Private Account Management Services
Newsletter Issued 09-11-02:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Position overview . . .

The August 7th newsletter forecast that the DOW would perform a minor bear market rally with an anticipated trading range between 9,250 and 8,080. It further stated that the countertrend rally could be short-lived and suggested a small 5% to 10% allocations into stocks and the liquidation of our various bond positions. The DOW did perform the minor rally during the course of the month with an intraday high of 9,077 and low of 8,030. On August 21st and 22nd, clients were notified to liquidate their small stock allocation and reposition back into the various bonds, but with a similar allocation. With the DOW intraday high occurring on August 22nd, we were able to maximize our profits even though it failed to reach our preferred objective of DOW 9,250.

The Federal Reserve chose to leave the Fed Funds rate at 1.75% at their August 13th FOMC meeting. However, they did change the bias from neutral toward easing with the expectation of another rate cut prior to the end of the year. The main topic for this months newsletter further defines four key points that investors are ignoring in the hopes that the Fed will rescue them along with the stock market.

Looking forward . . .

Historically, the month of September is the cruelest month of all for equities. We have taken a careful look at the history of equities over the last half-century (since 1971 for NASDAQ), measuring indexes from the end of the one month to the end of the next. September has been, on average the worst month of the year for the DOW (minus 0.85%), the S&P 500 (minus 0.50%), and the NASDAQ (minus 0.80%). None of the standard explanations advanced for this seasonality — tax selling, IRA contributions, etc. — seem to provide adequate answers for this phenomena.

Our wave pattern technical analysis is anticipating, during the month of September, a trading range for the DOW between 8,740 and 7,870. The US dollar is in the process of resuming it’s bearish trend as other countries continue to liquidate their various US holdings in the expectations of a long-term decline. US treasuries will continue to be supported until the end of the year. Until then, we are continuing with a large allocation in bonds. Another increase occurred today with the short-term weakness appearing in the various US treasuries.


The fact that investors continue to believe that the Fed can rescue the stock market is one reason, among many others, to doubt that a major market bottom has been reached. We believe that investors are ignoring a few key points.

First, the perceived need to reduce rates arises from weakness in the stock market and the faltering economic recovery. Over the past month, we have seen flagging growth in consumer confidence, employment, durable goods orders, the ISM manufacturing and nonmanufacturing indices and the GDP. Retailers have now joined other groups in noting disappointing sales while capital spending, particularly in technology, shows no signs of picking up. All of this means that the stock market will be continually disappointed by the slew of downward revisions which occur across a broad cross section of industries.

Second, the Fed, since January 2001, has already reduced the Fed Funds rate 11 times from 6.50% to 1.75%. Despite these historically aggressive cuts, the S&P 500 is 37% below its level when the first reduction was made. In the entire history of Fed rate cuts, dating back to 1915, there was only one time when the stock market was lower 18 months after the initial rate reduction — 1929. The fact is that the central bank is fast running out of ammunition, and any move to bring rates near the 1% level will raise comparisons with the recent experience of Japan and the experience of the US during the early 1930s.

Third, more rate slashing, at this time, is not likely to get the anemic economy going. Financing is already at zero rates in a large part of the auto industry while consumers have had no trouble raising huge amounts of money in the mortgage market. In addition, corporations are more interested in slashing expenses than they are adding to capital expenditures in a time of lagging profits, excess capacity and weak pricing.

Fourth, let us not forget that the people trying to rally the market on the prospect of a few more rate cuts are mostly the same ones who brought us this devastating bubble in the first place and have remained bullish throughout the market decline of the past 30 months. In our view the only thing that further rate cuts can accomplish now is to expose the apparent futility of the Fed’s recent easy money policy. The only way that the economy can turn around now is to correct the severe imbalance built up during the bubble. For the market to recover, it must go down to a level where stocks prices represent good values.


The conditions for a major stock-market bottom are not, as yet, fully developed. The size of a financial bubble, as a general rule, determines the magnitude of the subsequent decline and undervaluation. A bottom. based on that premise, would not form until the market plunges to depths below the extremes witnessed in both 1932 and 1974. A major bear market may be possible when fear is widespread and unemployment is high. Dividend yields will be lush, book values will sit at bargain levels, debt will be reduced, bullish sentiment will be low, and mutual-fund cash will be high when this happens. Price-wise, all of that is a long way off.


We previously indicated that we liquidated our small stock allocations and repositioned back into the various US treasuries on August 21st and 22nd. And, we are increasing our US treasury position today with the current short-term weakness. We are continuing to suggest inflation-protection index bond (TIPS), since the US treasuries may have limited upside potential, to lock-in an effective yield of 4.0%. Clients will be notified to liquidate the various US treasury positions once we are convinced of US treasury market peaks. The US treasury market, currently, will remain a favorable investment tool since the one-year treasury bills are still factoring in a Fed funds rate of 2.90%. We still feel this level of interest may be unrealistic within a year given the current state of our economy and global concerns. This, together with limited opportunities within the various stock indices for price appreciation, guide us in suggesting the following investment allocations:

1) A 30%-35% allocation into 2 to 10 year maturity of US Government bonds;
2) A 10%-15% allocations into 20 to 30 year zero coupon bonds commonly referred to as STRIPS. This type of bond will provide a greater rate of return, as compared to the conventional bonds, due to the leverage associated with this instrument:
3) A 40% allocation into inflation-protection index bonds (TIPS). If the treasury prices decline this instrument will effectively lock-in the profits generated with the US bonds and STRIPS with an overall effective yield of 4.0%.;
4) 0% in individual growth stocks due to the limited upside potential, low level of dividend yield and higher level of risk;
5) 5%-10% 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 bull or bear market as offered in 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

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