Private Account Management Services
Newsletter Issued 02-10-04:
By: John T. Moir
Chief Editor: Sara E. Collier

Position overview . . .

Our January 12th newsletter forecasted that the DOW would face stiff resistance at 10,650 and projected a trading range for the month between 9,925 and 10,600. The actual result was a more narrow range, but close to our projected upper resistance level, between 10,367 and 10,705. The strong beginning-of-the-year inflows of stock allocated funds supported the various indices through the month, artificially propelling them higher.

We forecasted that the US dollar would remain under pressure, but it was oversold and due for a countertrend rally. This proved to be accurate with it rallying during the course of the month, and a euro fx equivalent trading range between $1.2332 and $1.2846. The actual bottom for the US dollar occurred January 12th, the day the newsletter was released. We also expressed concerns that if the US dollar continued its decline, foreigners, which hold over 45% of our total US treasuries, could start to liquidate their positions. In addition, we anticipated that the US treasuries would be supported near-term and continue to hold a large allocation. This proved to be accurate, with the US treasuries moving higher, though at a slow and erratic laboring pace. The rally was not in a steady ascend due to comments made at the FOMC meeting by Federal Reserve Chairman, Alan Greenspan. He commented that they may not hold interest rates down for a “considerable period,” as previously stated. This caused both the stock and bond market to decline with the concerns of higher interest rates, possibly before the November 2004 election.

Looking forward . . .

Currently, within the United States, we have domestic asset inflation and a depreciating currency. In the long run, that is not a desirable state of affairs. It creates tremendous wealth inequality and an absolute decline in living standards.

The Dow Jones Industrials were up 25% in US dollars last year, but only 5% in euro fx terms. The euro fx has climbed from a low of 82 cents in 2000 to $1.27. Asset inflation will be necessary to keep up living standards. But in euro fx terms, or relative to a basket of commodities or gold and silver, the US is already deflating.

We have a deflationary boom, such as the US had for the entire 19th century or China has today. In the US, however, this kind of deflation is unacceptable to policy-makers because the debt-to-GDP (Gross Domestic Product) ratio is excessive. Between 1950 and 1980, debt and GDP were growing at about the same rate, and the ratio was about 120%. Today, it is more than 360%. The Federal Reserve was one of the principal architects of this debt explosion over the past 20 years. Every time there is a shock to the system, more money is printed and our businesses can continue to flourish.

We feel the housing boom has come to an end, which is discussed in greater detail later within this newsletter. Refinancing is down about 70% and real estate loans have started to contract with home sales weakening in the past few months. Once this asset inflation ends, consumption will slow or contract. It may start this year, as the impact of tax cuts end. We doubt interest rates will fall significantly, but let us distinguish between real and fictitious growth. In China, there is tremendous investment in plants and equipment as well as infrastructure, which is real economic growth. On the other hand, it has now become fashionable, especially in the US, for men to have cosmetic surgery. As a result, let us say more hospitals are built and more doctors have to be hired, causing employment to rise. But to what extent does that create growth? A lot of economic growth in the US is artificial, essentially transferring money from Peter’s pocket to Paul’s.

It is all well and good to have plastic surgery, or to buy or sell a certain service, but we cannot sell our plastic surgery to the rest of the world. In the past, it was good that we could sell our US treasuries and automobiles. But if growth now is predicated on services that are not tradable and that the rest of the world does not want, it is a negative in terms of the trade deficit, the US dollar and ultimately our standard of living.

The weaker US dollar may enhance exports for American farmers, but ultimately it lowers the standard of living for all Americans. This is the point that most Americans do not realize. As the US dollar declines, it costs more to import goods. Two or three years ago, the mantra was that because of the strong US dollar, foreign investors wanted to hold our stocks and bonds. If we have a weak US dollar, foreign investors would not want to hold our bonds, and believe it or not, our stocks. That ultimately affects Americans’ wealth. It appears that the US dollar has completed its period of consolidation and is resuming another decline to the next objective level of euro fx equivalent of $1.35 over the next few months.

The DOW is laboring through its topping process, with divergence’s starting to build with other stock indices. Both the Transportation Index and NASDAQ are trading below their previous ascending trading ranges, showing further signs that the topping process is starting to occur. Remember in March 2000, both the Transportation Index and NASDAQ topped first prior to the S&P 500 and DOW placing their final tops just one month later. We anticipate a trading range for the DOW this month between 10,250 and 10,735. The trading range has continued to narrow, which is leading us to believe that the level of bullish complacency is in the process of peaking. We would suggest that investors watch how the DOW trades at key support levels of 9,800 and 10,000 to confirm a much greater near-term decline. It is possible that those levels may not show any means of support, if consumer confidence shifts dramatically in the future.

The concern of the US dollar continuing its decline has caused us to reduce our suggested US treasury position to a more neutral outlook, due to the reaction after the last FOMC meeting. We will maintain a small shorter-term maturity position, but remove the longer ones and establish an Inflation-Protected Index Bond (TIPS) position. The combination of the two positions will create a neutral position with an effective yield of 3.3%, exceeding yields commonly acquired through money market funds. In the January Newsletter we projected that we would maintain the large bond position for a majority of the year and even stated that the Feds next move would be to cut rates. However, with the Fed adjusting their comments after the recent meeting, we have been led to believe that the US treasuries may have limited upside potential near-term. We discuss this along with our additional reasoning behind the adjustment within the “long-term conclusions” section of this newsletter. The new allocation percentages for the various bond positions are show within the “suggested investment allocation options” section. The numbering order in each option represents the level of importance and priority when considering allotment of funds for the different investment vehicles.


Today, there are more than 380,000 new homes “for sale” in the United States, exceeding every level over the past decade, and eclipsing the previous peak set in the summer of 1996.

With residential construction booming, of course, it is only natural that home builders — never shy about throwing up another structure, particularly when credit is dirt-cheap and demand extraordinarily buoyant — would be putting up houses as fast as they could, or there would be a constantly replenished supply of new houses coming to market.

However, this is not a one-month phenomenon. The inventory-sale ratio of unsold new homes climbed to a 4.3 month supply in December, up from the four months in November and a low of 3.5 months last June. Given the robust pace of new housing starts, if employment fails to pick up, we may witness the dread specter of overbuilding.

What inspires such rank apostasy of the faith on housing is the very fact that virtually no one agrees with us, except investors who have experience firsthand the illiquid discomfort of trying to sell real estate in a declining market. More substantively, we feel inflation will reappear, even though not very readily apparent today. We think inflation shows definite signs of revival based on the logic of the huge rise in commodity prices working their way through the system.

If we had any doubts that the housing boom was in for a cooling off, they were thoroughly dissipated by a recent brokerage-firm recommendation in which the analyst claimed that the housing sector’s potential for appreciation was “infinite.” This analyst, from what we conclude, was dead serious.

We feel that these real estate analysts are drawing similar complacent conclusions that Internet analysts drew in March 2000, prior to it’s peak and subsequent decline.


We should reward people who save money. They are the ones who make capital available for investment. A saver should not be penalized by artificially low rates or negative real rates.

Economies that become prosperous are ones with high savings rates and strong capital formation, not over-consumption. Artificially low or negative real rates drive people to move safe funds into risky assets, hence the rise in real estate values. The longer these rates last, the more people will be driven into an asset class that is appreciating rapidly. Eventually, a bubble appears. The public then buys an asset class nearest its peak and loses a ton of money, once again. Very low interest rates create the basis for the next big bubble.

So the poor individuals — let us say, the elderly, who depend on some income — 10 years ago earned 6% to 7% on their money-market fund. Now they are down to 1%. They decide to switch to 30-year bonds to get a higher interest rate of 5%. Well, tough luck, the price of bonds have been rising and subsequently declining in rates of yield since September 29, 1981, and may have peaked in price and bottomed in yield around June 2003.

We may still have a somewhat favorable appeal for bonds near-term, however, over the next 20 to 30 years interest rates will rise, especially if the US dollar continues it’s decline. It appears that the economic statistics have been grossly exaggerated on the positive side, where the economy is actually very soft.


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 individual investors seeking a more aggressive 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.


1. 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,;

2. A 25% allocation into 2 to 5 year maturity of US Government bonds;
3. A 0% allocations into 20 to 30 year zero coupon bonds commonly referred to as STRIPS;
4. A 20% 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.;
5. 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;
6. A 35% 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.

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 happy to provide further clarification.


John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
E-mail: JOHNTMOIR@aol.com

Acknowledgments: Northern Trust

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