Private Account Management Services
Newsletter Issued 10-07-03:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Position overview . . .

Our September 8th newsletter forecasted that the DOW would begin its next leg down and expected a trading range between 8,935 and 9,650. This forecast proved to be fairly accurate, but slightly narrower, with the actual range being between DOW 9,230 and 9,686. There were still individual investors supporting the stock market even though corporate insider selling remained at record levels. We projected that the US treasuries had completed their first leg down in what could become a decade-long bear market for bonds, but expected a rally due to the oversold condition. The US treasuries rallied as anticipated with the yield of the 10-year T-Notes declining from 4.65% to 4.07% during the month of September. The Fed held the prevailing Fed Funds rate at the record low level of 1.00% after their September 11th FOMC meeting, and maintained a neutral bias for the future direction of interest rates. The US treasuries continued their rally after the meeting since the Fed was not expected to raise interest rates in the near future. We further anticipated that the US dollar would decline substantially and forecasted a euro fx equivalent trading range between $1.0750 and $1.1530. The actual range was very close to our forecast, between euro fx $1.0746 and $1.1715.

Looking forward . . .

The September employment report, release on last Friday, showed a surprising increase of 57,000 new jobs created for the month. The report also revised the August payroll contraction from 93,000 to 41,000. The unemployment rate, which is what civilians react to, held steady at 6.1%

Upbeat as it was, the report actually wasn’t as positive below the surface numbers. For one thing, the manufacturing sector took another blow, albeit a softer one, with 29,000 jobs vanishing, keeping alive a losing streak that stretches back some three-years plus. Moreover, a formidable 1.5 million individuals could not find a job at any point in the past 12 months, but were not counted among the unemployed because they had not bothered to look for work in the four weeks preceding the survey.

The 66,000 bulge in service jobs, half were temps. Economists are quick to hail a pickup in temp hiring as a harbinger of an enduring rise in steady employment. That may have been true in the past; we are not so sure it holds today, if only because the post-bubble economy is not your typical post recession economy. Conditions are very different and so are employer attitudes.

The number of folks working part-time last month because they could not find full-time jobs shot up 11%. Also, the September dip in the average hourly earnings was the first such decline in more than 14 years. And that, when all is said and done, even after the uptick last month, a total of 221,000 jobs have been lost since the spring.

It is pretty apparent that the people who make the ultimate decision on hiring do not appear overly confident of the underpinnings of the recovery or noticeably ebullient about its prospects. That is strongly evidenced by the astounding gusto with which corporate executives and directors continue to unload their own stock, which is discussed in further detail later in this newsletter.

The US dollar should continue its decline and could start scaring off foreign investors, depressing the stock market and sending interest rates soaring. In the short-run, it would help reduce the US trade deficit imbalance which now exceeds 5% of the US Gross domestic Product (GDP), however, it will also force consumers to pay more for imports and drain off money they could have used for something else, thus dampening growth.

Consider the impact of a falling US dollar on foreign investors. The US depends on an enormous flow of capital into the country to fund everything from business investment to home construction to the government budget gap. Over the last year, for example, the US has absorbed roughly $800 billion in foreign capital, with most of that going into corporate bonds, US treasury debt and mortgage-backed securities.

Any drop in the dollar big enough to cut the trade deficit significantly — say, 15% — would also greatly reduce or eliminate the returns for European or Asian investors who put their money into US securities. Moreover, the prospect of further declines in the US dollar would encourage foreign investors to start pulling out their funds from the US stock and bond market. The outcome could be a spike in interest rates, much greater difficulty in raising money, and a squeeze on domestic growth.

We feel the DOW, for the reason mentioned above as well as those to be later addressed within this newsletter, is in the process of cresting and will be resuming it’s primary bearish trend. We anticipate a trading range for the DOW this month between 8,950 and 9,690.

The US treasuries should continued to be supported near-term, however, if the decline within the US dollar accelerates, we could see a resumption in the anticipated decade-long decline in US treasury prices.


Corporate governance is projecting a well and good image, as we have seen at the New York Stock Exchange (NYSE), but when it comes to the harsh realities of life and the stock market, investors might be better served observing how inside directors behave in regard to buying and selling shares of stock in the companies on whose boards they serve.

As it happens, the ratio of directors’ selling shares relative to those buying them is at peak levels for stocks traded on the NYSE and those listed on the NASDAQ. The NYSE ratio is 6-to-1, while on the NASDAQ it is 8-to-1. The ratio has averaged 2-to-1 for the past 12 years, which implies a broad negative sentiment by directors about earnings prospects for their companies. The ratio is derived by using the number of directors, rather than transaction value, to arrive at these ratios, to avoid having one big seller or buyer skewing the results.

The track record for directors is amazing, since whenever the sell-to-buy ratio exceeds the average, growth in earnings per share in the subsequent six months has averaged minus 9%, while when the ratio falls below average, earnings rose an average 12% six months on.

The key question is why at this juncture directors are looking to get away from their own shares? The main reason is that analysts have upgraded estimates and shares prices have risen with the rosier view.

Because directors have an insider’s view of their companies’ near-term profit outlook, they tend to sell their stock when they believe the companies will miss analysts’ forecasts and buy if they believe it will beat forecasts. If directors believe forecasts have gotten ahead of profits, given that stocks have already moved up … there is no reason for directors to hold on to their existing positions.

Director negativity cuts across all sectors except for one which is insurance.


The NASDAQ is up a smashing 40% this year since March 2003 and during this time span margin debt has zoomed fivefold. Between May and July 2003 alone, such borrowings surged to an all-time high of $26 billion, from $7.3 billion. The previous peak of $21.4 billion was reached in March 2000, just prior to the beginning of the major selloff in the NASDAQ from it’s record level of 4,882. Today, we are trading 60% off that peak level set over three years ago with a higher level of margin debt. Hence, the greatest stock-market mania of all time is still very much in progress. However, we are convinced that this mad borrowing to buy risky stocks can only end in tears.

The explosion of margin in NASDAQ shares provides a clear insight into mounting speculative fever that is furnishing an increasing part of the impetus for the rally, a rally — we are certainly not the first to notice — in which the worst stocks are scoring the best gains.

We have never seen a time when so many are so eager to buy on the come. And that includes the wild years from 1998 through early 2000. Then, after all, while fantasizing flamed, the economy was on a roll. Now, the drill is to pay no mind to what is happening or even what is visible; concentrate on the prospect of a big recovery in a company’s fortunes next year or the year after, powered by a surge in the economy that itself is highly problematic.

Nowhere is the gap between reality and fancy more evident than in the skyrocketing technology stocks. So far, the expected rebound in sales and earnings have failed to materialize; but, if anything, that merely seems to excite the speculative appetite, as though somehow today’s lag in performance only enhances the promise of a payoff tomorrow.


The bottom line on the outlook for a major rebound in employment is that whether it’s people or inventories or capital investment, companies would much rather make do than make commitments, and there is no sign that is about to change.

And, worth remembering, too, is that a number of those job losses the US is suffering over the past few years have migrated to faraway places where the workers are not paid too much and environmental controls are conspicuous by their absence; they are likely gone for good.

Insider selling from any corporate officer has in the past and will in the future project the likely direction for stock market and the anticipated level of economic growth. As insiders are selling, individual investors are currently borrowing funds at record levels to buy more stock. This level of investor complacency is very common at stock market peaks, and today’s conditions are of no exception.

We encourage investors to seek out investment managers — not brokers commonly referred to as financial planners or financial sales representatives — with a unique and flexible investment strategy where profits can be generated through either a rising or declining stock and bond market. All three of our trading models, which are the conservative, standard and wealth management services offer such flexibility as compared to conventional “buy & hold” investment strategies with defined asset allocations.


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 ordinary 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 into a conservative as well as flexible investment strategy using various no-load index mutual funds offered through our Private Account Wealth Management Services. This services is ideal for wealthy 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 maintain the same asset allocations from the prior month, but maybe liquidating the various 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 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.;
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. 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 as offered through our Private Account Management Services with the use of our conservative and standard trading models. 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
E-mail: JOHNTMOIR@aol.com

Acknowledgments: SG Cowen — London Headquarters, CrossCurrents, TrimTabs.

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