WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 03-14-02:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw
Position overview . . .
We projected in the February Newsletter that the DOW would find support at 9,529 and projected a bear market rally to either 10,650 or 10,800 over the next several months. The DOW actually closed at 9,625 and reached as high as 10,663 on March 8th. A false signal by our wave patterns during the course of this rally still did not prevent us from capturing profits for a majority of the move. We almost issued a market alert changing our projections. However, the key level on the DOW of 9,529 was never broken so we stayed with our original forecast issued in our prior newsletter.
We were projecting a top in price and bottom in yield in the treasuries with the 30-year bond yielding 5.37%. This expected top was due to an anticipated reallocation out of bonds and back into stocks as well as the expectations of repatriated funds by Japanese investors attempting to bolster their financial positions prior to their March 31st yearend. This projection was accurate with the exception of a false breakout period between February 20th and 25th. No market alert was issued since we felt that this minor move against us would reverse, which was the case. The false breakout, caused our profits to be less than anticipated, but profits were still made due to the size of the eventual downward move in price and a March 12th increase in yield to 5.77%. A performance summary for the first quarter will be provided for both the standard and conservative trading models in the April 2002 newsletter.
Looking forward . . .
Currently, our technical wave patterns analysis is projecting the DOW to be in a trading range for the next month between 10,650 and 10,300 with a near-term top recently occurring on March 8th at 10,663. High levels of complacency could artificially support all of the major indices in the near-term before a major fundamental event causes the indices to resume the primary bear market trends. We suggest that investor use this rally to further reduce or eliminate their stock holdings due to limited stock price appreciation and small anticipated stock dividends. This is an ideal time for investors to consider changing their investment portfolio allocations to a more defensive posture as outlined in the final section of this newsletter. We are expecting that a majority of traditional stock investments will have negative returns for the third year in a row. Thus, it becomes increasingly important to consider alternative investment vehicles where profits can be generated through either a bull of bear market. The futures/derivatives markets provide this opportunity.
Copper prices may finally be providing a near-term bottom for treasuries which can then resume a bullish trend. Copper and treasury prices usually move in opposite directions (with notable exceptions). Since November 2001, copper prices have been rising due to the higher product demand for construction of new commercial buildings as well as residential housing. This demand was further spurred by the mild winter conditions throughout the United States that allowed construction to continue without delays. Hence, copper prices have been rising, reflecting a strengthening economy. Just today, the upward trend in copper price is showing signs of cracking. This would seem to confirm a top for both new commercial building and residential housing demand. Many regions throughout the US have already shown signs of weakening real estate prices. This cracking in copper prices further confirms an eventual correction in the remaining regions of the US. Similar breaks in copper prices in the past have not only led to a reversals of copper demand, but have led to stronger opposing movements for treasury prices. The bottom line is that treasury prices may be completing this anticipated correction on March 12th and then resuming a bullish trend. Therefore, we would suggest booking the 5% to 7% profits in the suggested inflation-protected index bonds and purchasing various US government treasuries, as outlined in the final section of this newsletter.
MARKET PERCEPTION — SMART VERSUS DUMB MONEY:
An overriding idea is usually discovered prior to a change in market direction. The dumb money embraces the idea and it contributes to either the accumulation or distribution of stocks by the smart money, depending on whether a bull or bear cycle is ending. In a bull market, the widely circulated overriding idea to the general public will be the popular belief of a strong demand for common stocks which permits the smart money to get back into cash leaving the public holding the bag when stocks begin to go down. In a bear market scenario, the overriding idea will be belief that something very bad is about to happen and that the public would do well to sell their stocks. The smart money takes advantage of this and accumulates stock as the public sells. Thus, the time to identify the overriding idea is in the third phase of a bull or bear market. The dumb money, being the first to recognize the overriding idea, unfortunately, are the last to discover their very costly error.
Generally, we can find one overriding idea in every major cycle. This is when virtually everyone is led into total agreement. Currently, virtually everyone is looking for an economic recovery this year. Many economists feel we have begun such a recovery. However, five of the last seven recessions have experienced mild recoveries within before resuming a more lethal recessionary phase. This type of scenario is commonly referred to as a “double or triple dip” recession. Time will only tell if it is the case in the present scenario.
Our wave patterns are now saying that the anticipated upturn will not take place this year other then the currently anticipated bear market rally. Disappointment will follow surprising most people who have a limited ability to read the language of the market. They will then be counted among the majority looking for the economic upswing, which will not take place.
SUMMARY OF CONCLUSIONS:
You do not have to look hard to spot the hidden disappointments. Investors hoping for a revival of the wild capital investment boom of the ‘Nineties are destined to disappointment: the engines of that boom — the soaring bubble stock market and the mad corporate venturesomeness it fed — are one-in-a-generation, maybe once-in-a-lifetime, occurrences. Capital investment will be allocated elsewhere for some years, and the stock market hangover will be with us for a long, long time.
Even if we manage to avoid slipping back into recession in the next few months, the economy faces some rough sledding. An absence of a big snapback in capital spending, will make unemployment a sore point for the economy.
We are glad to note the consumer remains a loyal spender. But he remains highly leveraged, is light on savings, has been scarred by the bear market, and failed to realize the returns from the big bull market that were due him. In other words, from 1984 to 2000, while the S&P 500 racked up an average annual return of 16.2%, the average equity fund investor wound up with a yearly return of a mere 5.3%. Those investors would have been better off buying Treasury bills which, over the same time span, averaged a yearly return of close to 5.3%. And, the investor would have missed the chills and thrill of, among other things, the 1987 crash and the great leaps forward in the late ‘Nineties.
We think the automotive industry is slated to slow sharply once the zero interest loan buying has saturated the marketplace. Housing, that other great prop that kept the economy from falling into a truly deep hole, may be the next bubble in the making and is not likely to furnish much of a shot in the arm on the way up.
In short, we still do not see where the juice will come from for anything more than a modest recovery, once the initial bounce runs its course.
The excesses of the stock market from the bad old days have not yet been completely removed. Valuations are still more the product of hope and hype than reality and reason. And Enron, as well as other scandals, are apt to have a much more lasting and penetrating impact than Wall Street expects.
If companies, for example, are required to account the issuance of stock options as an expense rather than being capitalized on their balance sheets, corporate earnings will take a hit. It is estimated that if this accounting approach been in effect in the 1995-2000 stretch, S&P 500 operating earnings would have averaged 13% less than they did. Where corporate rogues are determined to inflate profits, the fallout from the scandals is sure to expose many of the insidious tricks they routinely used to do so.
Again, the current up swing may have ended on March 8th, but powerful rallies are always part and parcel of a big bear market, and we are still in a big bear market.
Due to the expectations that the Fed will not raise interest rates at their next FOMC meeting on March 19th as the treasury market is anticipating, and that the stock market will offer limited price appreciation, we are suggesting the following investment allocations:
1) A 25%-30% allocation into 2 to 10 year maturity of US Government bonds. (Note: Sell the Inflation-protection index bonds suggested in the previous newsletter for a 5% to 7% profit);
2) A 5%-10% allocations into 20 to 30 year zero coupon bonds commonly referred to as STRIPS. These type of bonds will provide a greater rate of return as compared to the conventional bonds suggested above due to the leverage associated with this instrument:
3) 0% in individual growth stocks due to the limited upside potential, low level of dividend yield and higher level of risk. (Note: Take profits in the 15% allocated toward stocks mentioned in the previous newsletter for this bear market rally, which should result in a 5% to 10% profit);
4) 35%-40% 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. (Note: the suggested cash percentage will decline once a bottom is confirmed within the treasury markets where the difference will be applied toward increasing both the conventional US bond and zero coupon bond positions);
5) 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 bull or bear market as offered in our private account management services).
The primary objective of our management services will always be to offer our clients a means to reduce their portfolio volatility risk, while greatly enhancing their returns in difficult economic environments that offer limited opportunities for those using conventional investment vehicles. Our main investment vehicle to accomplish this is through the futures/derivatives markets. However, we do offer suggestions to our clients, in greater detail than mentioned above, on other investment instruments for the remainder of their portfolio. These suggestions take into consideration the clients short and long term investment objectives as well as their levels of risk tolerance for the various financial instruments.
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 will be happy to provide further clarification.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400