WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 09-08-03:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw
Position overview . . .
Our previous newsletter, dated August 8th, forecast that the DOW would have a trading range between 8,275 and 9,250. The actual range proved to be higher that expected between DOW 8,997 and 9,499. Individual investors continue to be buyers even though a record number of corporate insiders (CEOs, CFOs, and CIOs) continue to be sellers at a ratio of 30 to 1 for the DOW as well as the S&P 500 and 1,170 to 1 for the NASDAQ. The extreme ratio of insider selling versus buying further confirms that the rally in the various stock indices since March 2003 is purely a countertrend rally in a primary bearish stock market trend. We projected that the bond market had put in a near-term bottom on August 1st. This proved to be accurate with the US treasuries remaining within a narrow trading range above it’s August 1st low, neutralizing its position prior to starting another bond market rally. We anticipated that the US dollar would have a trading range between euro fx equivalent of $1.115 and $1.180. The actual range for the US dollar was stronger than expected between euro fx $1.0803 and $1.1406 due to a number of positive economic events during the month of August.
Looking forward . . .
The US treasury bond market has completed the first leg down in what will become a decade-long bear market in bonds. Financial stocks are starting to follow. Their decline will lead the broad market into a significant correction.
The immediate problem is the recent sharp rise in interest rates is that financial stocks now represent over 20% of the S&P 500. The number is even bigger if you include the captive auto-finance subsidiaries. A disproportionate share of S&P profits and service-sector employment this year came directly from auto-finance subsidiaries and the mortgage-refinancing industry. Consumers continued to spend as loans negotiated in June and July put money in their pockets in August…. Refinancing has been the primary source of consumer spending growth. That is now over. Layoffs will follow in the very industries responsible for 2003 service-sector job growth. Auto and mortgage companies (including banks) will issue profit warnings for the third and fourth quarter. Refinancing profits are drying up at the same time the value of loans in portfolios are being adversely effected. These problems will be compounded on Wall Street, where most of the year-to-date 2003 brokerage profits have come from the bull-market bond trading.
There is a banking crisis looming due to the steadily rising rate of delinquency and bankruptcy filings since May 2002. Banks continue to provide loans with questionably inflated values imposed on peaking commercial and residential real estate holdings. Major banks are already holding billions of dollars in high-risk loans soon to become undesirable holdings. Those mortgage holders with variable rate loans could, in the near future, be unable to make the larger mortgage payments and may not even qualify to restructure their loans due to their fixed or declining level of income. This bank crisis will be for real and is going to effect real estate values and compound the level of decline in the US stock market.
We are anticipating that the DOW should begin its next leg down for the reasons mentioned above as well as others and are forecasting a trading range between 8,935 and 9,650 for the month of September 2003. The US treasuries should perform a flight-to-safety rally through this stock market decline as expectation twiddle over the chances of a fed rate hike. A recovery remains uncertain, even though a number a strong fundamental reasons seem very apparent today. We encourage investors to not be complacent and use this current rally to reduce or eliminate their US stock holdings and consider alternative investment vehicles, which offer more flexibility and profitability in either a rising or decline stock market.
Almost every Asian country wants a lower currency and have been buying US dollars to keep their currency down to make their products more competitive. Most of the world is now reflating. The US is the world’s biggest debtor and cannot afford all the these military actions all over the world. It has a current-account balance of half of trillion dollars and a budget deficit that is pushing half a trillion. The US is a nation that is moving toward technical bankruptcy, issuing a currency that will be increasingly in question. If the United States were a corporation, it would be bankrupt.
All of these factors and others mentioned within previous newsletters point to a weaker US dollar. The only way to prevent such an occurrence is if the US cuts spending significantly in an attempt to mitigate the excesses the Fed is building into the economy with its easy-money policy. However, this cannot be done without a great deal of discomfort. Therefore, we are forecasting a decline within US dollar this month with an expected euro fx equivalent trading range between $1.0750 and $1.1530.
IS IT DEJA VU?
In our April 2000 newsletter — released just two days before the beginning of the bear market in stocks — covered a number of key issues and some of them are relevant once again today. The following are a few of the excerpts from this timely released newsletter, with a few minor changes to reflect today’s current economic conditions, along with the actual results 3-1/2 years ago:
After performing our the wave pattern technical analysis for the DOW, it appears that a near-term top has been put in place at 11,418.24 and we are on our way down to retest the lows at 9,731.81 set on 3-8-00, and are projecting a move to 9,400 by mid-June 2000. Actual Result: The DOW topped at 11,540 on April 10th 2000. It later declined to a year low of 9,730 in October 2000. The price projections proved to be very accurate even though the decline took a longer period of time than initially anticipated.
There are a number of additional fundamental reasons to justify such a decline, which we have outlined below, along with a suggested means of diversification to prevent such a decline from effecting an investors portfolio and the possible reversal of the created “wealth effect.”
Complacent levels of confidence in the stock market:
1. Mutual funds cash reserves are at all-time lows with less than 2 percent in liquid assets as a percentage of fund assets.
2. Currently, the public’s direct equity exposure is at record levels with over 60 percent of a households discretionary portfolios invested in equities and/or equity mutual funds. The previous peak was set in 1970 at 55 percent and during the 1987 stock market correction, it was only at 33 percent.
A slumping stock market is apt to exert pressures in both of the items listed. First, the mutual funds are so shy of liquidity, they will have to sell stocks to meet a spurt of redemption’s, thus worsening any market decline. Second, because investors are leveraged and with high percentages of stock ownership, they are bound to cut back their purchases sharply, not only of stock, but of real items as well. This would in the process furnish a hit to the overall economy. Actual Result: Consumer confidence reached a record level of complacency at 140 before starting it’s decline and mutual fund managers were forced to raise their cash positions to meet investor redemption demands.
Increasing level of Margin Debt:
Over the past four years, the buying of stocks has increased at an astounding 200 percent annual rate, which is far and away the fastest ever. The main reason for this incredible increase is simply due to credit which has played a mighty part in this spur in this runaway bull market. Currently, there is over $270 billion or so of market credit, which doesn’t include the venturesome individuals who have taken loans out on other assets — like their houses — to enable them to get their additional piece of the booming stock market. Actual Result: This proved to be one of the catalyst for the stock market bubble to burst and is today proving to play a key roll in the looming housing bubble.
Internet companies are running out of cash:
There are currently over 100 companies that will run out of cash in less than 24 months and another 50 within 48 months. Many of these companies along with others are trying to raise funds by issuing more stock or bonds, but a lot of them will simply not succeed. As a result, they will be forced to sell out to a stronger rival or simply go out of business altogether. Here is a partial list of some the more popular Internet companies along with the number of months before they run out of cash: CDNow (CDNW) (1 month), Digital Island (ISLD) (3.5 months), Egghead.com (EGGS) (4.5 months), FTD.com (EFTD) (6.5 months), Amazon.com (AMZN) (10 months), eToys (ETYS) (11.3 months), E-Stamp (ESTM) (11.8 months), uBid (UBID) (12.2 months), Juno Online Svs (JWEB) (14 months), Stamps.com (STMP) (30 months), Priceline.com (PCLN) (36.5 months), and E*Trade (EGRP) (53 months). The Internet companies that will probably survive and acquire additional funding will be the ones that provide a distinctive service and not sell a product which could be purchases by other means besides the Internet. Actual Result: A majority of the Internet companies listed above are either no longer is business today or were acquired by larger companies looking to enhance their industry’s market share.
Nasdaq Composite and it’s cumulative breadth:
Over the past decade the NASDAQ Composite as risen over 850 percent and just 85.5 percent last year alone. This may have been one of the greatest advances, but it has also been one of the narrowest in stock market history. Just a handful of stocks have done fabulously well and are responsible for the spectacular rise in the NASDAQ. What has been less advertised is that a vast majority of the NASDAQ stocks have not merely lagged behind the chosen few leaders, but have actually been going in the opposite direction. Hence, the relative breadth for the past decade has been declining with a stronger decline over the last three years as more and more IPO’s have been brought to the market place. Actual Result: The NASDAQ peaked in March 2000 at 4,882 and declined to 2,902 in May 2000 before consolidating for the remainder of the year.
Does your current stock portfolio have proper diversification for all three(3) types of market direction?
With the extended length of the current bull market, most people have become complacent and have not reviewed the three types of markets when purchasing a stock, bonds, or stock mutual fund for their investment portfolio. The three(3) types of markets consists of a bullish, neutral, or a bearish market.
The following is an illustration of how these three(3) types of markets would effect a stock portfolio worth $2 million:
A. Bullish stock market: If the stock market continues it’s rally, gains would be realized from stock appreciation. The average dividend is only 1.7 percent, just slightly higher than the current US Treasury Bills yielding of 1.0%. Hence, gains would be limited to stock price appreciation and taxes would become applicable when the individual stocks or mutual funds are liquidated.
B. Neutral or flat stock market: This type of market refers to a situation where stock price fluctuation is limited and no major gain or decline in stock price is occurring. In this situation, the only return a person would see in their stock portfolio would be from dividend or interest income.
C. Bearish stock market: If the stock market starts a decline or major correction, the value of the portfolio will obviously decline, and if a person were to liquidate the stock holdings, gains would be faced ordinary and capital gains taxes would become applicable except in tax-deferred accounts. For example, if the stock market just corrected 10 percent that would represent a $200,000 reduction in stock portfolio value. Even in a bull market, we can see stock market(s) decline 20 percent or $400,000 in portfolio value and still be in a bull market, which represents a large fluctuation in stock portfolio value without including the applicable tax consequences, if liquidated. Depending on the individual stock or mutual fund gains, if a portfolio of this size were liquidated after a 20 percent correction, the after-tax value of this portfolio would be approximately $1.2 million.
It will be essential for investors to consider alternative investment vehicles, which have the flexibility to capture profits through either a bullish or bearish stock market as offer through our management services. In addition to our private account management services offered within the futures/derivative markets, we have just introduced a new service called the private account index funds management services. This new service is designed for wealthy individuals and/or privately held corporations seeking a more conservative investment vehicle than the use of futures/derivatives or even real estate through the use of open-end no-load index mutual funds. The minimum investment level is much higher than our other services and is designed to assist investors with the remaining 60% to 80% of their overall investment portfolio. We have offered some investors assistance with this flexible investment strategy, on a limited basis, in the years 2000 through 2002, and averaged over a 15% annual rate of return. All three major stock indices produced negative rate of return for those years and for a majority of investors; however, our unique wave pattern technical analysis of the markets and flexible investment strategy allowed us to generate positive rates of return well above any expected average. We encourage investors to seek out an investment manager with a much more active asset allocation investment strategy for this long-term secular bear market, which will produce on many occasions countertrend rallies like what we have seen over the past few months.
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, declining 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 (Note: This will help provide investors a means to hedge as well a further diversify their investment portfolio during either a bullish or bearish stock, bond and/or currency market as offered through our private account management services).
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 would be willing to provide further clarification.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400