WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 07-11-02:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw
Position overview . . .
We projected, in the June 12th newsletter, that the DOW would be range-bound between 9,450 and 10,000. We further stated that a DOW close below 9,000 would produce a major selloff in all US stock indices. This proved to be somewhat accurate with the monthly intraday high for the DOW being 9,986 and the intraday low being 8,926. Obviously, our expected range low of DOW 9,450 did not hold, however, it found support at our next support level of DOW 9,000.
It was stated that the US treasury market would continue to be a favorable investment vehicle since we felt that the Feds would not raise interest rates in the future in spite of the expectations of those holding treasuries. The Feds did maintain neutral bias at the June 25th and 26th FOMC meeting, and no adjustment in interest rates was made holding the Fed funds rate at 1.75%.
We also projected that the US dollar would continue its decline due to the large US current-account deficit of nearly 5%. This projection proved to be the most profitable of our projections due to our accurate wave pattern analysis.
Over the course of the second quarter, our foreign currency trades generated the highest level of profits followed by the US treasuries, and then the various stock indices. Clients with diversification in the various types of instruments (stock indices, treasuries, and currencies) as offered in our standard trading model outperformed the conservative model of treasuries only. Our private account management services, generated for the second quarter a net rate of return (including fees) on investment for the standard model between +19.0% to +35.8%. The conservative model generated a net rate of return for the second quarter (including fees) of between +14.1% to +32.2%. This brings the cumulative year-to-date (YTD) net performance for both the standard and conservative trading models to between +42.4% to +66.9% and +22.2% to +42.5%, respectively.
Looking forward . . .
The current crisis in the level of consumer confidence will continue to put pressure on the various stock indices. We feel that the DOW will still offer limited upside potential and are expecting a larger range between 9,400 and 8,080 during the month of July 2002. Today’s intraday low of 8,605 will offer some support for the DOW, but it could be temporary. The bearish trend remains in tack for all three major stock indices, however, there will continue to be countertrend rally’s over the next 8 to 10 years as investors try to pick a bottom. In reality, an actual bottom will not occur until capitulation by investors causes them to liquidate their stock holdings seeking alternative more conservative investment vehicles.
The US dollar will remain under pressure until the US current-account deficit of 5% is reduced to a manageable level. The decline in the US dollar of 13% since January 2002 only represents a portion of our expected total decline of between 25% to 35%. If the US dollar continues its decline at this rate, we will likely see further declines in the various stock indices. Also, bond prices will move downward causing interest rates to rise. This upward move in rates will be required to entice investors back to the US treasuries by providing them with a higher effective yield. Furthermore, the US dollar decline would be an additional catalyst for the US real estate market bubble to burst, which was further explained within the May 2002 newsletter. Copies available upon request.
Since conventional investment vehicles of stocks, bonds and real estate will offer limited price appreciation and positive rates of return over the next 8 to 10 years, we would encourage investors to seek alternative investment vehicles where profits can be generated in either a bull or bear market. Our private account management services offers this kind of flexibility within the futures/derivatives markets, and can serve as hedge or further diversification in these ever changing economic conditions.
Our allocations will remained the same as compared to the previous newsletter, however, we may change them in the near future. Since the US treasuries may have limited upside potential, we are suggesting inflation-protection index bond (TIPS) to lock-in an effective yield of 4.0% and to protect our generated profits. These TIPS are only being used by investors looking for a conservative way to locked-in an effective rate of return. Once we are convinced of a US treasury market peak, clients will be notified to liquidate the various US treasury positions. For now, the US treasury market will remain a favorable investment tool since the one-year treasury bills are still factoring in a Fed funds rate of 2.91%. We still feel this level of interest, may be unrealistic within a year, given the current state of our economy and global concerns. This, together with limited opportunities within the various stock indices for price appreciation, guide us in suggesting the following investment allocations:
1) A 30%-35% allocation into 2 to 10 year maturity of US Government bonds;
2) A 10%-15% allocations into 20 to 30 year zero coupon bonds commonly referred to as STRIPS. This type of bond will provide a greater rate of return, as compared to the conventional bonds, due to the leverage associated with this instrument:
3) A 40% allocation into inflation-protection index bonds (TIPS). If the treasury prices decline this instrument will effectively lock-in the profits generated with the US bonds and STRIPS with an overall effective yield of 4.0%. This investment vehicle is only being suggested to investors looking to reduce their exposure within the US treasuries while receiving an effective 4.0% yield.;
4) 0% in individual growth stocks due to the limited upside potential, low level of dividend yield and higher level of risk;
5) 5%-10% 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) 15%-20% in the futures/derivatives markets (Note: This will help provide investors a means to hedge as well a further diversify their investment portfolio during either a bull or bear market as offered in our private account management services).
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 would be willing to provide further clarification.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400