WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 09-23-01:
By: John T. Moir
Editor: John Allen
Position overview . . .
On the August 8th newsletter we projected that the DOW would initially remain in a narrow trading range with key support at 10,000, then breakout into a bear market rally. This scenario would be confirmed only by closing above 10,600. We also expected the treasury prices to peak, with an attendant bottom in yield on the August 8th release date. Even though we never got the close above 10,600, the oscillations within the prescribed range allowed use to capture substantial profits that provided the bedrock for our strongest monthly performance this year. The treasury projections proved accurate with the exception that the top occurred on the 13th instead of the 8th. We entered into a short position to take advantage of the sell off, but were forced to take a small profit and quickly reverse our position as the downward move lost momentum unexpectedly. This proved to be timely as we were able to capture our largest profits, on an individual trade, since early spring on the subsequent upward swing. All active clients were notified of our change in assessment and were recommended to refrain from purchasing the inflation-adjusted index bonds until further notice.
As a result of the DOW range-bound trades and the accuracy in accumulating profits in both the short and long side within the treasury trades, we were able to generate a positive rate of return for all clients in both trading models. Depending on which of the standard trading models used, the net return on investment (including fees) for the month of August 2001 ranged from 28.5% to 42.3%! Cumulative year-to-date net return on investment for our private account management services is now 72.7% to 118.8% for these trading models. The new conservative trading model (restricted to the treasury market) was also quite profitable for the month with net returns (including fees) of 15.2% to 21.7%. This brings the year-to-date performance up to 43.2% to 61.1% with the more aggressive models achieving the higher rate of return.
These high levels of return on investment were accomplished due to the flexibility we have within our trading models and the ability to take advantage of utilizing short position trades in addition to conventional long positions. So far this year, 48% of profits have been generated from shorting the various stock indices, treasuries and currencies. Fifty-two percent has come from going long these various instruments. The ability to react to rapidly changing market conditions and unexpected world events is becoming increasingly vital in generating substantial return rates. Readers of this newsletter, who are not active clients and therefore not receiving mid-month analysis changes, should use it as supplemental, independently objective information and NOT as the basis for mid or long term trading.
Looking forward . . .
With the recent break below 9,100 when the stock market reopened on September 17th, we now see the next levels of support at 8,600, 8,350, and 8,000. The DOW reached as low as 8,480 on Sept. 19th, just 2 hours after we issued a market alert calling for a bottom by the close on the following day. It continued lower to the next support level with a low of 8,376 the following day. On Friday, Sept. 21st, the DOW made one final move lower to 8,062 before reversing with a close at 8,235. Following the bottom, we expect a bear market rally into the fourth quarter of 2001 before resuming the primary bear market trend As stated, we may have already begun the bear market rally into late this year, but this will NOT be confirmed unless the DOW successfully closes above BOTH 9,600 and 10,000, which will now offer stiff resistance. In all likelihood, we will perform a rally to one of these levels, then, resume the downtrend early next year. Since the primary trend remains down, we would use this rally as a SHORT term trading opportunity only, or as a selling one to further reduce stock holdings.
Since wave patterns are determined by investors’ level of “greed and fear”, we are actually encouraged by recent market indicators. Fear has risen to the highest level since the correction in the fall of 1998. Monetary conditions are becoming more positive with the Feds substantial increase of money supply and the cut in the Fed funds rate by 50 basis points. In the upcoming FOMC meeting being held on October 2, we expect the Fed to cut again by at least 25 basis points. The possibility of a deeper rate cut will be determined by the strength of the markets during the next 2 weeks. While stocks are technically in a high momentum bear decline, our experience has been that momentum can quickly reverse itself. Earnings warnings and early tax loss selling will contribute significantly to volatility during this tenuous rally.
The US dollar has begun its final rally, which should extend into the fourth quarter as foreign investors place funds in the US seeking a safer location for their funds during uncertain times. This comfort with the US dollar could quickly change within the first quarter of 2002. The basis for this viewpoint will be monitored and discussed in some detail toward the end of this year.
Treasuries appear to have topped in price and bottomed in yield on September 18th. If the bear market rally in the US stock market does materialize, then, we could see a shift out of bonds and back into stocks. Even though interest rates may trend slightly lower, the majority of the gains has already been established in the treasuries and we would use this as an excellent profit-taking opportunity. We are still only recommending a small allocation in stocks due to the short duration of the rally. There will also be a limited profit potential as well as a high level of risk. A suggested asset allocation is mentioned in the summary section of this newsletter.
COMPANIES COME AND GO, BUT RETIREMENTS LAST A LONG TIME:
Everybody says diversification is the key to security in a long-term investment portfolio. So why, then, do so many people saving for their retirement put so many eggs from the same chicken in their basket? An employee who invests in his own company does exactly that! After 20 years or so of working for one company, the promises pile up: Pensions, retiree health benefits, perhaps some other things. Prudent employees, already dependent on these promises, should not add another promise from the same source to their portfolios if they can help it, unless they are extremely confident in the company’s ability to perform.
We were shocked to learn that disgruntled workers are suing Lucent Technologies because the company put Lucent stock in their 401K retirement plans and did not warn them that the stock was about to tank. Setting aside the issue of whether the executives knew what was going on before the stock fell 94% from its 1999 high, it apparently was legal for Lucent to make its contributions in the form of company stock. But it was irresponsible.
Retirements can last a long time. Many retirees may outlive the companies they worked for. It is dangerously wrong to make them more dependent on their former employers by investing their retirement funds in company stock.
“THINKING OUT LOUD”:
Editorial by Editor: John Allen
Readers have probably noticed the delay in distributing this month’s newsletter. This was done out of respect for the victims and families involved in the attack on the World Trade Center and related atrocities. Additionally, we felt that it was prudent to wait until the markets resumed full operation and less erratic indicators could be analyzed.
It appears the World Trade Center (WTC) was targeted as a symbol of American values. The reality is that the criminals who committed this heinous crime attacked, as the name suggests, the WORLD. Unless some miracle is found in the rubble, more than 5,000 people from over 40 nations will have perished. More than 1,000 were foreign nationals. Great Britain’s losses were over 300 and Germany mourns over 500. A few were even Islamic. It appears terrorism does not discriminate. It appears terrorism does not discriminate. The entire global community was attacked on September 11th. The global community needs to respond. The full weight of a new collective world order needs to be brought to bear against these insidious tenants of terror.
With the recent cut in the Fed Funds rate to 3.00%, which has been factored into the treasuries, the bond market will offer limited price appreciation. Therefore, we are suggesting the following investment allocations:
1) 50%-60% in US Inflation-protection index bonds. (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) 20% in individual “old economy” growth stocks with P/Es of 8 or less (take profits in value stock positions suggested last month on this expected bear market rally);
3) 15% 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% 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. Also, we would like to thank those readers that took a few minutes last months to respond to the “Reader’s Survey.” Your feedback was greatly appreciated.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400