Newsletter 5-6-00:

In my April 2000 newsletter issued on 4-8-00, I mentioned that I felt that the DOW had topped at 11,418.24 and would begin a decline to 9,400 by late June or early July 2000. Well, on 4-12-00 the DOW got as high as 11,425.45 and then proceeded to selloff to 10,201.53 with a partial retracements thereafter. This short position trade in the DOW along with the currency and Eurodollar spread trades resulted in profits between 25 to 35% for the month of April 2000, depending on the individual client profiles.

Presently, the DOW should remain in an ascending narrowing range into either May 12th or 15th 2000, with an upside objective of resistance between 10,758 and 10,900. The DOW should resume the down trend after this time period toward the objective and date range previously mentioned.

There are continuing to be a number of fundamental reasons to further justify a decline in the various stock indices, and I am pleased to provide two additional reasons for your review.


With the recent declines in the various stock indices, the US Dollar has remained remarkably firm with analysts thinking that we are in a new currency paradigm as the justified reason for it’s lack of decline. Well, in reality, though, the old rules still apply to the dollar, which is why there are growing concerns about a plunge in the world’s reserve currency.

Through the turbulent times over the past few years in Southeast Asia, Russia and Latin America, the US economy and the dollar has been the safe haven through these difficult times. However, attention is now turning to the ultimate potential “systemic problem of the century,” which is the US economy’s external imbalance. While policy-makers have been worried about this imbalance for some time, the gapping US account-deficit is getting more consideration, especially in Washington and New York. Currency and bond investors are becoming very nervous, since the old paradigm says that currencies with massive current-account deficits are still vulnerable and applies to the dollar as well.

The old rules of this situation haven’t applied so far because the markets don’t believe the recent slump in stocks is for real and they see it as a buying opportunity. Obviously, the side effect of Wall Street’s irrational exuberance is that it may be keeping the dollar artificially high given the breadth of the US current-account deficit imbalance.

Publicly, Washington is saying the current-account imbalance, which is running at a record $400 billion or 4.3% of Gross Domestic Product (GDP), is really a sign of strength, not weakness. With much of the global economy doing poorly in recent years and the US expanding briskly, investors are naturally favoring the dollar asset, and getting plenty of financing from abroad. However, privately, the size of the imbalance and the fact that it is growing, starts to make you ask yourself an important question: What if the rest of the world becomes reluctant acquirers of US assets? The current-account is funded with capital inflows; that’s why it’s called a balance of payments. Another important question is: What set of exchange rates, interest rates and assets prices is need to attract the capital?

High-ranking Fed officials are far less concerned about inflation than they are about the nation’s external imbalance. If prices heat up, the Fed’s can work with this concern by raising interest rates, but if tons of capital was pulled out of the US, capital needed to finance the deficit, then that is a “systemic risk.”

The traditional method of reversing a current-account problem is with higher interest rates and a weaker currency; however, they could slam the stock market and the major force supporting the economy. Secretary Lawrence Summers would prefer a “balancing up” approach where if stronger growth occurred in Europe, Asia and Latin America, this could enable their consumers to buy more US goods. This would narrow the current account with fewer secondary effects on the dollar and US interest rates.

But many observers fear the worst, since the US has never before been so dependent on foreign money to finance its economy. It’s bad enough to be running a large current-account deficit, but even worse when there is no end in sight to its growth. Furthermore, if Summers balance-up approach is less benign than expected, the results would be rising inflation from a weak dollar and a weaker economy from higher interest rates, which would be the worst of all possible sinario for the world.

For the global marketplace, the repercussions of America’s adjustment would not be positive. There would be a spillover effect with an increase of volatility in world markets and the loss of the world’s economic engine. With Asia’s stability depended upon exports to the US, their continued recovery would diminish. Also, the declining dollar would effect Europe even though it would bolster the sagging Euro as investors try to find a safe currency resting place.

The last time the current-account deficit loomed at a large amount was just prior to the October 1987 stock market crash. As the world lost faith in the dollar, interest rates soared and stocks crashed. This should serve to remind investors that the effect of a dollar crisis can come back to re-haunt the stock markets of today.


Recently, we had key data released in both the Employment Cost Index (ECI) and just yesterday the Unemployment number. The ECI jumped 1.4% is the first quarter, which represents the biggest gain in a decade. The economy’s annual growth rate of 5.4% is being spurred by the 8.3% American consumer spending spree. The Unemployment number broke below the 4% level at 3.9% for the first time in 30 years. Things are starting to become very troublesome with the inflation-data, even with the Fed’s five 25 basis points rate increases since June 1999.

Furthermore, workers are taking home more money than analysts had expected as evidenced in the ECI number with a 0.7% gain in personal income. As compensation rises, some Fed officials will argue that productivity growth may not be sufficient to offset the rising labor costs. And facing higher compensation costs with a gyrating stock market, Corporate America’s profit margins may get squeezed, leaving executives with little alternative to raising prices.

There are further concerns that the ECI doesn’t include the increasing form of compensation: Stock options. So while the official date shows the overall ECI rising by 1.4% for the last quarter, the actual number is probably higher. The Bureau of Labor Statistics will shed light on the subject at the end of the third quarter, when it will release data in its effort to track the effects of stock options and hiring bonuses on business costs.

The expectations are now increasing that when the Fed meets for their FOMC meeting on May 16th, they will raise the Fed Funds rate by 50 basis points instead of just 25 basis points to 6.50%. However, even with that adjustment, the Treasury Bill market is factoring in (anticipating) a Fed Funds rate of between 7.00 to 7.25% by the end of the year 2000. Reason being, any action taken by the Fed’s today will take about 6 to 12 months to filter through the economy and make any significant changes in the level of current growth at almost 6%.


As you can see wave pattern analysis can offer accuracy with both price and time period, and result in some sizable profits. With my accumulation (adding to) the DOW short position after the 4-12-00 top, I was able to generate a larger profitable position while only risking a portion of the existing profits. The initial capital exposure for this trade was only between 2 to 3%, but with properly capitalized accounts, I was able to add to this improving position.

With the current-account deficit imbalance and the increasing concerns of inflation, there will be continued pressure in the various stock indices, at least in the near-term. Rallies should only be used as an opportunity to sell your current stock positions. If you have a long-term stock objective in mind and do not want to liquidate your holdings due to the tax ramifications, I would suggest that you allocate between 10 to 20% of your stock/investment portfolio in the derivatives/futures market. Hence, you could hedge your current holdings from further equity exposure in a stock market decline and/or you could generate profits in this ever changing stock market environment. Should you have further questions on how I can assist you in your specific investment/stock portfolio, please feel free to send me an e-mail to or call me at (775) 841-9400.

John T. Moir
Wavetech Enterprises, LLC

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