Private Account Management Services
Newsletter Issued 06-10-03:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Position overview . . .

Our May 7th newsletter forecasted that the DOW had reached the upper end of a large trading range and expected the DOW to trade between 7,625 and 8,680 for the month of May 2003. Actually, the DOW continued its countertrend rally due to the number of positive economic developments being released. The result was an intra-day low of DOW 8,340 and an intra-day high of DOW 8,868 during the month of May. We further projected that the US dollar would enter a period of consolidation between euro fx $1.10 and $1.15 due to the sharp decline over the prior two months. Initially, the US dollar did start the expected period of consolidation, but later pierced the euro fx $1.15 level and quickly moved lower with the euro fx reaching as high as $1.19. We made an intra-month adjustment and were able to capture profits as the US dollar continued lower during the latter half of the month. We anticipated that the US treasuries would remain supported in the near-term and continued to forecast that the Fed would cut the prevailing Fed Funds rate by 25 to 50 basis points (1/4 to 1/2 of one percentage point). We also significantly changed the suggested investment allocations to favor our support for US treasuries, which proved to be very timely. The day after the newsletter was released, the US treasuries started a significant rally for the entire yield curve with the 30-year US treasury bond rallying by more than 4.3% over the remainder of the month. This occurred because Federal Reserve Chairman, Alan Greenspan, indirectly expressed increasing concerns about “deflation” and was prepared to cut the Fed Funds rate if necessary to reduce the possibility. Our wave pattern technical analysis and evaluation of the current economic business cycle allows us to anticipate this adjustment and others prior to the actual fundamental events occurring for both the US treasuries and the US dollar.

Looking forward . . .

The bear market rally, which may have ended last Friday, June 6th, is largely due to the list of positive developments in support of the economy. Congress approved a respectable sized version of the president’s tax-cut proposal. The decline in oil prices acts just like a tax cut, leaving more discretionary dollars in consumer hands. Monetary policy is highly accommodative, where Federal Reserve Chairman Alan Greenspan, has talked down long-term rates by merely mentioning that “deflation” have become a greater concern. Risk spreads have declined, easing the path for corporate-refinancing activity. Both high-grade and high-yield debt financing is running at very high levels. Reflecting many layoffs to cut costs, corporate profitability was stronger than expected in the first quarter, rising nearly 12%. The weak dollar enhances the competitiveness of domestic goods in international markets. Even with all of these positive factors, caution has been a powerful brake on spending, as companies and individuals were reluctant to spend in the face further uncertainties.

All of the listed positive developments above will only, as proven with other secular bear market rallies, temporality support the stock market before it resumes it primary bearish trend. Economic business cycles, in the past, have continued on their own defined path even when there were manual attempts by US and/or foreign Governments to manipulate such a path through the use of various economic stimulus packages or noteworthy developments like the ones mentioned earlier. Many investors are hoping that the lows of October 2002 at DOW 7,197 will hold where the S&P 500 was selling at more than 33 times earning with a yield of 1.78%. However, typically, at the bottom of a bear market, blue chips fetch between five to eight times earnings and offer yields of 5%, 6% or more. We have a long ways to decline before reaching these levels of price/earnings ratios (P/Es) and yields, based on past historical bear market bottoms.

We feel the DOW has completed a 3-month secular bear market rally and are forecasting a trading range for the month between 8,180 and 9,225. Those investors that are still holding undesirable stocks should use this rally to liquidate those positions and reposition those funds into the suggested asset allocations mentioned at the end of the newsletter.

The US treasuries continue as a large asset allocations with the expectation that the Fed will cut the prevailing fed funds rate by at least 25 and possibly 50 basis points at their next FOMC meeting on June 24th and 25th. Deflation is an increasing concern for the US economy, which is further explained within the main section of this month’s newsletter.

The US dollar could be range-bound for the month, however, there remains a strong possibility that it could continue it’s decline to the equivalent of euro fx $1.21. The declining US dollar has helped to reduce the current-account deficit imbalance to 4.2% of the US Gross Domestic Product (GDP); however, a level of equilibrium will only be achieved with an additional decline of the between 15% to 20%. Those investors with large US holdings may want to consider an alternative investment vehicle to hedge their holdings from a declining US dollar as offered within our private account management services and the standard account model, which invests in foreign currencies, US treasuries and the various stock indices.

DEFLATION: Investors & Business Owners Should Hope For The Best and Prepare for the Worst.

Surviving deflation requires planning and preparation of a sort foreign to most investors and business owners. After all, it has been about 70 years since the Great Depression, our last bout of deflation, when the ravages of unemployment and financial misery forced down prices and asset values across the board. Governments hate deflation even more than they detest inflation, which explains why Fed Chairman Alan Greenspan recently expressed concerns about “further disinflation” rather than using the dreaded “de” word.

Where inflation is often summarized as too much demand for too few goods (leading to rising prices), deflation is a matter of too little demand for too many goods (leading to falling prices). Deflation scares central bankers for two reasons: First, it is invariably accompanied by a slowdown in economic activity and, second, it puts huge pressures on borrowers as debt becomes more difficult to repay.

The cost of paying less. If you want a preview of what happens during deflationary periods, just look at the current cost of borrowing money: Interest rates are approaching zero, and banks still cannot seem to give the stuff away. Television ads by furniture stores and auto dealers are beginning to quarrel over whose zero-percent interest rates are truly zero, and for how long and under what conditions. In certain areas of manufacturing, deflation is already a reality — computer prices are down nearly 18%, television sets by more than 12%, and new cars 1.4% over the last year. Those figures do not begin to capture the challenges facing business owners supplying auto manufacturers and mega-retailers like Walmart, which are under huge pressure to continually reduce their prices.

While the chance of large-scale ongoing deflation actually occurring is thought by most economist to be small, the odds are definitely rising — witness recent warnings by the Fed as well as by investors in the form of soaring prices (and declining rates) of US Treasury bonds. Business owners and investors concerned about deflation can take a number of steps to reduce its ravages. In essence, the steps are the opposite of those that are most effective for dealing with inflation. They are as follows:

1.) Avoid long-term borrowing, lighten up on debt. While a favored tactic during inflationary periods is to lock in fixed-rate, long-term loans with a view to repaying today’s debt with less-valuable future money. During deflation, cash is king. Debt becomes an ever-more weighty burden as prices decline and margins erode. Imagine what would happen if homeowners could not return to the well for mortgages refinancing every time rates fell. Rates that once looked like great bargains would suddenly become onerous. Bankers are not nearly as ready to refinance loans for owners of businesses as they are homeowners, especially if the business’ revenues and/or margins are declining. And, if home prices begin to show signs of decline, homeowners will run into trouble refinancing as well.

2.) Reduce fixed cost as much as possible. For most companies, the largest fixed costs are for employees along with the office, retail, or warehouse space. One way to change labor costs from fixed to variable is to explore transforming workers from employees into contract workers. This can be tricky for existing employees because of Internal Revenue Service regulations that require certain criteria to be met before someone can be considered a contract worker, but employees whose hours are reduced from full-time to part-time can sometimes simultaneously be made contract workers who bill you for their time or projects and do not receive benefits. If you have a service business, explore ways to reduce the amount of office space you require, such as by having part-timers or contract workers share decks and offices.

3.) Avoid long-term financial commitments. These would primarily be rental leases, and supply purchase agreements. If you have a lease expiring shortly, try to negotiate a shorter term, or even a month-to-month rental arrangement, especially if you are in an area like many right now where commercial real estate is weak. What looks like a great deal now in exchange for a two or three year price commitment might be a much better deal in six months and then require no long-term commitment. Once again, do the exact opposite of what you would do during an inflationary period, when you try to lock in today’s prices for as long a period as possible.

4.) Find ways to reduce prices while maintaining margins. Business Management 101 instructs us to continually be seeking ways to add value, and justify price increases. Under the logic, reducing prices is the path to destruction But during deflation, pricing logic gets turned on its head, and those companies that successfully find ways to reduce prices will survive, and possibly thrive. Prices of many manufactured goods have come down because companies of all types and sizes have shifted manufacturing to China, Mexico, and other low-cost areas, enabling price reductions with stable or even increasing margins. We have even seen price pressure on such items as prescription drugs via ordering from Canadian sources on the Internet and dental services as consumers seek out Eastern European alternatives.

The key to surviving deflation is to be as liquid as possible, because the pressure on cash flow becomes enormous as everyone tries to conserve cash and spend less. It is a trick, too, because deflation demands that business owners and investors a like have to reject everything we have been taught, namely that debt provides leverage and inflation is inevitable.


The increasing threat of “deflation” made us decide to maintain the same asset allocations from the prior month. The uncertainties over the future levels of consumer spending and corporate growth has lead us to believe that the Fed will continue with a low interest-rate policy until a stable and consistent level of growth within the US economy reappears. One strong quarter does not in any way represent a recovery long-term for the US economy. Therefore, we continue to suggest a combination of zero coupon bonds (STRIPS) and longer maturity Treasury Notes & Treasury Bonds with no allocation in the inflation-protection index bonds (TIPS). Deflation is presently a larger concern within the US economy, but could change in the months ahead depending on the rising level of inflation, commodity prices, and rapidness of the declining US dollar. Hence, we are suggesting the following investment allocations:

1) A 35% allocation into 2 to 5 year maturity of US Government bonds;
2) A 35% allocations into 20 to 30 year zero coupon bonds commonly referred to as STRIPS;
3) 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.;
4) 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;
5) 15% 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 bullish or bearish stock, bond and/or currency market as offered through our private account management services).

The investment strategies for our private account management services are derived from evaluating the various markets through long-term technical wave pattern analysis and changing economic business cycles. We are not to be construed as a market timer, which is a trading technique primarily practiced by both institutions and individuals who day-trade the various markets for short-term results.

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
E-mail: JOHNTMOIR@aol.com

Acknowledgments: David E. Gumpert, Author of: Burn Your Business Plan: What Investors Really Want from Entrepreneurs.

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