WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 06-06-01:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw
Position overview . . .
In the May 7th newsletter, we were expecting the Dow Jones Industrial Average (DJIA) to remain within a large trading range with stiff resistance at 11,000 and 11,185. This office issued a market alert 10 minutes prior to the actual DOW top at 10,995 with the complete newsletter released later that same day. Initially, the DOW did selloff to as low as 10,800 over the next few days and profits were partially protected with a trailing stop. We were able to capture a 100 DOW point profit prior to the DOW initiating its final bear market rally wave to 11,350 on May 22nd. As per the market alert and newsletter, we once again shorted the DOW at the next indicated level of 11,185. The initial position was small as we were concerned with a continuation of 100 or 200 points higher prior to resuming the bear market downtrend. The DOW closed the month at 10,911 below our entry price with reasonable DOW short profits. Our wave pattern analysis was able to capture profits with the best performance favoring our more conservative clients. With the continued Fed easing of interest rates, we are anticipating an above normal rate of return for treasuries during June.
Looking forward . . .
We feel that the DOW has put in a near-term top at 11,350. A move below 10,700 would provide confirmation of a continued decline to at least 10,000. Our wave pattern analysis indicates that the bear market still remains intact and we provide further comparisons to previous bear markets in the next section which posses similar rallies. In spite of the recent dip in the unemployment rate, from 4.5% to 4,4%, the new weekly claims for unemployment insurance indicates that people are losing their jobs at rates we have not seen since the tail end of the early Nineties recession. Moreover, manufacturing posted a decline of 124,000 jobs, and the sector has shed over 500,000 jobs over the past six months — a 5.4% annualized decline. It is expected that the Federal Reserve will drop interest rates by 25 basis points (1/4 percentage point) at their next FOMC meeting on June 26th and 27th.
Over the next 3 to 5 years, we still suggest that investors continue to keep no more than 10% in selective stock holdings with P/Es of 10 or less; between 10 to 20% in cash reserves; 50% to 70% in a selective groups of bonds and 20% in a more flexible trading instrument such as the futures/derivatives markets. If inflation continue to accelerate on a consumer level — currently at 3.6% annually — then, bonds will be effected along with stocks. We suggest investors consider more flexible investments where profits can be generated by trading long or short in either a growing or slowing economy.
BEAR MARKET RALLIES DO CONVEY A FALSE SENSE OF SECURITY:
Since our primary emphasis in evaluating the various markets is by wave pattern analysis, there are always wave movements in both directions as investors determine their psychological level of “greed and fear.” Even bear markets do not act like a medicine ball rolling down a smooth hill. Instead, they behave like a tennis ball bouncing down a flight of stairs; there is a lot of movement (waves) up and sideways before the bottom is reached.
Indeed, during the Great Bear Market from 1929 to 1942, the Dow Industrials (DJIA) had rallies of 48% (from November 13, 1929 to April 17, 1930), 94% (July 8, 1932 to September 7 of that year), 121% (February 27, 1933 to February 5, 1934), 127% (July 26, 1934 to March 10, 1937), 60% (March 31, 1938 to November 12th of that year), and 28% (April 8, 1939 to September 12th of that year).
Yet, on April 28, 1942, the DJIA was still at only 92.92, 76% below its September 3, 1929 high of 381.17. Therefore, superb rallies do occur during bear markets. Choosing when to ride or abandon them, of course, is better determined with our wave analysis patterns and are entered for only short periods of time since it is against the primary bear market trend.
In this type of market, neither bulls nor bears can easily gain the upper hand. And in the short term, the market will respond to random news as easily as a leaf does to a gust of wind.
In any case, the tennis ball has taken a modest bounce this year after reaching a mountainside ledge in the bear market on March 22. It will encounter many, many more ledges before the market’s long-term swoon ends. And each time it does, a smaller and smaller number of bulls will feed the bear with fresh money.
When the bulls stop asking, “Is this the bottom?” and instead are explaining to their friends why “this time it’s different, and the market really is a bottomless pit,” then it, will be time for us to issue a buy alert. But we are a long way from that as discuss within the January 2001 newsletter (copies available upon request).
The DJIA first reached the 100 level in January 1906. It traded above and below that level for more than 36 years; it was not until May 1942 that the market left 100 behind for the last time. Furthermore, the DJIA first reached 1,000 in February 1966. It traded above and below that level for the next 17 years, leaving that figure behind for the last time in February 1983. And, finally, the DJIA first reached the 10,000 level in March 1999. Considering the unprecedented gains of the past several years, would it be that unusual for the benchmark to take a decade or even two before leaving 10,000 in the dust for the last time?
HIGHLY LEVERAGED CONSUMERS WILL POSE FURTHER DANGER IN A US DOWNTURN:
The consumers urge to shop has eroded personal savings rates into negative territory for the first time since the depths of the Great Depression in 1933. In those days, when 25% of the labor force was unemployed and incomes were spiraling downward, families had to draw down savings. But last year as the economy was recording its tenth year of expansion, incomes were rising and the unemployment was at a 30-year low.
The decline in saving is not a recent phenomenon. It actually started to slide in 1984 and has dropped like a stone since 1992. The downtrend has become critical and is particularly anomalous because the 76 million Baby Boomers, born during the years 1946 through 1964, are now in the 37-55 year age bracket. This most populous segment of the population, during its peak earning years, should (historically) be saving significantly. They are instead continuing to flock to the securities markets. Remember that high savings rates provides a source for feeding markets as investors snap up low market valuations. Conversely, low savings rates indicate that the dollars have already transitioned into the various markets and have the potential of being withdrawn if market trends become too painful for unsophisticated investors. This fear is best characterized by John D. Rockefeller – “I am not so worried about the return on my capital, as I am about the return OF my capital.”
Economists and politicians are now fretting that consumers, fearing layoffs and uncertain incomes in the months ahead, will tighten their belts and tip the economy into recession. Unfortunately, most American households have not been saving for a rainy day and thus have little financial net worth. This lack of financial cushion could prolong and exacerbate an economic slowdown in the months ahead. Moreover, in a decade or so, when their earnings capacity begins to wane, we will see the Boomers’ lack of financial wealth come home to roost. Now in their forties and fifties, Boomers are running out of time to build a nest egg.
The fact that consumers are very highly leveraged today cannot be disputed. It probably is a surprise to some, that the ease of borrowing and the seemingly uncontrollable propensity to spend have resulted in a surge of personal bankruptcies We have watched it rise progressively from 800,000 in 1994 to a record 1,410,000 in 1998. It has since remained near that level with a recent rise as debtors rushed to take advantage of less stringent laws prior to their termination. Record bankruptcies during the strong economic boom in modern history? What might happen in a period of slower growth or recession?
There is a myth in financial circles relating to the pervasiveness and magnitude of stock ownership in this country. Proponents of the “wealth effect” claim that rising stock prices (remember when?) have made people wealthier by increasing the value of their “savings”, without any sacrifice from current income. In other words, the stock market has increased their nest egg, so consumers have no compunction about spending their entire income.
So what can be done to encourage people to save and invest? Companies that sell goods and services do not want people to save. Financial services companies are not interested in unprofitable small accounts. The federal government is probably the only entity that could have an influence on people’s spending and saving behavior, but to what extend? An aging population, little wealth accumulation, virtually no personal savings, the move to voluntary retirement plans may offer the only solution with the tenuous future of Social Security.
Decisive long-term financial planning is imperative as we go through this bear market over the next 3 to 5 years and possibly much longer. Since stocks will offer limited stock price appreciation with a minimal amount of dividend yield, alternative investments should be given strong consideration. The various government and corporate bonds will offer a conservative rate of return if the economy continues to slow, but provide limited price appreciation if the increasing inflation concerns continue on a consumer level. Therefore, more flexible forms of investment might be considered where profits can be generated either by going long or short in the various treasuries, foreign currencies and major stock Indices as offered in the futures/derivatives market. If there are any questions regarding this newsletter or our management services, please call the office number provided below or e-mail us and we will be glad to provide further assistance and/or clarification.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400