Private Account Management Services
Newsletter Issued 05-07-03:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Position overview . . .

Our previous newsletter, dated April 10th, forecast that the DOW would resume its bearish trend and was anticipating a trading range between 7,450 and 8,525. The actual range proved to be narrower due to favorable quarterly earnings reports being released for the various DOW stocks. The result was an intra-day low of DOW 7,959 and intra-day high of DOW 8,559 during the month of April. We also projected that the US dollar would continue its bearish trend and were looking for a euro fx currency value of $1.11. This proved to be very accurate, even with the US stock indices being supported by the above expected earnings reports, with the US dollar declining to an actual value of euro fx 1.1172. We anticipated that the US treasuries would continue to rally and forecasted that the Fed would cut the prevailing fed funds rate by 50 basis points (1/2 of one percent) at either their May or June 2003 FOMC meeting. This projections was somewhat accurate with the US treasures remaining with within a wide trading range for a majority of the month before starting the anticipated rally in the last few days. The FOMC meeting was held yesterday and they left the fed funds rate at 1.25%, however, further stated that the bias remains toward easing. This still means they could cut the prevailing fed funds rate, as forecasted, at the June 2003 FOMC meeting.

Looking forward . . .

While the economy will show signs of improvement over the next few months, overall demand is not likely to increase enough to reduce excess capacity and restore pricing power to corporate America. A majority of small and large companies are currently planning to reduce capital spending and increase their layoffs during the next six months. And, starting July 1st, more than 40 states will implement budgets with cutbacks in spending, services, and layoffs by the thousands. This means the economy is not likely to measure up in the second half of this year to the increased expectations economists and investors will have after the economy modestly improves during the next few months.

We would suggest that investors, who are still holding US stocks, use the current bear market rally to liquidate their various positions. We feel that the DOW is currently at the upper end of a large trading range and are forecasting the DOW to trade between 7,625 and 8,680 during the month of May 2003. The current bear market rally is being supported by only US investors since the US dollar has been continuing it’s bearish decline. Foreigners are not placing funds into US stocks, but into safer investment vehicles like US treasuries.

The US dollar has substantially declined to a current price of euro fx $1.14 and are now anticipating a period of consolidation before resuming it’s bearish trend. We feel the consolidating range will between euro fx 1.10 and 1.15. The decline in the US dollar will help to reduce the current-account deficit imbalance currently at 4.5% of the US Gross Domestic Product (GDP); however, if the decline continues at the current rapid rate, foreigners could start to loose confidence in all US investments. This lack of confidence could motivate foreigners to start liquidating their various US holdings, causing US treasuries prices to decline and yields to rise. They could also choose to liquidate their various residential and commercial real estate holdings, bursting the looming housing bubble.

The US treasuries should remain supported in the near-term with the expectations that the fed will cut the prevailing fed funds rate of 1.25% at their next FOMC meeting in June by either 25 or 50 basis points (1/4 or 1/2 of one percentage point). However, if the US dollar continues it’s decline at a rapid rate, the US treasuries could have some difficulty continuing it’s rate-easing expectation rally. Therefore, we feel that the US treasuries could have a large trading range during the month of May as investors analyze it’s true value as a safe investment vehicle and if deflation is a real concern.


Today, residential real estate has become the “asset class of choice,” now making up 31% of household assets versus 23% three years ago. The trend in household ownership of real estate is becoming reminiscent of that in equities during the ‘Nineties boom — when stocks accounted for virtually the same proportion of assets as real estate does today. This is not exactly a comforting parallel.

Housing fundamentals are starting to deteriorate. This, in turn, will cause real estate prices to slide and could effect consumers ability to spend as well as the overall US economy. We estimate that a 10% drop in real estate prices would drain some $1.4 trillion from household net worth’s, the equivalent of roughly 20% of disposable income. The “feedback effect” from declining real estate prices is three times that of declining stock prices. The 10% decline in the value of an investor’s home translates into a $100 billion hit to overall consumption.

There are currently four(4) red flags that signal the bubble is bursting, which are as follows:

1.) Inventories of unsold homes are rising quickly and, measured in months, are now at their highest level since 1996.
2.) The median number of months a home has been on the market has jumped to 4.8, from 3.8 last fall and the highest in nearly a year.
3.) New home sales have fallen sharply since the start of the year and are growing at the slowest run rate since August 2000.
4.) The traffic of prospective buyers has fallen to a 17-month low, not seen since November 2001.

In the face of all of these signs of weakening demand, builders do not seem to understand: starts relative to employment have hit a four-year high.

It appears that the stock market has been correct all of these months in marking down the home builders, despite glowing forecasts. This means that the consumer may be forced to cave, and there most assuredly will effect the US economy.


The continued weakness of the US economy and the uncertainties over the future levels of consumer spending and corporate growth has lead us to change our investment allocations. We still believe that “reflation” will occur, but in the near-term, the weak economy has caused us to increase our suggested allocation into US treasuries. We are suggesting a combination of zero coupon bonds (STRIPS) and longer maturity T-notes & T-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. This is far more a conservative investment vehicle than stocks or equity mutual funds and provides an effective between 4.0%-5.0% yield and possible price appreciation as the bond market declines.;
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).

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

Acknowledgments: Homebuilders Survey, Economist: David Rosenberg

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