Private Account Management Services
Newsletter Issued 01-13-02:
By: John T. Moir
Editor: John Allen
Associate Editor: Barbara Crenshaw

We were quite surprised at the number of readers who E-mailed us regarding the omission of the December newsletter. It is gratifying to be missed, however, an explanation appears in order.

We initiated the newsletter two years ago as an informal vehicle meant to briefly update clients on the performance of the previous month and share with them our analysis of upcoming market conditions. We were flattered to find that clients were forwarding it to friends and associates who, in turn, passed it on. Soon we found ourselves being read by a rapidly growing audience. This distribution phenomenon was further fueled by our accurate assessment of the general market decline. Since our clients now represented a small part of the newsletter readership, we considered initiating a subscription fee for non-client readers. The idea was shelved at that time in order to stay focused on our trading strategies. Since then a number of developments have conspired to impede or outright prevent the timely distribution of the newsletter. Primary among them is that the editor and associate editor have strayed more directly into the world of Balance Sheets and Income statements with a new business acquisition. Because of the time constraints arising from this new venture, it may be necessary to revisit the subscription issues in order to assure a timely publication. In the mean time, thank you for your e-mails and questions regarding this matter and we hope this answers a majority of them.

Position overview . . .

In the November 20th newsletter, we projected that the DOW would offer stiff resistance at 10,000 and were projecting a decline to 8,450 before a final bear market rally to 10,600. This proved to be a wider range than the market delivered, as it was range bound over the last 45 days between 9,690 and 10,300.

We also stated that the US dollar had priced in its best value against the European currencies and would start to decline. A final rally in the treasuries around December 11th was anticipated after the Feds rate cut to 1.75%. As for the US dollar, the upper end of the range was put in just two days after the newsletter’s release and has been lower against the European currencies ever since. The treasuries did rally into December 11th, but from a lower level. The Feds cut the rate by 25 basis points to 1.75% as outlined and this represented a short-term top for the treasuries.

In light of the events of September 11th, our trading models faired well against the currency and stock index trades; however, we had some difficulty in the treasuries due to the extraordinary effects of this type of event. We made adjustments with the expectations that similar future, though milder, events might occur. This never materialized and the result was that we still sustained losses in the fourth quarter for all models. Obviously, the clients with diversification in all three types of instruments were less affected as compared to our conservative (treasury only) trading program. Depending on the trading model used, the net return on investment for the fourth quarter ranged from -5.2% to -7.9%. This was dramatically overshadowed for the year by the performance of the previous three quarters culminating in an outstanding return of 67.5% to 110.9% for the various trading models. The conservative trading program sustained larger losses, in the fourth quarter, due to the “Attack on America.” Net returns (including fees) were -6.5% to -9.7%. This brought the cumulative annual performance for the year 2001 to between 36.7% and 51.4%.

With all major stock indices having a negative return for year 2001, we were especially pleased to provide a rate of return equaled by only a handful of trading firms. This performance is similar to having a rapidly growing income with the housing market plummeting. It sets the stage for outstanding future opportunities. We were additionally pleased to hear from clients that they were able to utilize market projections from the newsletter to maximize results in their personal retirement and pension funds. Some generating positive rates of return as high as 17%. This area is further addressed in the section below on the future risks of 401K’s.

Looking forward . . .

In the last recession, the Federal Reserve lowered the cost of money 68% over a 32-month period. In this one, it has slashed the cost of money 74% in just eleven. Most economists and financial analysts point to the Fed’s aggressive easing as the primary reason they are forecasting a recovery. This analysis, however, overlooks a critical detail. Maybe Alan Greenspan is moving so uncharacteristically because the economy is facing problems that warrant unprecedented action. In this context, expectations of a normal recovery seem more hopeful than realistic. The Dow’s bear market rally may have reached a plateau on January 7th, with a high of 10,300 and could be starting its next wave down. There was mild support at DOW 10,000 but this key barrier was broken on a closing basis. We are still looking for the decline to 8,950. As for the time period of this decline, it could occur over the next three weeks or could extend out over several months. As stated in the previous newsletter, we are still looking for a final bear market rally to 10,600 but will only be able to confirm this movement after the decline to 8,950. We still remain within a primary bear market and are simply capturing profits on the long and short side of the market when the opportunities present themselves with the least amount of risk.

As for the treasuries, we are expecting a rally into January 24 or 25th, just prior to when the Fed may actually cut the rate by another 1/4 percentage point to 1.5%. Our clients were notified to postpone their entrance into the inflation-index bonds prior to December 11th date specified within the previous newsletter. The revised dates provided above may represent a major top for treasuries, especially for maturities between 10 to 30 years. This long-term change may cause the US dollar to remain supported, however, we feel the level of appreciation is limited and would suggest hedging US investments with European currencies. The suggested investment allocation is provided at the end of this newsletter.

First, we feel it is important to address a number of important issues on the popular retirement plan, which should be shunned for decades to come.


The past 12 months or so brought a revelation to many 401k participants: Stocks can actually lose money. This knowledge brings to light the serious flaws in the burgeoning defined-contribution retirement system. The average 401k account held just $40,000 — woefully inadequate to meet the needs of the typical retiree, even allowing for further contributions and investment growth.

Although the current system seems robust, the exodus from traditionally defined benefit plans to the employee managed contribution paradigm is a social and economic time bomb primed to explode sometime within the next few decades. Here are some of the reasons:

1.) Employees are not saving enough. A worker who earns a constant real salary from age 20 to 65 and saves 10% of it requires a 4% real investment return to sustain a 20-year retirement at the same inflation-adjusted salary level. Most younger workers have relatively low incomes and no savings at all. Starting later, between ages 30 to 40, raises the required real investment return to 6% to 8%.

2.) Future returns will not be nearly this high. The long-term price increase of stocks must track that of earnings and dividends. Over the past century, this has been 2% per year adjusted for inflation. New Paradigmistas point out those reinvested earnings, stock buybacks, and technology-driven improvements in productivity will result in increased earnings growth. From 1950 to 1975, annualized real per-share earnings growth was 2.2%; from 1975 to 2000, it was 1.9%. Add a 1.50% dividend yield and you get an expected real stock return of just over 3%. The 7% stock returns seen in the 20th century resulted from a combination of this 2% real earnings growth and dividends averaging 5%; anyone forecasting the same returns going forward should have their head examined and seek additional assistance from their former math teacher.

3.) The average long-term investor will receive the market return minus plan expenses. The typical 401k plan is an absurdly expensive vehicle with fees approaching 3%. Also, add commissions and other costs from frenetic trading at the funds.

4.) Poor allocation decisions further degrade performance. At one major company almost half the participants own only one or two funds, resulting in unnecessary risk. Worse, many companies encourage purchase of company stock in their retirement plans, exposing employees to the double jeopardy of losing both paycheck and nest egg if the company fails. Enron was a glaring example of this folly.

5. In a recent survey of over 250 large companies with both defined-benefit and 401k plans for the 1990-1995 period, it was found that the defined-benefit plans outperformed the 401k plans by 2.3% per year. Even more dramatic are the results in the 401k plans from three of the most prestigious financial service corporations. For 1995-1998, the annualized returns of these 401k plans were 13.3%, 10.2% and 11.7%, respectively versus a 21% return for the global 70/30 mix. If employees at three sophisticated financial companies cannot get it right, what chance do folks on the assembly line at General Motors have?

Given low equity returns, high expenses, and poor planning, it is likely that most 401k investors will obtain near zero real return in the coming decades. Further, a substantial minority will have disastrous results. Only a lucky few will save enough and obtain the 4% to 8% real returns necessary for a comfortable retirement (that is, aside from their bosses, who were smart enough to retain their traditional defined-benefit plans).

In today’s specialized society, most people do not build their own cars or remove their neighbor’s kidney stones, and for good reason. We should treat retirement investing the same way. If a person wants to manage his or her own retirement account, they should ask themselves if they really posses at least basic competency in the investing principles regarding stocks and bonds; the fundamentals of prudent diversification; and the impact of expenses on returns.

The self-managed defined-contribution concept is fatally flawed. While Wall Street pros may (or may not) be getting it right, the overwhelming majority of employees are bewildered by a subject they only dimly comprehend. The time has come to throw workers a lifeline, in the form of meaningful pension reform, but this type of reform will take years to implement.


With the expectations of an additional fed rate cut at their next meeting on January 29th & 30th and a major top for treasuries just prior to this, the bond market will offer limited price appreciation. Even though we were early on projecting a top within the various treasuries, we still are suggesting the following investment allocations:

1) 50%-60% in US Inflation-protection index bonds before the January 29 & 30th FOMC meeting as mentioned earlier in the “looking forward” section. (As investors sell their treasury positions, these types of index bonds will actually appreciate in value and will provide more comfortable rate of return as compared to individual stocks. If a higher rate of return is preferred or an investor would prefer to hedge their existing bonds positions, we can further assist with our private account management services);
2) 0% in individual stocks due to the limited upside potential and large level of risk. (take profits in value and growth stock positions).
3) 25% in cash, T-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;
4) 10%-20% in the futures/derivatives markets (this will help provide investors with a properly weighted investment and stability for either a bull or bear market as offered in our private account management services).

The primary objective of our management services will always be to offer our clients a means to reduce their portfolio volatility risk, while greatly enhancing their returns in difficult economic environments that offer limited opportunities for those using conventional investment vehicles.

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 will be happy to provide further clarification.


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

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