Private Account Management Services
Newsletter Issued 03-09-04:
By: John T. Moir
Chief Editor: Sara E. Collier

Position overview . . .

Our previous newsletter, dated February 10th, forecasted that the DOW was laboring through its topping process and projected a trading range for the month between 10,250 and 10,735. This proved to be partially accurate, with the actual range narrower between 10,521 and 10,746. The trading ranges since the 1st of the year have been continually narrowing, displaying additional evidence for the completion of this bear market countertrend rally within the major stock indices. We further stated that there were divergence’s occurring with the Transportation and NASDAQ indices as compared to the S&P 500 and the DOW. These imbalances, with the Transportation and NASDAQ indices failure to ascend to higher levels as compared to the S&P 500 and DOW, provide additional indication of a topping process. The longer this higher price level failure exists, the more increased probability of resumption in the primarily bearish stock market trend.

The US dollar was forecasted to resume its bearish decline during the month. This proved to be correct for the first half of the month, prior to us adjusting our outlook. Reason being, the US dollar with its euro fx equivalent, failed to formidably decline through the euro fx $1.29 level, representing the previous peak set early in January at $1.2846. We, therefore, adjusted our objective for the remainder of the month, expecting the US dollar to perform a countertrend rally. This prompt adjustment proved to be an accurate assessment, since the US dollar rallied for the remainder of the month to a euro fx equivalent of $1.2379. We also forecasted that the US treasuries had limited price appreciation and reduced our bond position to reflect a more neutral allocation. We still felt that the US treasuries would be supported due to the sustained deflationary environment, but were concerned with the adjustments made in public statements by the Federal Reserve Chairman, Alan Greenspan. However, in mid-February 2004, we converted back to our bullish bond position, as outlined within the January 2004 newsletter, due to the US treasuries failure to mount any type of significant decline in price. It also concerned us that such a high percentage of analysts were expecting the Fed to raise interest rates this year, which had already been factored into the marketplace. This reassessment proved appropriate, given the US treasury rally for the remainder of the month.

Looking forward . . .

We have noticed that despite Wall Street analysts’ gushing with optimism about the supposed strength of the US economy, the level of American interest rates (as measured by the US treasury yield curve) are not moving higher. Additionally, we noticed that after the Fed moved to eliminate the phrase “considerable period” from its previous communiquéé, the spread between the 5 and 10-year Treasury notes even tended to shrink by a few basis points, showing a “considerable” lack of belief. We feel that with 82% of the analysts expecting interest rates to rise this year, the direction of least resistance will actually be to see them decline. We readjusted our allocations mid-February, as mentioned above, to once again favor higher bond prices and lower yields for the remainder of the year, due to growing near-term deflationary concerns, and for the reasons below as well as the opinions discussed within the previously released January 2004 newsletter.

Last Friday, the Bureau of Labor Statistics released its February jobs report. The consensus of expectation for this non-farm payroll number was between 130,000 to 200,000 and there were mutterings about the risk in the estimate being very much to the upside. In fact, there were only 21,000 new jobs created in February, and if you were to exclude hiring done by the US government, not a single one would have been added at all. Worse still is the fact that the payroll gains originally reported for both December and January were shaved significantly. January’s 112,000 rise was trimmed to 97,000; December’s already feeble 16,000 was sliced in half. In other words, the job picture was not only gloomy last month, but was even more bleak than originally thought in the prior two months.

Manufacturing extended its long losing streak in February, dropping another 3,000 jobs. This sector has now declined for 43 months in a row, and counting.

The only reason the unemployment rate stayed at 5.6% in February 2004 was that the labor force shrank by a hefty 390,000 people. If we are in a supposed recovery for three years, the economy should be churning out 200,000 to 300,000 jobs each and every month.

Beyond the headline employment numbers, the job picture is even darker. The average stretch of workers who have lost jobs and stayed idle have reached a new 20-year peak in February. If you include in the people who quit looking for jobs because they have been searching and are thoroughly discouraged, plus those who are eager for work and have tried recently but failed to land a job, along with people who are working part-time because they cannot find full-time occupation, the unemployment rate rises to a formidable 9.5% compared to the reported number of 5.6% last month.

We are simply not impressed by the quality of the market through this rally, with the Bush booming economy apparently under way. If US corporations are starting to borrow for expansion or continuing to fund stretched pension plans, we should be seeing upward pressure on interest rates. We are not, and when a market is not behaving the way that it should, watch out! Something is wrong in the underlying assumption.

It is fashionable to claim that the enormous Japanese and central-bank purchases of official US debt are driving rates lower. We do not believe this is so, for the simple reason that the US dollar borrowing market (both at home and abroad) is incredibly huge. To think that one sector of this market (foreign central banks) can run the level of yields up and down seems to be casting about for a simple solution where none may exist. Perhaps the market is really telling us that the US recovery is not as robust as hoped, and that another recession may be looming in the near future.

The US trade deficit has been holding at nearly 5.5% of the US Gross Domestic Product (GDP), even with the US dollar declining by 17% over the past twelve months. This trade imbalance can only be reduced with a weaker US dollar, which in all likelihood could decline by another 20% over the next 2 to 3 years. Some pundits feel that a continued decline would support the US economy and a subsequent recovery; however, we feel it only produces short-term price-sensitive export benefits. This is one of the reasons for the countertrend rally within the stock market over the past 15 months, making the various US stocks, bonds and real estate markets more affordable to foreigners.

It appears that the US dollar this month could once again test the euro fx equivalent of $1.29. If this level is breached, it could cause the US dollar to decline further to euro fx $1.35. However, it is possible we could be range-bound this months between euro fx $1.20 and $1.29, representing a larger trading range than normal.

We feel the DOW should continue its topping process and expect the Transportation and NASDAQ to lead the decline. The projected trading range for the DOW is between 10,260 and 10,700. If the DOW and S&P 500 break below it’s ascending trading range like the Transportation and NASDAQ indices have already, this will further confirm the top as being in place. We intend to monitor how the DOW trades on a closing basis at 10,400, 10,000 and 9,800 to confirm our technical wave pattern analysis showing a completion within this bear market rally and the resumption within the primary declining trend.


The affect theory shows that we, the investor, all have our likes or dislikes, whether it be where we want to vacation, to the type of people we like to associate with, or the kind of stocks we want to buy. The more we want or like something, the more easily we are swayed to believe that the object of our desire is without flaws. There is such a thing as falling in love with a stock. The speculative juices have never gushed as quickly after any bubble, and never in the same stocks. Investors have simply been swept away on tides of emotion.

That is why the late-1990s technology breakthroughs caused investors to believe (and many still do) that we were on the cusp of a technological upheaval to match the harnessing of electricity. The outcome would be supernatural profit levels. Thus investors rationalized all of those insane price/earnings (P/Es) ratios, with many companies with no earnings or price sales ratios.

There appear to be four theories that best derive investors psychology today through this bear market rally:

1. Disavowing prudent investment odds: Investors’ willingness to buy a stock they strongly believe in is similar whether the odds of success are 1 in 500 or 1 in 5 million. Such blindness to long odds can make investors drive up an exciting stock to as much as 100 times its fundamental value.

2. Assuming current trends to persist: When an investors’ newly issued stock doubles in price right away, they expect this phenomenon to continue indefinitely. This belief allows investors to pay sky-high prices for a hot stock, making for a self-reinforcing fantasy.

3. Buying through a desirable forecast, while ignoring everything else: When revenues are projected to expand like a chain reaction into the future, investors get caught up in the excitement and overlook any warning signs. This ignorance phenomenon is referred to as “temporal construal.” One example is how people in 1999 pushed AOL up to a price that an earnings discount model indicated would be justified only if it had 16 billion subscribers, triple the population of the Earth.

4. Allowing popularity to distort risk perception: Investor’s underestimate the risks of things they like, such as their favorite stock. They overestimate the risks of things they do not like — nuclear power, for example. This distortion helps to explain why both professional and individual investors were sanguine four years ago about stocks, propelling P/E ratios to unseen levels. This further confirms that prices are rational reflections of all available knowledge through efficient market theory.


Tracking the flows into and out of very aggressive funds offers a window into hedge-fund trading activity and provides some clue to the direction where the broader market is heading. Up and increasing is bullish, while down and decreasing is bearish. Since October 2002 and March 2003, when the money flows into these more aggressive funds hit their peaks, they have been decreasing. This shift in money flows has also reflected a decline in sentiment, further confirming the divergence within the current stock market rally as simply a countertrend movement.

The NASDAQ volume relative to the New York Stock Exchange (NYSE) is an important ratio of speculative activity and often signals moves in the NASDAQ. It has been running higher than average for the last four to five months, between 1.2 and 1.4. This current peak ratio was last seen in March 2000 at 1.3, just prior to the major NASDAQ decline. This is a strong sign that the NASDAQ has peaked, although it is a more broad-brush indicator than a razor-sharp one.


Last month, we discussed the record level of unsold single-family homes existing today as compared to the previous peak seen in the summer of 1996. There is another peak level occurring today that has not been seen since the summer of 1995, which exist in copper prices. This commodity, as all homebuilders know, is a key and expensive component in building a new or improving an existing home. Copper prices have risen nearly 70% over the past 12 months, reaching levels not seen since the previous housing price peak in the summer of 1996. They eclipsed even higher levels one year earlier in the summer of 1995 and had already started on their way down due to reduced demand.

There is a possibility that the effect of higher copper prices may not reduce real estate demands immediately, however, it will in the long-term as profit margins for home builders are squeezed and consumer affordability of existing and new homes diminish.


One would think that after the beating investors took in 2000, 2001 and 2002, it would take some time before they could be persuaded back into buying stocks through mutual funds again….especially after all the scandals in the corporate world and mutual fund industry. But the public is right back to buying as if there were no bear market within stocks, with over $140 billion, if recent estimates are correct, flowing back into equity mutual funds over the past eight months. The secular bearish stock market that we are in will not end until the public liquidates on the order of $350 billion to $450 billion of equity mutual funds. The longer the public continues to pour new money into equity mutual funds that depend on stock market price appreciation, the riskier and more vulnerable this stock market becomes.

We encourage investors to consider alternative investment strategies — as offered through our management services listed within both investment allocation options — where profits can be generated through either a rising or declining stock, bond and/or real estate market.



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

Acknowledgments: David Dreman, Author of “Contrarian Investment Strategies: The Next Generation,” Paul Slovic, Psychologists with the University of Oregon, Daniel Kahneman, 2002 Nobel Prize winner in Economics, George Loewenstein and Baruch Fischoff with Carnegie Mellons, and Yaacov Trope with New York University.

All Rights Reserved. Copyright © 2020 Wavetech Enterprises, LLC