires to pull themselves out of a very long-term economic slump, but the US dollar value depends greatly on supply and demand. More and more nations are slowing their use of the US dollar. Saudi Arabia now takes euros for its crude oil exports rather than US dollars. In addition, Russia, which is becoming a major source of crude oil production, has been amassing euros since early 2002. Those nations that previously amassed US dollars consistently lose huge sums as the US dollar falls. As a result, they are moving out of harms way and into the euro fx. A prudent person would take out some insurance on the US dollar devaluation, especially if their entire net worth is in US dollars. This form of insurance or hedging is available through our management services, while still holding investments is US dollars.
The US dollar decline is expected to continue and we anticipate an additional decline of 15% to 20% over the next 3 to 5 years. However, with the US dollar currently oversold, we could be due for a period of consolidation prior to the resumption of this bearish trend.
Our assessment remains unchanged that the DOW and the other major stock indices are in the process of topping, with our wave pattern technical analysis forecasting a DOW trading range between 9,210 and 10,000 for the month of December. This type of slow ascending and narrowing trading range for the major stock indices is quite common within bear market rallies, making it difficult to project the actual top in price. When the resumption in this bearish trend is continued, the initial move will likely be very sharp, as the bullish investors scramble to liquidate their positions.
Our imposed concern over the weak US dollar is cause to worry about our suggested allocations to US treasures; however, we have decided to maintain the same suggested percentages due to our analysis of the various US treasuries throughout the entire yield curve. Today, the Federal Open Market Committee (FOMC) met and decided to leave the Fed Funds rate at the prevailing 1.0% level even with the strong third quarter economic growth. The Fed said that the accommodative policy can be maintained for a “considerable period,” which eludes us to believe that they are in a “wait and see mode.” We feel that the Fed will hold the prevailing funds rate at it’s current level for several quarters, since they do not believe that the economy can support itself without continued forms of stimuli. Their next move will not be to raise interest rates like the market is expecting, but to actually lower them, once again. However, this opinion will depend on how the US dollar performs over that same time period, which could be altered if the US dollar accelerates its level of decline to euro fx equivalent of $1.35. Such a move could cause foreigners to start liquidating a portion of their large holdings of US treasuries, driving prices down and yield up.
The US current-account deficit is large and continues to rise. It is financed by the Chinese, Japanese, and other central banks of Asia that are channeling the substantial domestic savings of their population into funding the spendthrift, debt-ridden ways of Washington.
The growth of the world economy today depends on simple logic: “The US spends and Asia lends.” Protectionism threatens to upset this logic with the continued selloff in the US dollar. Alan Greenspan, Chairman of the Federal Reserve, recently warned that new protectionist initiatives in the context of wide current-account imbalances could erode the flexibility of the global economy. Such initiatives could roil currency markets, undermine capital flows, and strangle the nascent global expansion.
The following is a more detailed explanation of the two options we suggest:
SUGGESTED INVESTMENT ALLOCATION OPTIONS:
Since the ownership of stocks, bonds and real estate will offer limited growth potential, if any, due to the continued decline in the US dollar and other reasons discussed within this and prior newsletters, we have chosen to offer two different options for investors to consider. The first option is designed for individuals and privately held corporations seeking a conservative, but flexible investment vehicle for both their taxable ordinary funds and tax-deferred funds. The second option is for individuals investors seeking an investment vehicle that can produce a higher rate of return by using ordinary funds and hedging their existing conventional investments should the US dollar continue its decline.
1. A 75% to 85% allocation of their taxable ordinary funds and/or tax-deferred funds into a conservative as well as flexible investment strategy using various no-load index mutual funds offered through our Private Account Wealth Management Services (minimum investment: $1 million). This services is ideal for individuals and privately held corporations who have liquidated large stock, bond and/or real estate holdings and are seeking an investment vehicle to generate a positive rate of return between 12% to 19% per year (after fees) through either a rising or declining stock, bond or real estate market;
2. A 15% to 25% allocation toward 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.
In this option, we have chosen to maintain the US treasury asset allocations from the prior month, but may be liquidating the remaining 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 move us to 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, 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 25% 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. A 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. A 25% 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. A 15%-20% in the futures/derivatives markets. This will help provide investors a means to hedge as well a further diversify their investment portfolio during either a rising or declining stock, bond and/or currency markets with taxable ordinary funds as offered through our Private Account Management Services (minimum investment: $250,000). This services is ideal for individual investors seeking an investment vehicle to enhance their overall portfolio performance, which can provide a rate of return between 20% to 125% per year (after fees), depending which trading model is used and the client’s profile.
If there are any questions regarding the information discussed within this newsletter, the two investment allocation options mentioned above or our 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