WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 07-09-04:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our previous newsletter, dated June 10th, forecasted that the DOW had completed another countertrend rally and anticipated a trading range for the month between 9,800 and 10,440. The actual range was narrower than projected at 10,143 and 10,487. However, the upper forecasted price point was merely off my 48 points, further confirming the topping process for the stock market. We also anticipated that the Fed at their late-June FOMC meeting would leave the prevailing Fed Funds rate at 1.00%, and that the US treasuries were bottoming in price and peaking in yield the week of the newsletter release. The actual bottom for the US treasuries occurred not that week, but on the following Monday (June 14th), after the special stock market closure Holiday for The Ronald Reagan Memorial. Later in the month, the Fed did raise the prevailing Fed Funds rate by .25% (25 basis points), however the US treasuries reaction was to rally since the market had factored-in such an adjustment. The 10-year US treasury Notes from it’s mid-month peak in yield of 4.79% has rallied in price and declined in yield to 4.47%, reversing part of the true concern going forward from inflation to deflation.
Looking forward . . .
Although the 1,086,000 increase in payroll employment over the last four months may seem like a lot compared to what we were getting, it actually falls far short of what we should be seeing at this stage of a recovery.
Here is what we found in examining the last seven economic recoveries: In the first 30 months of the last seven cyclical expansions, employment rose by an average of 7.4% (range: 9.6% to 2.7%). This includes one cycle that peaked in 24 months with a gain of 7.3%. In the current recovery, employment has increased only 0.3% in the first 30 months, including the May number and reported upward revisions of prior months, and the recent June downward revisions.
If employment over the entire cycle had increased by 7.4%, the average of the past recoveries, June payrolls would have come to about 140.5 million rather than the 131.4 actually reported. This means that there are now 9.4 million fewer jobs than there should be at this point in the cycle, and that we needed an average increase of 324,000 jobs for each of the past 30 months to equal the average job growth of the last seven expansions. Hence, employment is not a lagging indicator, and even if it were, 30 months is surely enough time to catch up.
The lack of employment gains on this cycle has had a distinctly negative impact on wage and salary growth. Since consumer spending is about 70% of US Gross Domestic Product (GDP), it has taken massive monetary and fiscal stimulation to pump up asset values (homes and stocks) and thereby raising consumer wealth in a desperate effort to keep the expansion going. However, with the end of the tax refunds, there is little stimulation left, and the economic recovery is unlikely to be sustained.
We can see further evidence of this unsustained recovery with the details in the monthly released Institute of the Supply Management (ISM) survey. The June index dipped only slightly to 61.1 from 62.8, however, a key component within this report is new orders. These new orders fell for the sixth month in a row and the index measuring them is at its lowest level since September 2003. This has only happened four times in the past 50 years, and in three of those cases, the economy was in recession; in the fourth, it was on the cusp of a slump.
The bottom line of the ISM survey is that the pace of the economy is decelerating to the point that second-quarter GDP, which most of the Street anticipated would grow at a 4% or higher annual rate, might have advanced only by 2.5%. This, indeed, would be a shocker and not least for the stock market.
We feel that the DOW, based on our current wave pattern technical analysis, is resuming its next bear market decline and are projecting a trading range for the month between 9,800 and 10,450. An end-of-the-day close for the DOW below 9,800 will confirm the top being in place and an acceleration in the decline to much lower levels. We would suggest that investors consider a more defensive posture as shown in the investment allocations outlined at the bottom of this newsletter. A conventional investment strategy of 65% stock, 25% bonds and 10% in cash may work well in trending bull markets like from 1980 to early 2000; however, through periods of large trading ranges or declining stock markets, this conventional wisdom fails to produce long-term positive rates of return. We, as active money managers, who trades these rotations within the various markets, can generate profits through either a rising or declining stock, bond or US dollar.
The US treasuries peaked in yield and bottomed in price on June 14th, and we are projecting the rally to continue as inflation concerns dissipate and deflation worries start to reappear. Since consumers have already refinanced their homes through the prior decline in interest rates, this upcoming decline in rates will not spur any renewed level of refinancing, preventing consumers from continuing to treat their homes like ATMs. It appears the housing bubble is bursting and will become more readily apparent as the economy slows in the months ahead where consumers and corporations will be forced to reduce their desired levels of spending due the overwhelming imposed debt burden. We encourage investors to liquidate their real estate holdings held for price appreciation, even if their are tax consequences, and divert those funds towards investment vehicles that can generate profits through a declining housing market as outlined below.
SUMMARY OF SUGGESTED INVESTMENT ALLOCATION OPTIONS:
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 aggressive 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 20% 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 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