WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 06-10-04:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our May 11th newsletter forecasted that the DOW had begun another bear market decline and we expected a trading range for the month between 9,800 and 10,400. This forecast was very accurate, with the actual DOW intra-day low and high for the month being 9,852 and 10,386, respectively. The DOW held the key specified support level of 9,800 and started another countertrend rally later in the month, as we continue to be range-bound. We further anticipated that the US treasuries would continue their decline in price and rise in yield, and were expecting them to bottom in the next few weeks. Early in the month, the US treasuries declined after the strong employment number, but were then range-bound for the remainder of the month, with the 10-year note reaching a peak yield of 4.77%. It appeared that they were beginning the bottoming process, reaching a low in price and peak in yield for the entire yield curve, as forecasted.
Looking forward . . .
One of the issues confounding many people these days is the skyrocketing cost of energy and its effect on the economy. The rise, as discussed in previous newsletters, particularly in gasoline for the consumer, is not inflationary. Rather, it is much more like a tax on the consumer, and we believe it is highly likely to result in the economy progressing to a deflationary environment.
Ironically, even if we do see such a progression, we may not actually see any negative Gross Domestic Product (GDP) data for some time. Reason being, even though the effect of consumers having to spend more and more money on gasoline is anything but positive, the fact of increasing expenditure in this area will be recorded as a positive in future GDP data. This is why looking at the numbers the way they are released to US consumers is very dangerous: You simply cannot afford to take data at face value without carefully considering their veracity. This applies to employment data, inflation data and GDP data, just to name a few.
Last Friday, the May employment number was released, showing payrolls swelling by 248,000 while April and March’s improvements were revised sharply upward, respectively, to 346,000 (from 288,000) and 353,000 (from 337,000). The increases in jobs were distributed over many industries. As always, the quantity of jobs added is much easier to gauge than their quality. Nearly 30% of the additions were in health care and food services, and we would estimate that a majority of these were either minimum-wage or modestly higher.
Also included within the latest released employment report by the Bureau of Labor Statistics was the all-inclusive unemployment total, which encompasses just about every conceivable category of willing-to-work folks who cannot find full-time jobs. In May the real unemployment rate stood at 9.7%. One year ago it was 10.1%, showing a small improvement, although nothing that validates the “boom” label being used by the more excitable economy-watchers.
The stock market response to such a bullish payroll number was muted with only a two-day rally after its release, confirming the lack of corporate and consumer confidence in a renewed bull market for stocks. Furthermore, it appears from other employment data that the surge in jobs may be peaking. Among them, a much more reduced pace of the decline in new claims for unemployment insurance (in some weeks, they even have increased), far-from-robust help wanted ads, the erosion of consumer sentiment, and the rise in the tally of layoffs by the outplacement firm, Challenger Gray & Christmas. There were slightly more layoffs in May than April, and more than May 2003, marking the first time in 10 months there has been a noticeable year-to-year increase.
This suggests that we will not continue to see higher payroll numbers in the months ahead, but that the gains could be more subdued than everyone now expects.
The US treasuries decline in price and increase in yield over the past three months has factored in the Fed raising the current Fed Funds rate of 1.00% to 1.25% later this month, when they meet on June 29th and 30th for the Federal Open Market Committee (FOMC) meeting. Furthermore, the US treasuries have also adjusted in yield to reflect the Fed raising the Fed Funds rate by an additional 75 to 100 basis points (.75% to 1.00%) before the end of this year. However, given the expected decline in employment and economic growth going forward, we anticipate that the Fed will not be raising interest rates at all or even at a stated “measured pace,” and we are seeing the US treasuries bottoming in price and peaking in yield this week for the entire curve.
We feel that the DOW has once again completed another countertrend rally, and are forecasting a trading range for the month between 9,800 and 10,440. It is highly probable that we may have topped yesterday at 10,431 and could be resuming the bear market decline. The major stock market descent will be confirmed when we achieve an end-of-the-day-close below DOW 9,800. We recommend that investors adjust their current positions to reflect the more defensive posture as outlined within the two suggested investment allocation options shown below for a positive rate of return on investment.
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