Private Account Management Services
Newsletter Issued 11-10-03:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Position overview . . .

Our previous newsletter, dated October 7th, forecast that the DOW would have a trading range between 8,950 and 9,690. The actual range proved to be higher than expected between DOW 9,497 and 9,850. The narrower and ascending trading range is just a further confirmation that this bear market rally is very soon coming to an end. The US dollar remained within a large trading range, working off its oversold condition. There was no specific forecast made for the US dollar other than the primary trend still remains bearish for the long-term. We projected that the US treasuries would continue to be supported in the near-term, but that this position could change if the decline within the US dollar started to accelerate to the downside. The US treasuries declined during the month of October 2003 due to higher than expected forecasted economic indicators, even with a range-bound US dollar. We had established a number of US treasuries spreads (long T-bills and short T-notes), so the decline did not actually effect our performance, but only is a minor way.

Looking forward . . .

Last Friday’s released US employment report was stronger than expected with non-farm payroll showing an increase of 126,000 new jobs. The consensus for this number was for an increase between 65,000 and 75,000; however, we feel the number was so robust due to the California grocer’s strike and those “temporary workers” hired to replace them. The survey period and the manner in which the union leadership “paid” their union membership — those striking were paid and thus were counted as employed — as were the “new hires.” Therefore, we anticipate that a portion of the November report will be reversed as a revision within the upcoming December report. By and large though — the monthly unemployment number is the most statistically flawed number available, since it shall be revised once, revised twice — and it shall not look anything close to the first release.

However, what is more important is the response after the number was released on Friday. After an initial strong move upward at the open, the DOW along with the other major indices, proceeded to trade lower and closed down for the day on their lows. The reaction to this very strong fundamental event was reacted to in a very negative manner, possibly confirming a “climatic peak of optimism” for this bear market rally. It is important for investors to remember, at the lows in October 2002 and March 2003, the overwhelming news was negative, with the present day news is nothing short of optimistic.

The continued decline of manufacturing workers, losing another 24,000 jobs in this latest report, was part of the reason for the adverse reaction to such a strong employment number. Something like 2 million workers, or nearly a quarter of all those on the dole, have been out of work for 27 weeks or longer. Some 1.6 million, 170,000 more than this time last year, had been looking for work, but gave up their search because they were discouraged or sick so were excluded from the tally of unemployed. Roughly 9 million people who would take a job if one was offered were omitted from the official count of the labor force.

Federal Reserve Chairman, Alan Greenspan, has tended to downplay the “guarded optimism” many have come to recently regarding the US employment picture — stating that “while labor market conditions may be stabilizing, a more historical view suggests that the labor market has been weak.” Obviously, he does not see the type of “normal” hiring patterns that generally result during an expansion — we are in an expansion — not a recovery. The expansion started 2 years ago and today still has yet to do anything more than “stabilize” the employment picture.

The reasoning has more to do with the structural tendencies of the labor market in this past recession to that of previous recessions. In effect, past recessions have seen employment grow faster as workers are “recalled” to their jobs, especially in the manufacturing sector. However, during this past jobless recovery, those permanent jobs were lost rather than “temporary jobs” such as manufacturing jobs. Also, the relocation of jobs to other industries is quite high, and thus the decision process behind hiring new workers is considerably longer than simply recalling temporary laid-off workers to return in such as today’s uncertain environment.

The fact that the stock market is rising does not mean it is a low-risk option. It would be a mistake to chase this rising market. During the second quarter, the federal government debt rose at a 24% annualized rate, household borrowing rose at a 12% annualized rate, and mortgage debt rose at a 14% annualized rate. We can safely assume incomes did not keep pace. The bulls may argue that this is how we avoid the pain of a recession. When the economy gets going, consumers can pay down debt, but the increased debt load and the large run-up in stock prices means that risks to the economy and the stock market have increased, not decreased.

The DOW appears to have finally completed the topping process, even though higher than forecasted over the past few months, and are projected a trading range this month between DOW 9,240 and 9,910. Our technical wave pattern analysis is foreseeing the possibility of a rapid decline if key support levels are broken at 9,000 and 8,800, respectively. The rally over the past year from DOW 7,197 has purely been a countertrend rally with the primary declining trend soon to be resumed. We suggest to investors to not be complacent by holding on to stock positions simply because of the already factored in strong fundamentals. Stocks historically top at extreme levels of optimism and bottom at extreme levels of pessimism and today’s conditions are of no exception.

The US dollar should be range-bound this month as it works off its oversold condition and could resume its bearish trend in December 2003. The US treasuries should continued to be supported this month; however, if the US dollar decline below the euro fx equivalent of $1.20, we could see foreigners start to liquidate part of their US treasury holdings, now representing nearly 45% of the total open interest of US Government bonds.


Over the past two months, we have seen a striking slowdown in the growth of money supply and it has actually fallen into negative territory as well as the remorseless decline in bank lending.

Growth within the US economy, over the past two years, has been fueled by cheap credit with investors taking funds out of safe but rewarding harbors — money market funds and saving accounts, and been pouring it into the shark-infested pools of the equity funds.

The money supply decline over the past two months has failed to attract much notice at all, except among bankers and ourselves. The shrinkage in lending is no longer restricted to business borrowing, but no extends across the board, encompassing all the familiar consumer preserves (M1, M2, M3). And the shrinkage is taking place despite your friendly bank’s willingness to ease credit standards.

The lending decline is occurring simultaneously with a steep drop in bank holdings of US treasuries. Normally — and logically so — when loan demand dries up, banks park their money in US treasuries, which are very liquid, so that when demand revives, they can quickly rise to meet it.

This time around, however, both are declining in concert because banks are suffering that aforementioned flight of deposits, the likes of which have not been seen in over 30 years. And all due thanks for this mass exodus of deposits and mounting pressure on the banking system must go to Alan Greenspan (Federal Reserve Chairman) for its relentless campaign to punish savings and hold real rates under water.

While the Fed’s campaign to make cash a devalued investment has been a resounding success, it’s not, since it is apt to be without consequences that are no less unpleasant for being unintended. Shifting money out of the banking system in this fashion robs money of one of its most attractive traits — its multiplier impact. But then, chasing money out of banks into the financial markets in the hopes of reigniting a positive wealth effect is the last hope of the truly desperate.

Yet, we have been convinced for some time, that reinflating the bubble is precisely what the Fed and the Administration have conspired to do. We are also convinced that they should take great care in what they wish for, since it could come true.


In our view, investors are ready to bail out quickly at any sign that the stock market begins to fall, or any disappointment in the economy. This means that on any downturn the stock market would unravel much more quickly than in 2000-2002, and that there are likely to be numerous days of discomfort for those investors with a “buy-and-hold” investment strategy.

Along with our technical analysis projecting a resumption in this bearish stock market decline, there are a number of fundamental reason as well: First, the stock market remains extremely overvalued with price/earnings ratios (P/Es) over 21 and fair value close to 8. Second, stocks have already discounted a strong recovery and are not acting that well in view of the improved economic numbers. Third, a majority of the economic stimulus available have already been used with fewer stimuli available to use in the near future. In particular, mortgage refinancing has dropped dramatically over the past few months, and are now being reflected in reduced money growth. In the last three months the annualized rate of growth in M2 has declined from 12.5% to 1.9%. In summary, we believe the stock market is vulnerable to an extreme downturn, and it could happen sooner than most believe.

We discourage investors from simply using asset allocations in stocks, bonds and cash as offer through stock brokers — commonly referred today as financial advisors, financial planners and financial sales representatives. This type of buy-and-hold asset allocation investment strategy could fail to generate a desired positive rate of return over the next 8 to 15 years, since the stock market may remain within a large descending trading range.

Both of the suggested investment options listed below, depending on the investors financial position and personal profile, can offer a means for the desired positive rate of return through this non-ascending stock market period. We are active asset portfolio managers and have the flexibility in generating profits through either a rising or declining stock and bond market.


Since the ownership of stocks, bonds and real estate will offer limited growth potential, if any, due to the continued decline in the US dollar and other reasons discussed within this and prior newsletters, we have chosen to offer two different options for investors to consider. The first option is designed for wealthy individuals and privately held corporations seeking a conservative, but flexible investment vehicle for both their taxable ordinary funds and tax-deferred funds. The second option is for individuals investors seeking an investment vehicle that can produce a higher rate of return by using ordinary funds and hedging their existing conventional investments should the US dollar continue its decline.


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.


In this option, we have chosen to reduce the US treasury asset allocations from the prior month, and maybe liquidating the remaining suggested US treasury positions over the next few months for the reasons mentioned earlier. The uncertainties over the future levels of consumer spending and corporate growth made us conclude that the Fed will not raise interest rates in the near-term until a stable and consistent level of growth reappears within the US economy. Therefore, we continue to suggest a combination of zero coupon bonds (STRIPS) and longer maturity Treasury Notes & Treasury Bonds with no allocation in the inflation-protection index bonds (TIPS). Deflation may not be a concern now, but this conclusion could change in the months ahead depending on the 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 25% 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.;
4. 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;
5. A 25% 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. 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 market 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 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.

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 willing to provide further clarification.


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

Acknowledgments: US Department of Labor, MacroMavenus, NY Federal Reserve paper — “Has Structural Change Contributed to a Jobless Recovery?”

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