Private Account Management Services
Newsletter Issued 07-12-01:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Looking forward . . .

We feel that the DOW may find some key support at 9,980 and could be range-bound between 10,000 and 10, 500 during the month of July 2001. However, if it does succeed in closing below this key level, it could proceed lower to the next levels of support at 9,450 and 9,100.

Even with the lack of performance for the year in the various stock indices, Wall Street’s stock-market strategists have been urging investors to steadily boost the portion of stock in their portfolio. At last count, the average equity allocation recommended by these peerless seers stood at a formidable 71%. Unfortunately, the bullishness level of complacency has continued even with 401k’s and various pension funds posting a 10% loss over this past year.

As investors have increased their equity allocations, insiders (officers, directors and outsized owners) have increased their level of bearishness. These insiders have been scrambling to unload the stock of the companies they know intimately — their own. Recently, they have dumped more than seven shares for every one they have bought and over the past eight weeks they are averaging close to four sales for every purchase. Typically, these same insiders usually sell two shares for every share they buy.


1) In the manufacturing sector, where weakness persists, signs of any bottoming are inconclusive at best. There are many indications of continuing deterioration.
2) International debt problems persist and may intensify. Keep an eye on Argentinian debt. You will see a short-term solution exacerbate a long-term problem.
3) Notwithstanding the previous monthly report for May 2001, which showed a drop in the unemployment rate from 4.5% to 4.4%, the employment situation is deteriorating rapidly and was confirmed with the recent report released just last week. We expect to see a jobless rate above 5% by Labor Day. That will be up from a recent cyclical low of 3.9%; changes of this magnitude have always been consistent with a recession.
4) The tax cut approved is a watered down version of what was expected and is heavily back-loaded. Most people who receive a refund check will get barely enough to cover their increased energy costs. The Fed is well aware of this situation. As the FOMC members deliberate policy again in August 2001, they will now have to consider the fact that the fiscal stimulus is less effective than originally anticipated and may require monetary assistance to bolster the sagging economy.
5) The Fed’s lowering of the short-term rate has been somewhat offset by higher rates in the bond market. The benchmark 10-year Treasury yield is a half-point higher than it was when the Fed started cutting rates in January. The change is impacting the housing sector, which should slow down over the next few months. In turn, that will slow the consumer spending that originates when housing is strong. Mortgage refinancing is also slowing. Higher mortgage rates are the result of higher Treasury bond rates.
6) The Fed’s preferred measures of inflation do not represent an immediate threat. Conclusion: Fed policymakers have room to ease further.


Despite the weakening economy, the US dollar is still strong compared to other currencies, particularly the euro and the yen. There are a number of reasons for this. As a refuge for investment, a weak US economy is still more desirable than a weakening Europe or a slumping Japan. Remember the old adage: The US sneezes and the rest of the world catches a cold.

We believe that policymaking in the US (both fiscal and monetary) is incomparably more credible and responsible than in Europe or Japan. The newly formed European Central Bank, which continues to be embroiled in internal issues, cannot agree on leadership or its formal role, let along policy. Japan’s economy, meanwhile, has been mired in recession for the better part of the last 10 years and is fiscally saddled with a government debt exceeding 150% of GDP. Furthermore, Japan has had 11 prime ministers in 13 years. All of these characteristics are unattractive, resulting in a flight to US dollar-denominated assets, which provide a safer haven.

Editorial by Chief Editor: John Allen

When we arrive at the end of a reporting period, we inevitably start hearing terms like “Portfolio balancing” and “Window dressing” with increasing frequency. Exactly WHAT do these terms mean and how do they affect mere mortals? First, it has to be understood that we are NOT dealing as much with financial concerns as we are with marketing issues.

The first item is “Portfolio Balancing”. All fund managers, especially large ones, deal with what is called “Portfolio Allocation”. This is referred to STRICTLY in terms of percentage — not dollars. Example: Stocks will account for 70% of fund holdings. Tech will account for 25% of stock holdings. Microsoft will account for 20% of Tech holdings. This means that Microsoft’s percentage of the total fund may be computed as follows: 100% times .7 times .25 times .2 = MSFT shares or 3.5% of total fund holdings. If the size of the fund is 5 billion, then the fund will own $175,000,000 worth of MSFT. (5,000,000,000 x .035) If the fund managers decide that stocks will now be 50% instead of 70% and that tech will be 10% instead of 25%, then the fund will have to sell 35 million dollars worth of
MSFT. This will almost always happen by the end of the quarter, regardless of price in many cases.

The second item is “Window Dressing”. This is a move that is completely in the interest of the prospectus. How many times have we heard about the meteoric rise of a new stock and then seen that same stock in a fund prospectus. Our first thought is that the fund manager is “in the know.” We are impressed. The reality might be that AFTER the stock has made it’s mark, the fund manager is brutally aware of it’s rise and wants to benefit by association. To accomplish this he sells off some minor positions and acquires a small amount of this stock just before the quarter ends, even though the price is quite high. Why would he do this? Rules only require that he owns ANY amount of the stock to list it in his prospectus. Funds need not, and usually DO NOT, list the amounts or purchase date of the stocks owned.

And you thought all fund managers made only surgically precise decisions that were in the fund investors’ interest . . . Remember, most fund
managers are given bonuses based on the funds size, growth and FEES generated.


As the Fed continues to cut interest rates to bolster the economy and the US dollar remains a safe haven due to global currency uncertainties, we would suggest the following investment allocation:
1) 50%-60% in US Government Treasury Bills, Notes and Bonds (corporate bond
allotment or municipal bonds with short maturities are also acceptable);
2) 10% in individual old economy stocks with P/Es of 8 or less;
3) 15% in cash or money market funds;
4) 10% to 20% in the futures/derivatives markets.
We would suggest avoiding mutual funds and annuities with high commissions and fees.

The mutual fund industry is reaching a level of saturation at over 8,000 funds. This combined with deteriorating performance due to difficult market conditions, increasing commissions, and enhanced competition require the prudent investor to consider alternative investment vehicles with more flexibility. In the futures/derivatives market profits may be generated within a bull OR bear market. This type of flexibility can provide stability to an overall investment portfolio as market conditions change from a bull market to a bear market and back once again. If there are any questions regarding the information discuss within this newsletters or our private account management services, please either 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

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