Newsletter 11-6-00:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Position overview . . .

The October 9th newsletter stated that the wave patterns analysis showed the DOW would be range-bound between 10,500 and 10,900, due to the upcoming election, and would offer a good selling opportunity if it reached 11,210. Even though the DOW did not reach the desired selling level or remain within specified range, it did pull back to 9,654. This low set in October was at the upper end of the specified range of 9,400 to 9,700 that has been forecasted since the June newsletter. While being off on the time period projection, the price range provided was accurate.

Since the DOW did not reach the desired selling level, the primary focus in the month of October 2000 was in the various currency spreads. As mentioned in the previous newsletter, I was expecting to recoup the loss from the currency spread and generate an overall profit, which was the case. Depending on the five different trading models used, the returns on investment for the month of September 2000 varied between +6.7% to +11.2%. This brings the cumulative year-to-date gross return on management services to between 63.9% to 102.6%, and represents a strong rate of return as compared to most mutual funds still remain negative for the year.

Looking forward . . .

Currently, the DOW has recovered from its intra-month low of 9,654 and will offer another selling opportunity if it reaches 11,022. On October 31st 2000, the DOW did reach intra-day as high as 10,995 which was within 27 points of my objective. Therefore, it is possible we may have topped near-term, however, I plan to keep my focus in the various currency spreads since they have proven to be more profitable and reliable. Also, there is a possibility that the DOW could rally after the election on November 7th and feel the currency spreads will respond with much more accuracy and with the least amount of risk.

Even though there is a seasonal tendency for the stock market to rally from November through May of the following year, there is further evidence that this tendency may not occur this time as explained in the following section on money flows:


Perhaps the most striking difference between the two periods lies in the pace and direction of liquidity flows. Liquidity, as gauged by the money and financial-flows index, is much lower now, and still is decelerating. Created by the Department of Commerce almost 30 years ago, the liquidity index measures the change in demand for money and credit based on trends in real M2 (a measure of the money supply), the change in business and consumer credit and the growth in short and long-term liquid assets.

During the past 40 years — a period that spans five business cycles of varying duration, speed and composition — the liquidity index has established a near-flawless track record of telegraphing turns in the economic growth cycle well in advance. Even as the consensus repeatedly argued that the economy would slow in the year ahead, the continued fast gain in liquidity flows signaled that the economy would power ahead, registering gains in real gross domestic product of at least 4%. And true to form, the economy posted real GDP gains of 4% or more in 1997, 1998, and 1999, and it is almost certain to repeat that again this year.

Even in November 1998, when the financial markets greatly raised the probability of an economic downturn in early 1999, the liquidity index signaled that the risk of recession was greatly overblown. Why? Because liquidity flows were exceptionally strong, and the US economy never had suffered a hard landing when liquidity flows had been so robust.

Today the trend in liquidity flows is decidedly weaker than in 1998. Indeed, in September the year-to-year gain was estimated to be 2.5%, the weakest gain in five years. Even more troubling is that liquidity flows have been stagnant since the beginning of the year — the weakest nine-month stretch since 1994. Moreover, if current trends extend through yearend, the liquidity index would show no growth over a 12 month span for the first time since 1991.

While many analysts argue that the US economy is less sensitive to oil prices than it was in years past, energy prices are still important. The economic effect of a rise in energy prices include not only the traditional loss of real income, but also new income effects, which arise from reduced company earnings, the associated fall in stock prices and the attendant decline in the value of stock options. It is estimated that the market value of stock options on the books of S&P 500 companies declined by more than $125 billion by the end of the second quarter.

Higher energy prices both drain liquidity and limit the flexibility of policy makers by raising inflation risks. Also, it is not mere coincidence that sharp decelerations in liquidity flows have occurred during periods marked by rises in energy prices and official interest rates. That combination almost always has proved to be deadly for the economy and the financial markets.

Rising energy prices are problematic because policy makers must guard against a spillover of those prices to other prices that would lift household and business inflation expectations. In 1998, inflation was not a concern. In fact, if there was a concern it was more on the deflation side because commodity prices were tumbling in an already low-inflation environment. Today the concerns of policy makers are fundamentally different. They are worried that ongoing increases in energy prices could lead to an environment where rising price expectations start to become a bigger factor in household spending decisions.

The conclusion of all of this is that the economic fundamentals — and thus the concerns of policy makers — in the November 2000 are dramatically different from those of 1998. Indeed, liquidity flows are slowing quickly and energy prices are rising fast, the reverse of 1998. As a result, policy makers are unable to lower rates to cushion the economy and the financial markets as they did in 1998. For that reason it is easy to see that the coming year will not repeat that happy outcome of 1999.

Editorial comment by Chief Editor: John Allen

We are all aware that on the first day, Al Gore created the Internet. Then on the second, Bill Clinton engineered the budget surplus. The third found the Democrats incubating economic prosperity for all – right? WRONG. Let’s put the election banter behind for a moment and get back to cold reality.

Bill Clinton, Alan Greenspan and the Democrats were all just as surprised as we were with the rapid development of the surplus. Where did it come from? Lowering the porkbarrel limits? Tighter fiscal policies? Shrewd productivity increases by government managers? Not a chance! These are election rhetoric issues, not sources of sane fiscal policy. The surplus simply came from increased taxes paid by all of us. More specifically it came from a dramatic and unforeseen increase in capital gains tax revenues.

The politicians from both parties can thank the internet and other leading edge technological developments for the startling rise in productivity that has fueled corporate profits and manic momentum investment trends. These have culminated in exorbitant valuations and the attendant capital gains bonanza that the government has realized. Additionally, the lack of government borrowing has eased real demand pressure on interest rates. The Feds have been hoping for consumers to at least curtail their spending to match their income for years now. They think of the economy as an old car rolling downhill with the money supply playing the part of gravity and interest rates providing the brakes. Their game is to let the car make progress without excessive momentum that could overpower the delicate brakes. Conversely they don’t want to have their foot down too hard on the shallow grades and bring the whole affair to an abrupt halt. A very deft touch is required here as a not so small incline is possibly coming up that has never been negotiated before.

This incline is coming in the form of decreasing tax revenue and it won’t matter which party is in office. How, you ask? Consider the outcome of already declining quarterly estimates by multinationals in light of decreased European spending – reduced tax payments. What about the decline or even absence of padding the bottom line with investment income that has been so dramatic lately – more reduction. And how about the real knockout that will occur if the indexes complete the year lower than they started? Think about it. Not only would there be little in the way of capital gains but the average investor could be offsetting ORDINARY income with capital gains LOSSES!

The Feds have planned for this for some time and engineered some protection by limiting the deduction to $3,000 per year. Cagey, those guys. . . However, we have never seen that deduction used on such a widespread basis as could occur if the markets remain weak at the end of the year. Additionally, margin debt has crept back to historic highs even though the market has not. With these pressures, we could find ourselves competing for capital with the Feds again, just like the good old days. This would have the effect of both feet on the brakes while going uphill!

The closing quarter of 2000 demands our attention as never before. It has the potential to be a clear harbinger of the second half of 2001. If the market closes in positive territory it would postpone the real damage for another year. If negative, however, the real winner in Tuesday’s election could prove to be the party with the fewest electoral votes!


With the heightened level of stock market volatility, it is becoming even more important to have a properly weighted asset allocation for this type of unstable and/or non-trending environment. This proper allocation should include the basic instruments of stock and bond mutual funds, but would recommend that between 5 to 20 percent of your current investment portfolio be allocated towards the derivatives/futures markets where profits can be generated by either going long or short. This type trading instrument can create a more balanced and stable portfolio through adverse stock market corrections through hedging and further diversification.

Should you have additional questions regarding the information discussed within the newsletter or how the profits in the management services were generated by using derivatives/futures markets, please reply with your question(s) and we will be glad to provide further clarification.


John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400

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