Private Account Management Services
Newsletter Issued 01-12-04:
By: John T. Moir
Chief Editor: Sara E. Collier
Associate Editor: Barbara Crenshaw

Position overview . . .

Our previous newsletter, dated December 9th 2003, forecasted that the DOW was in the process of topping, and we anticipated a trading range between 9,210 and 10,000. Unfortunately, the DOW actually ascended further and had a trading range between 9,785 and 10,462. The buying above DOW 10,000 was primarily propelled with the artificial expectations of an improving long-term economy and employment situation. We will address these cosmetic fundamentals and the complacent movements further within this newsletter.

Additionally, the US dollar was forecast to be range-bound due to the sharp decline over the past 4 months and the primary declining trend over the past 22 months. We further stated that a decline in the US dollar to the euro fx equivalent of $1.35 could cause foreigners to start liquidating their various US treasury holdings. The actual result, during the month of December, was a continued decline within the US dollar causing the euro fx to rise to $1.26 from $1.20. The trade deficit, now representing nearly 5.6% of the US Gross Domestic Product (GDP), is forcing the US dollar to decline in order to reduce this imbalance. Furthermore, we projected that US treasuries would continue to be supported and maintained a large position, since we felt that the Feds next move would not be to raise interest rates, but actually to lower them instead. This proved to be accurate with the entire yield curve rallying for the duration of the month, with the lows placed on December 1st.

Looking forward . . .

We are starting to see more evidence of the economy beginning to slow down. The ISM Non-manufacturing Business Activity Index came in well below expectations for the second straight month, falling from 60.1% to 58.6% in December 2003. This marks the first month since May 2003 that the index failed to surpass the 60% mark and indicates business is not as brisk as initially believed by the majority of investors.

Furthermore, November 2003 factory orders fell 1.4%; the first drop in three months. Durable goods orders fell by 2.5% while orders for computers and electronic products took their biggest drop in more than three years.

Last Friday, the Labor Department released its monthly employment report showing non-farm payroll only increasing by 1,000. The official consensus was for an increase of 150,000 new jobs, while the unofficial projection was for 250,000. On virtually every count, the report was poor; even last months reduction in the unemployment rate to 5.7%, from 5.9% in November, was, on close inspection, less than bullish. Both the November and October non-farm payrolls were revised downward from 57,000 to 43,000 for November and from 137,000 to 100,000 for October. Moreover, 26,000 jobs were lost in the already weak manufacturing sector during December, continuing its negative decline. Later within this newsletter, we will discuss the unrealistic notion of a jobless recovery, which is going to become more readily apparent in the near future.

Based on our technical wave pattern analysis, the DOW will face stiff resistance at 10,650 and we are projecting a trading range for the month between 9,925 and 10,600. The gradual ascending and narrowing trading range for the major stock indices over the past six months inclines us to believe that it is only a corrective rally in a primary bearish stock market trend. We should be able to confirm a near-term top is in place with an end-of-the-day close below DOW 9,800.

We continue in our belief that the US dollar will remain under pressure due to a large trade imbalance. This was our most formidable position in 2003 as the US dollar trended downward by nearly 17%, allowing for profits to be generated within the foreign currencies and specially selected investment sectors. A decline within the US dollar to euro fx equivalent of $1.35 is possible, however, the US dollar remains oversold and may be due for a period of consolidation prior to resuming its decline.

The expectation that Feds will be raising interest rates has diminished, and we believe that their next move will be to actually lower them late this year. Therefore, we will maintain our current favorable stands for US treasuries, but will monitor the decline of the US dollar. Foreigners hold over 45% of US treasuries and may start to liquidate them if the US dollar decline accelerates or reaches euro fx $1.35.

We would suggest that investors first take action to hedge their US dollar holdings through either of the investment options listed at the end of this newsletter prior to maintaining a large US treasury positions. The US dollar decline has caused US investors to lose 17% in the value of their assets, offsetting the gains from the stock market rally and real estate price appreciation in 2003. We live in a time of global markets and economies, and it has become essential to properly diversify with different investments vehicles in order to maintain or increase valuations of investment holdings, including fixed assets. These fixed assets, like equipment and real estate, can become very illiquid when demand disappears, and need to be affectively hedged with liquid investment vehicles such as those offered through our management services.


Tax cuts and rebates encouraged consumers to accelerate the purchases they would have made later. Accordingly, a spike in retail sales resulted in June through August 2003. This has depleted pent-up demand.

Consumer spending, even though not readily apparent, has declined following the tax rebates. The worst-case scenario is that consumer spending softens with no further stimulation left. Retail prices, which are very apparent, have slipped into the deflation zone once again. Retailers are now being forced to cut prices to stimulate revenue. The auto industry is a proven example of this decline in prices, except for a few well-demanded makes and models. Remember, consumer spending affects 70% of our economy. If it slows, as evidenced the last two months, the economy will weaken. The recent pickup in production and factory output is most likely a reaction to the spike in demand this past 2003 summer. Overall, the economy appears to be headed for a slowdown.

One of the best valuation measures is actually the market value of most publicly traded stock (6,300 US companies) as a percentage of Gross Domestic Product (GDP). Since 1925, the market value of all publicly traded securities has approximated 57% of the total country’s business. Historically, the market has formed a major top when this ratio exceeded 70% (e.g., 1929 and 1973). Conversely, stocks are at bargain-basement valuations when the ratio breaks below 40% (e.g., 1925 and 1982). In the late 1990s, the ratio line accelerated, then ballooned to 171% in 2000. In this extreme nosebleed zone, stocks were valued at nearly twice that 1929 level. The ratio at July 1, 2003 was 105%, when the DOW was 8,985. We appear to have once again reached another nosebleed zone for valuations with the DOW 11% higher than that valuation level determined in mid-2003.


It is becoming more and more evident that there is a significant amount of overtrading being performed by individuals as well as institutions. An institutionally owned stock such as Amazon.com has a market capitalization of over $21 billion, about 280 million floating shares, and trades an average of 10 million shares per day. That works out to a holding time of 28 days for the average share of Amazon.com stock. It is also notable that at the March 2000 NASDAQ top, Amazon.com had a lower average daily trading volume of about 9 million shares. Examples such as this suggest that the level of speculation in the stock market is very close to where it was at the March market top. Obviously, the traders flipping Amazon.com stock every 28 days are not truly interested in earnings or even a two-year time horizon.

Overtrading and speculative market leadership are not indicative of a bull market. Rather they indicate that the current stock-market rally is a secondary rally in a primary bear market, commonly referred to as an “echo bubble.”


Optimists have seized upon any tiny shred of evidence that employment is coming back, such as the small downtick in unemployment claims in late-December 2003. And we keep hearing that US unemployment really is not bad after all at 6.1% versus 9% in Europe. However, layoffs are a key concern with baleful consequences for investors who are betting on better times.

Companies just don’t need more workers, and consumer demand is not very robust. The strong third-quarter profits, the top lines — which drive hiring decisions — are again subdued for most US corporations. Pricing power remains nonexistent due to global excess capacity and robust deflationary forces. Businesses are producing more with fewer people. In the seven quarters since the recovery supposedly started, real gross domestic product (GDP) was up 6.2% and employment was down 0.8%.

The US saw productivity boom in the 1990s, mainly powered by spectacular advances in information technology. Better labor training, more efficient staffing structures (fewer managers), and smarter corporate strategies were helpful. However, today’s productivity, though, is catalyzed by layoffs.

We do not expect businesses anytime soon to step up capital spending anytime soon, which could increase the need for more workers. Inventories are low in relation to sales, and companies now prefer backlogs to more inventory on the shelves. Also, there is an abundance of excess industrial capacity and vacant commercial space to spawn an economy-loading capital spending boom.

A host of other factors are stopping employers from adding to the head count. Larger companies are facing requirements to restore depleted pension-fund assets, a need that drains away capital. The corporate world continues to suffer from spiraling health care costs, one area of the economy that has apparently not heard about the end of inflation.

The truth is that cutting costs is the only route to profits salvation these days. Most costs are directly or indirectly are labor related, which means more layoffs. The latest manufacturing employment numbers for the past six months show a drop of 1.4%, in line with a year ago. Lately, the average time someone spends unemployed is longer lately, a fact that is not encouraging for the future. It hit 19.5 weeks over the past six months, up from 17 weeks for the same period in the prior year.

Cost cutting layoffs will squeeze consumer incomes. Fiscal and monetary stimuli, which cover the devastating effects of layoffs on consumer incomes, are fading as well. The jump in mortgage rates this past summer terminated the mortgage refinancings and home equity loans that have tided people over. The $400 Child Tax Credit, the only economic short-term cash incentive part of the 2003 tax cuts, has long been spent. The big bulge in Iraq spending, $52 billion during the two-month hot war phase, is over.

The consumers, who have kept the economy going are not going to be in the checkout lines due to their new found zeal for saving which will pinch spending even further. The spillover to housing will break that bubble (request the May 2002 Newsletter for details on the expected housing bubble), and seals the case for a 2004 recession.


Most investors are simply unaware that they pay $70 billion a year in expenses; and probably $4 billion is going into investment management, another $16 billion to marketing; and the pretax profit margins are probably close to 50%. The prospectus that an investor receives in the mail discloses the management fee, but that only represents about 5.7% of the total expenses paid. On top of the fees and sales loads, stock funds lose money to the fractional cost of trading portfolios. There are commission costs, now buried in the statements of additional information. And then there are the transaction costs that are harder to quantify: bid/ask spreads and the tendency of a fund and institutional manager to temporarily push a stock price up or a sell order to push it down. Academic research on this topic suggests that hidden transaction costs for a round-trip trade can run 1%. A stock fund with 150% annual turnover, then, may be losing 1.5% of the investor’s money annually to brokers, market makers and institutional traders.

We, as a Private Account Management Services Firm with no actual access to clients funds (a preferred major brokerage firm retains the clients’ funds), only charge a management fee and, when applicable, an incentive fee or performance bonus. This, as stated in the above paragraph, represents the smallest portion of the total expenses imposed by institutions and fund companies and prevents any form of a possible “conflict of interest.” We have always believed in maximizing the returns for our clients, while keeping transaction expenses as low as possible.


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

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
E-mail: JOHNTMOIR@aol.com

Acknowledgments: Bridgewater Research, Ned Davis Research, John C. Bogle, founder of the Vanguard Group, Arthur Levitt, former SEC chairman.

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