Private Account Management Services
Newsletter Issued 11-20-01:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Position overview . . .

In the September 23rd newsletter we projected that the DOW would find support at either 8,350 or 8,000 and issued a market alert just one day early from the actual bottom of 8,062 on September 21st. Furthermore, we projected a bear market rally in the DOW to 9,600 and possibly 10,000 during the fourth quarter of 2001. As of November 19th, we have traded as high as 9,974 which represents a 12 percent rally from the timely issued market alert at DOW 8,300. We also stated that the US dollar should perform a final rally in the fourth quarter of this year, which has been the case.

As for the US treasuries, we were projecting a top on September 18th, which was not the case due to the attack on September 11th and the flight to safety effect. Instead of investors reallocating funds out of bonds and into stocks since the bottom on September 21st, we saw both rallying with the emphasis in treasuries. With the expectation that the conflict will continue for several years, we are in the process of adjusting our treasury trading models to take this “war effect” into consideration. Therefore, we should be able to resume the monthly and/or quarterly performance summary after the first of the year. At that time, we also plan to provide the 2001 summary performance for both the standard and conservative trading models.

Looking forward . . ./em>

We feel that the DOW will offer stiff resistance at 10,000 and the high yesterday was 9,976. Our wave patterns are now projecting a decline to as low as 8,450 before making a final rally in the first quarter of 2002 to 10,600. Since the primary trend remains down, we would use this rally to almost 10,000 to further reduce stock holdings. As for the US dollar, it also appears that it will decline in line with the various stock indices against the European currencies.

In regard to the various US treasuries, we are expecting a final rally in price from current levels to possibly new highs on or before the Feds FOMC meeting on December 11th. Our expectations are that they will cut the Fed fund rate by 25 basis points (1/4 percentage point) to 1.75% due to the continued economic weakness. However, this maybe the last Fed easing due to the reasons addressed below regarding inflation concerns and supported crude oil prices.


The price reports from the Bureau of Labor Statistics suggest that the US was in good shape on the inflation front when the September 11th tragedy hit. In the months of August and September, consumer prices rose at only 0.7% and 0.4% rate, respectively. Core inflation – omitting food and energy – was only 2.6% in both months, barely above where it was a year earlier. Such positive inflation news has made it easier for the Federal Reserve to slice interest rates.

But an alternate measure of core inflation, calculated by the Federal Reserve Bank of Cleveland, presents a far less optimistic picture. Each month, the bank calculates what it calls the “median consumer price index,” which smoothes out some of the big month-to-month changes, not only in food and energy but also in other that may be distorting the index. The result: Inflation, measured by the median CPI, rose at a 4.2°r6 rate in August and a 4.4% rate in the month of September. What’s worse, the price hikes are accelerating. The median CPI is up by 3.8% over the year ending in September, compared with 2.8% a year earlier.

The implications are that inflation, by conventional measures, may rise soon as well. Over long periods, both the conventional and median CPI rise at roughly the same rate. But in the short run, the median CPI is less affected by temporary price changes that may not reflect the underlying inflationary trend.

In August, for example, the conventional inflation rate was pulled down by sharp declines in prices not just of food and energy, but also of such items as tobacco products. Indeed, the price of tobacco products fell at a 37°.6 annual rate in that month, a startling drop that is unlikely to be repeated. In contrast, the median CPI gives less weight to such big misleading price movements.

This suggests that the Fed may have less of a cushion against inflation than it thinks. Our observations are that inflation will now tick upward, probably over 3%, in the short term if everything goes well. Such a rise in inflation will keep long-term bond rates high even as short-term rates are cut. Moreover, higher inflation could force the Fed to raise interest rates faster once the recovery begins.

Still inflation concerns take a back seat to current problems. We could easily be in for a rather protracted period of stagnation; however, It would surely be better to live with a small amount of extra inflation now and worry about it when growth goes back to a steady 3% or more.


As fears of recession have risen in the US, oil prices have declined based on the expectation that consumption of everything from gasoline to jet fuel is going to fall. Indeed, as of today, crude oil prices have dropped 30°r6 since the attacks, to $17.50 a barrel.

But instead of worrying about a demand slowdown, perhaps investors should be concerned about a shortfall in supply. Rising tensions in the Mideast indicate a 80°r6 chance that US oil supplies will be disrupted in the next two years. Short-term, there is probably a 20% to 30% chance of a supply interruption if the US targets terrorist organizations linked to oil-producing countries such as Iraq and Iran.

Since the US imports about 60°r6 of its oil, a reduction in supply from overseas would push prices higher. If oil supplies to the US were to fall by 3 to 4 million barrels a day crude oil prices could soar as high as $40 to $50 a barrel. Making matters worse, US oil producers are already producing all they can, and even a recession may not send demand plummeting. In the past five decades there were only a few years in which worldwide demand for oil fell.

Of course, predicting the timing of an interruption is tough, but prices are likely to jump $4 to $5 when news of an attack hits the wires.


The lessons learned since 1982 will be of little value. The buy and hold strategy simply will not work, and will prove unrewarding for the next several years. The market no longer will be a free ride, a money making machine that cranks out 15%-20% returns year after year. Making money in the market will require three key things:

1.) Recognizing the larger trend will be sideways or lower for stocks. Capital preservation will be vital, but will not equate capital preservation with investing in bonds. Bonds are in a precarious position. Several years of sideways to higher yields (lower prices) will make bonds a poor investment. Instead, short-term money market instruments may be the only safe harbor in a difficult market environment.

2.) One of the lessons learned in 2000 was how badly flawed fundamental stories could be. Stocks with great fundamental reasons for ownership still suffered sharp declines. Investors thus should be considering alternative investment methods such as wave patterns, which we use in our private account management services. Stocks no longer will trade within seemingly endless uptrends. Instead, many will trade through numerous mini-bull and bear markets. Wave pattern technical analysis will prove invaluable.

3.) Be a contrarian. One of the characteristics of trading ranges is that the market feels great at the top of the range and awful at the bottom of the range. Learn to fade the crowd.

CONCLUSIONSspan style=”color: #000099;”>:/strong>

The 20-year bull market in stocks pushed equity valuations to historically overvalued levels. While possibly justified a couple of years ago with the talk of a new paradigm, we now see that the economy and stock prices are subject to the same old cyclical fluctuations. Unfortunately for investors, correcting the huge overvaluation has just begun. This correction process should lead to several years of poor performance by the equity markets. Investors conditioned to buy and hold, to invest for the long-term, will be dancing out of time with the market and will not be rewarded. Make no mistake, there will be opportunities to make money, just not with the buy and hold strategy. Just as platform shoes, bellbottoms and Barry White have resurfaced, the 1970s-style stock market is likely to make a come back over the next several years.

With the expectations of an additional fed rate cut at their next meeting on December 11th and a major top for treasuries, the bond market will offer limited price appreciation. Even though we were two months early on projecting a top within the various treasuries, we still are suggesting the following investment allocations:

1) 50%-60°rb in US Inflation-protection index bonds after the December 11th FOMC meeting. (As investors sell their treasury positions, these type of index bonds will actually appreciate in value and will provide more comfortable rate of return as compared to individual stocks; 2) 0% in individual stocks due to the limited upside potential and large level of risk. (take profits in value and growth stock positions suggested over the last few months on this bear market rally); 3) 25% in cash, T-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; 4) 10%-20°r6 in the futures/derivatives markets (this will help provide investors with a properly weighted investment and stability for either a bull or bear market);

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

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