Private Account Management Services
Newsletter Issued 10-12-04:
By: John T. Moir
Chief Editor: Sara E. Collier

Position overview . . .

Our September 8th newsletter, using our wave pattern technical analysis, that the DOW would resume the bearish stock market trend, and anticipated a trading range for the month between 9,800 and 10,370. This forecast proved to be fairly accurate, with the actual trading range during the month being between 9,977 and 10,354. We also forecasted that the stock market would resume its decline the day following the newsletter’s release, which proved to be the case. Higher crude oil prices and a number of lower-than-expected earnings reports were some of the fundamental catalysts for the decline, following our already-released technical projections for the stock market. We also anticipated that the US treasuries would continue to be supported in the near-term, but cautioned investors that we could revise these expectations in the months ahead. The actual result for the month showed the US treasuries being range-bound, as they worked off their overbought condition prior to continuing their ascent. The possibility of renewed concerns for deflation or stagflation should reappear in the near future, however we are also watching the US treasuries very carefully for the likelihood of repricing, which would cause a substantial decline in price and acceleration upward in yield.

Looking forward . . .

For only the second time in its 90-year history, the Federal Reserve has hiked the discount rate in the two months preceding a presidential election. The previous instance occurred in 1980 when inflation was over 12%, compared to only 2.7% today. The 60 days leading up to the election, from Labor Day to Election Day, could prove pivotal to the political outcome. A fact the candidates may not realize.

Historically, the market’s performance in the two months preceding a presidential election has displayed an almost uncanny ability to forecast who will win the White House. Since 1900, there have been 26 presidential elections. In 16 of them, the Dow Jones Industrial Average (DJIA) climbed during the two months preceding the day of the elections. The incumbent president or party won in 15 of those 16 instances, with a 94% probability of success. However, in 9 of the 10 elections where the DJIA fell in the two months preceding the election, the incumbent party lost, boasting an accuracy level of 90%.

Overall, the DJIA movement in the two preceding election months has a combined level of accuracy in predicting the winner for the election of 92.3%. This proves that stock market investors display their own level of confidence with the existing president in ways other than the voting booth on election day.


Between 1995 and mid-2003, home prices have tripled in Ireland, doubled in the Netherlands as well as Britain, and were up nearly 70% in Australia. Spain, Sweden and America had jumped 27% in the same period. Gains are outstripped by the rate of inflation. A little less than a year later, at the end of March 2004, annual house prices had increased another 22%. It certainly shows all of the signs of a property bubble in the making.

In June of this year, there was evidence that the bubble might be starting to break. Sydney and Melbourne reported single and double-digit drops, respectively, in property sales prices in the first quarter as compared to 2003 when those two areas showed increases in home prices. The latest data reveals that home prices have dropped 9% in Sydney and 14% in Melbourne. There were numerous stories that emerged outlining sellers who were forced to sell for thousands less than they could have a few months earlier. Has the bubble begun to pop and, if so, could other areas be far behind?

There is a common misconception perpetrated by real estate agents around the world that when real estate markets are hot, property is a far safer bet than the stock market. But anyone who has lived through any one of the countless property busts during the last quarter of a century knows that this is simply not the case. Both are susceptible to bursting bubbles with historical declines in real estate averaging a 30% drop in property values over 48 months, and the stock market averaging a 45% drop in just a 30 month period. The effect of declining real estate values on the economy is more devastating, since property accounts for a larger percentage of the average household wealth. For assets in developed countries, residential property accounts for nearly 50% of household wealth versus just 20% for equities.

While the property bubble debate rages, there is one reason this boom is different from most others. This stems from the lowest interest rates in history, which has made lending costs downright cheap. Also, unlike the localized bubbles that generally occur, this one has been global. Building cranes have dominated the urban scenery from Shanghai to Lisbon, and money has been flowing into property like never before.

A look at the S&P GICS Home Builders Index indicates how the low rates impacted the group. Between 1990 and June 2004, it jumped nearly 1,600%, and gained 600% since the year 2000 alone. In comparison, the NYSE Composite Index rose 373% and lost 4% during the same periods. The decline in the fed funds rate, from an all-time high of 19% in 1981 to 1% in June 2004, has worked wonders for the housing and real estate industries. Since 2000 alone, the fed funds rate has declined from 6.5% to a 46-year low of 1% in June 2004. However, there are long-term dire effects to the robust housing market, which appear to be out of control.

There have been three successive interest rate hikes in Britain between November 2003 and May 2004; however, they have failed to cool the housing love affair. Even a report by the International Monetary Fund (IMF) declaring real house prices overvalued by 35% had little effect. How long it will take to cool less-inflated North American markets remains uncertain, but higher levels of debt in the US that currently exceeds 300% of Gross Domestic Product (GDP), substantially increases the market’s vulnerability to interest rate hikes.

Unlike the stock market, obtaining market data is a challenge. Variations between states can be significant, often making interpretation difficult. Data provided by real estate organizations generally paint a rosy picture for obvious reasons. Optimism is essential if their members are going to sell homes.

Even if one could accurately interpret like-to-like data, the results would probably fail to show a number of worrisome national trends. There are four(4) areas of major concern that may effect valuations no matter the level of complacent optimism that investors presently have, which are as follows:

1.) Rising Mortgage Rates: The advancement of rates does not necessarily signal an end to home price appreciation. In fact, an initial move upward in rates can fuel market activity as buyers panic to buy before rates increase even further. But as rates rise, so do mortgage payments. A rise in the mortgage rate from 4% to 5% is not significant; it represents an increase in mortgage payments of 25%. The real question is how many already stretched homeowners could afford such an increase? If rates go to just 6%, this would amplify to a 50% jump in mortgage payments. Hence, the lower the initial rate, the greater the differential in payments are rates rise and the more sensitive the market becomes to them.

2.) The Divergence between House Prices and Incomes: We have the widest annual rate of change gap in home prices versus disposable income and the fed funds rate. Incomes and home prices have been diverging since 1993. The last time the key rate was this low occurred in the summer of 1958, when it plummeted to a low monthly rate of 0.63%. This was short-lived, with the key rate jumping within 18 months to nearly 4% (3.99%). The large rate of change disparity normally leads to an adjustment, and toward an equilibrium for all three annual rates of changes.

3.) Ballooning US Total Credit Debt: There has been a rapid increase in all levels of US debt since interest rates started declining in the late 1980s. Unsecured debt and mortgage debt have reached record levels at $1.7 trillion and $3.4 trillion, respectively. Total US credit market debt (debt at all levels of the economy) has now reached 304% of GDP, the highest level in history. In 1933, fours years after the stock market crash of 1929, debt reached a peak of 268% of GDP. Economic recovery did not really start in earnest until the onset of World War II in 1939-40. And in Japan, at the peak of their stock market in late 1989, total credit market debt was 250% when their crash started to occur — a devastating period during when the stock market dropped by 80%, along with real estate values in a number of urban areas. Years later, from 1997 to June 2004, Japan real estate values have still remained under pressure, dropping nearly 25% with Hong Kong declining over 50%.

Debt in the US has doubled since the 1970s, making markets more susceptible to interest rate hikes. This also includes mortgage debt, which has grown rapidly in America. In 1960, it accounted for just more than 60% of all household debt, however, in 2004, it has grown to more than 72% and is increasing at an annualized rate of more than 10%.

4.) Increasing Consumer Bankruptcies: Consumer defaults, not business, have comprised the vast majority of bankruptcies since 1993. Between 1993 and 2004, bankruptcy filings have doubled in a falling interest rate environment. The true number of people who declared bankruptcy in the first quarter 2004 totaled more than 2.6 million, since couples file jointly. This means that nearly 1.5% of US households file for bankruptcy each year. US consumers currently hold $1.7 trillion in unsecured debt, and the annual loss rate is about 7%, suggesting that losses are about $120 billion per year or $1,200 per household per year.

In final analysis, there is no one key catalyst that proves a collapse is imminent; however, as we witnessed with the stock market decline from April 2000 through October 2002, the vast majority of investors do not know until it is too late. Even though economic evidence is readily apparent that the bubble has burst, we have developed a checklist of warning signs to help investors decide for themselves. The greater number of true points, the greater the potential for trouble ahead.

Ten(10) Signs That We Are in a Real Estate Bubble:

1.) Friends and acquaintances brag at cocktail parties about how much their homes have appreciated in the last year. In a number of areas, prices are up by 25% or more. Property discussions replace the weather as the favorite topic of conversation between strangers.

2.) People who never would have considered investment real estate are now buying properties independently or with friends, apparently oblivious to the risks Many are speculating that they can flip it for a quick buck. In a hot market, speculators can make as much as 50% off of the buyers, especially in yet-to-be-built projects. But they are the most vulnerable part of the buying craze, as they cannot make mortgage payments on multiple properties when the market slows. Renting is not usually an option because rental properties will be added to an already oversupplied market. Speculators are the leading edge in a correction when they are forced to sell or go bankrupt, necessitating the banks to do it for them. Unfortunately, there are no statistics to track them.

3.) Lenders and housing agencies make home ownership far easier as markets heat up, partly the result of increased competition to earn mortgage business. For example, in 2004, the Canadian Mortgage Housing Corporation announced plans to allow buyers to purchase with no money down. The same thing happened in Japan in the late 1980s. Qualification requirements are relaxed from 40% of income for total debt service. Buyers are encouraged to take out short-term, variable-rate mortgages to qualify. As prices squeeze buyers, adjustable-rate and shorter-term mortgages gain in popularity. The crunch comes when rates rise, and tapped mortgage holders must ante up more each month.

4.) Real estate prices rise faster than both incomes and rental rates in many areas. Rental vacancy rates are also increasing. In a number of locales, rents are falling, and this causes a growing divergence between rental rates and purchase prices. Either rents must increase or prices must fall with the latter being far more likely.

5.) Lineups and multiple offers on those properties become commonplace as competition heats up to buy properties. In the excitement, buyers often purchase more expensive properties than they can realistically afford. Selling prices, well excess of listing prices, also become commonplace.

6.) When interest rates rise, there is a negative reaction in home building, mortgage and refinancing markets along with stocks. Real Estate Investment Trust (REITs) and other rate sensitive issues like bank and financials are leading indicators. How these stocks perform often provides advance warning of what is ahead for the real estate market.

7.) Comedians begin doing jokes about the real estate market, and plays feature lineups of purchasers buying high-rise condominium projects.

8.) Rental properties long have stopped making sense from an investment standpoint. The current rental rates supports only a small percentage of the overall cost of owning the property. Experienced property investors have long since stepped aside.

9.) Home prices make them unaffordable to those who bought just three to four years ago, if they had to buy today. Friends, who have nice homes, surprised to find that their homes now make them millionaires. Many take advantage of the situation by obtaining home equity loans and increasing their already-high debt levels.

10.) Property assessments jump and homeowner groups lodge complaints to protest skyrocketing property taxes. Seems strange, but whenever assessments jump more than 20% to 30% in a year or two, a real estate correction is not far behind.


There is no single catalyst that would indicate that a housing market crash is coming, which is usually the case. In technical analysis, it is said that a trend will continue until a force greater than the one currently driving it takes over. Property markets have been driven worldwide by historically low interest rates, which have created a boom in home buying and refinancing. This intern, has created a double-edge sword: low interest rates also have stimulated a significant growth in overall debt, and as debt levels grow, markets become increasingly more vulnerable to those interest rates. Sensitivity is not only increased by the total weight of debt, but by the increased differential in loan or mortgage payments as rates rise from low levels.

The real question that exists, with no defined answer, is when the debt burden will reach critical mass and what might trigger a drop. One symptom of this is increasing level of consumer bankruptcies. It is likely that the final catalyst will come through either a significant increase in rates, due to inflationary pressures, or an economic malaise that reduces incomes and debtors’ abilities to repay debt.

History also tell us that the longer a bubble grows, the more severe the collapse when it finally breaks. While we may not know precisely when a correction is coming, we can at least be better prepared when it does by reducing real estate holdings to no more than 25% of total net worth and recognizing the symptoms as they continue to appear.

In addition, the Federal Reserve has used asset bubbles in stocks, bonds and housing to facilitate the continued household spending of borrowed money. This has created a false sense of wealth and has kept the economy rolling with no savings.

What is becoming crystal clear is that if the US bond and stock markets suddenly re-priced to fair value, the world would witness a crash in stocks, bonds, housing prices along with the US dollar. This inevitable repricing, caused by unsustainable Treasury and trade deficits, will be fiercely and politically delayed, at all costs, until after the November election. Also, the extent to which the Treasury and Federal Reserve can use legal, but undisclosed exchange-stabilization policies, is not widely understood by financial markets.

Long-term conclusions and current month expectations . . .

The DOW, along with the other major stock indices, are continuing their topping process in this countertrend rally that began in October 2002 and ended in February 2004. With or without further stimulus, the US economy requires additional time to work off the excesses of the bubble, which could take decades. Following the popping of the Japanese bubble in 1989, and the 80% drop of the Nikkei Dow, Japan was mired in an economic hangover for 14 years with their bank lending rates at only 0.5%. Therefore, we continue to believe that we remain in a super-bear stock market, with either higher or even lower interest rates, and suggest that investors avoid conventional investment strategies of simply buying and holding stocks, bonds or real estate. Proper diversification and hedging will be essential going forward to prevent substantial declines in overall investors’ net worth. Our Private Account Wealth Management Services can assist investors — as an active manager — with this process by using the unique investment vehicles and trading strategies which offer complete flexibility, liquidity and privacy where the funds are held at a major institution in the investors name, to generate a positive rate of return through either a rising or declining stock, bond and/or real estate market.

We anticipate that the DOW this month will resume the bear market decline into the election, with a projected trading range between 10,260 and 9,800. The DOW has created formidable support at 9,800 with several countertrend rallies from that level over the past 6 months. We expect a strong resumption in the bear market trend once we have an end-of-the-day close below DOW 9,800, which may occur in the very near future.

The US treasuries should continue to be supported as the economy slows in the months ahead, resulting in renewed concerns over either deflation or stagflation. The possibility of the US treasuries declining due to repricing concerns is still a major problem. If a number of major participates in the various US treasury auctions, more specifically Japan, choose to suspend their accumulation of US treasuries, we could see a substantial decline in price and rise in yield due to the reduced demand. In the previous quarterly refunding auction, the Japanese did not purchase even close to their normal quarterly allocation amount. The shortfall was actually purchased by various European countries due to the higher crude oil prices, which resulted in additionally US treasury demand. We will continue to monitor this situation very closely and could make a major adjustment in the near future, if this reduced demand shift for US treasuries appears to becoming a reality.


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. The minimum investment criteria are determined after reviewing the investor’s current assets and fund allocations. 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.

If there are any questions regarding the information discussed within this newsletter, the investment allocations mentioned above or our unique management service, please call the number provided below or e-mail us and we would be happy to provide further clarification.


John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
E-mail: JOHNTMOIR@aol.com

Acknowledgments: NYSE Index, Federal Deposit Insurance Corporation (FDIC), US Federal Reserve, Administrative Offices of US Courts, Economist, InvesTech Research, National Bureau of Economic Research.

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