WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 11-06-07:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our previous newsletter, dated October 10th, predicted that the third quarter earnings’ reports would be weaker than the overly optimistic estimates, with a DOW projected trading range during the month between 12,900 and 14,175. A majority of the earnings’ reports did fail to meet the factored-in expectations, resulting in the DOW having an actual trading range for the month between 13,407 and 14,198 — narrower than anticipated, but accurate in determining the peak-in-price trading point. The slowing of the actual earnings for the various US companies further confirms that the US economy is slowing and increasing the likelihood of an upcoming recession.
The US dollar was forecasted to possibly find some near-term support, but the question still remained if it would hold. We anticipated that the US dollar would have a euro fx equivalent trading range for the month between $1.39 and $1.43. The actual result produced a slightly weaker trading range, between euro fx equivalent of $1.4048 and $1.4510, as the US dollar continued to trend lower.
The US treasuries were anticipated to be price-supported, with the 10-year note yield remaining below 4.65%, partly caused by the weakening US dollar, and the flight-to-safety into US treasuries from a declining stock market. The actual result, during the month, produced a 10-year note yield range between 4.33% and 4.69%, as US treasury prices were indeed supported and inversely caused yields to decline — a very accurate forecast.
Looking forward . . .
The employment report, released last Friday, provided a very mixed message. There were supposedly 166,000 jobs added to payroll last month, way above the 90,000 predicted by the Street. What stirred our suspicions was the 2,100 added jobs in — ready for this — real estate!
We also noticed that no fewer than 103,000 of the presumed 166,000 additions came by virtue of the birth/death adjustment. This means, pure and simple, they were the product of somebody’s computer computations. Something over 80% of this year’s reported new jobs are similarly mythical constructs.
This is one reason why consumer confidence levels are so low, even in the face of Fed rate cuts and a stock market that shows impressive resilience, because the non-farm payroll reports are overstating labor market strength. Moreover, the weakness in the household survey of employment is much more evident — falling by 250,000 this past month alone — than in the payroll count, and is running more than 80% below last year’s average monthly gain. A similar large drop in the labor force — down by 211,000 — kept the unemployment steady at 4.7%, which could inch up to 5% by early 2008.
Consumer expectations are down 12.8%, on a year-to-year basis, and were down 38.3% ahead of the 2001 recession. Jobless claims are up 5% on a year-to-year basis, an increase that would hardly be noteworthy under normal circumstances, but they typically rise 25% or more ahead of recessions.
The bullish part of this hybrid bull-bear market has been restricted pretty much to a relative handful of high-steppers — a number of which are prominent components of the DOW and the S&P 500 averages. There are historic instances demonstrating that narrow bull markets end badly.
The Nasdaq 100’s spectacular performance so far this year is up 25% — or some 448 points — is a startling illustration of how a few exceptionally strong stocks can give the impression of a big bull advance. A whopping 230 points of the nearly 450 points gained by the Nasdaq, or over half the index rise, has come from just three stocks — a very narrow bull advance that could follow histories same previous results.
GROWING CREDIT CARD DEBT:
This past summer’s subprime meltdown involved about $900 billion in now-suspect securitized debt, reckless lending, and consumers who buckled under the weight of loans they could not afford. Now another link in the consumer debt chain — credit cards — is starting to show signs of strain, and the fear that the $915 billion in US credit card debt may blow up has major financial institutions like Citigroup, American Express and Bank America strapping on their protective vests.
Last month, as banks reported their worst quarterly results since 2001, concerns about rising credit card delinquencies began to make their way onto earnings’ announcements alongside mentions of subprime concerns. These financial institutions were further stating that their credit card holders were beginning to increase the balance on their cards or take cash advances on those cards for the first time — behavior that can translate into future trouble. These changes could produce loan losses, but are not yet visible in delinquencies. These signs of stress are forcing financial institutions to boost their loss reserves in core US credit cards by between 35% to 45%. These major financial institutions are bracing for a 20% or higher increase in credit card losses over near to medium term.
US credit cards could be the catalyst for the next seizing up of the global credit markets. We are in a heightened state of alert to monitor a potential domino effect, since credit card delinquencies will likely rise as consumers, who have until now used home-equity lines of credit to pay off their cards, start ratcheting up higher credit card debt.
It was easy for consumers to tap the escalating values of their homes to keep borrowing, when housing prices were rising. Over-leveraged consumers may have trouble keeping up with payments, with the home-equity spigot turned off.
The doomsday scenario would play out something like this: Credit card debt is sliced, diced and sold off as packages of securities, just like collateralized debt obligations (CDO’s) and asset-backed securities. Rising delinquencies would hurt not only the banks involved but the securities backed by the credit card receivables. Those securities would decline in value as consumers defaulted, leading to bank losses as well as portfolio losses in hedge funds, institutions, and pensions that own the securities. It could wreak havoc on the US economy as much as the subprime crisis has done, if the damage is widespread.
There are key differences between the subprime market and the problems brewing with credit cards. The first is that while rising mortgage delinquencies were apparent for months before the subprime market blew up, credit card delinquencies are actually coming off unusually low levels.
US credit cards are well understood, with a long history of securitization, so it may not be the next bubble to burst. The securitization of the subprime sector, by comparison, became very blurry and people did not focus on what it actually meant.
Credit agencies that monitor credit cards in the asset-backed securities market share that confidence, with the performance in the core consumer sectors are expected to deteriorate, and could cause substantial downgrades. Furthermore, credit card debt is different from subprime debt in another way, since unlike mortgages, their debt is unsecured, so a default means a total loss. Missed payments may be at historic lows, they are showing signs of an up tick. The quarterly delinquency rate of the major financial institution has risen by an average of 13% in the third quarter, compared with a 2% drop in the previous quarter.
It appears that consumers, and the people who market financial services to them, may have not learned their lesson, as various television advertisements still aggressively tout no-questions-asked credit. Some European countries are calling for tighter standards, and discussing the ethical questions about consumer lending. The US should be watching, if there is an international precedent.
The U. K. British consumers are just as overstretched as Americans, but since the real estate values rose faster and fell earlier, they are about 18 months ahead in the credit cycle. Credit card delinquencies and charge-off rates in Britain, since the last quarter of 2005, have risen as much as 50%, forcing banks to take huge write-offs. It is a sign of the times that, according to one survey last month, 6% of British homeowners have been using their credit cards to pay their mortgages. That is suicidal, given that credit cards interest rates are more than double even the heftiest mortgages. Keep your fingers crossed that this is not a trend that crosses the Atlantic.
Long-term conclusions and current month expectations . . .
There is real trouble ahead as asset-dependent US consumers struggle to negotiate a post-bubble adjustment that is bound to stifle their insatiable zest to consume, and we do not believe the widely popular notion that the rest of the world will manage to continue unaffected no matter what happens in the US.
The bursting of the dot-com bubble seven years ago caused a mild recession but, more importantly, a collapse in business capital spending, both in the US and abroad. The subprime mortgage fiasco is only the proverbial “tip” of a much larger “iceberg.”
The consumer, which has indulged in the greatest spending binge in modern history, now accounts for 72% of the US Gross Domestic Product (GDP), which is five times the share of capital spending seven years ago. This is reason enough to suspect that the impact of a sharp contraction in consumer spending could be considerably more pronounced than the damage wrought by the end of the capital-investment boom at the turn of the century.
It is no contest which of the two forces sparked consumer demand, wealth or income, and provided the impetus for the mighty surge in John Q. Public spending. Income has taken a back seat: In the past 69 months, private-sector compensation has ended up a mere 17%, after inflation, which falls nearly $480 billion short of the 28% average increase of the past four business cycle expansions.
The appreciation in housing assets has more than taken up the slack, but this source of wealth is dramatically running dry with the bursting of the housing bubble. There is simply no way that non-existent saving and overly indebted American consumers can continue to spend with wild abandonment. Consumer capitulation will result in a higher and rising recessions risk, with a US economy so lopsidedly dependent on such spending.
Even a moderate slump in growth could prove strictly bad news for the earnings optimism, still embedded in global equity markets. The recent actions within the US markets strongly hints that such optimism is beginning to wear thin.
There is no mystery how the various markets got into such a bind, since central bankers opened the monetary floodgates, following the end of the equity bubble,.and liquidity poured into the global asset markets.
The world embraced a new culture of debt as well as leverage, aided and abetted by the explosion of the new financial instruments — especially what is now comprised of over $440 trillion of derivatives. Yield-hungry investors, fixated on the retirement imperatives of aging households, acted as if they had nothing to fear. Risk was not a concern in an err of open-ended monetary accommodation.
We plainly have doubts whether the Federal Reserve Chairman Ben Bernanke’s recent rate cuts can stem the current rout in the still overvalued credit markets. The Fed actions could be strategically flawed in failing to address the dilemma that continues to underpin asset-dependent economies.
Investors now appear to be programmed that the Fed’s actions assure a floor to any stock-market trouble. Recent polls of investors, both nonprofessional and professional, show the same expectation: higher stock prices. This historically is a dangerous time to be fully invested, and we are projecting the DOW to continue its broad rotation lower, with an anticipated trading range for the month between 12,700 and 13,975.
The major problem in housing is continuing, with foreclosures being up more than 100% from one year ago. Refinancing activity is rising, with the largest number of adjustable-rate mortgages due to be reset in March 2008, and a majority of them are tided to London Inter Bank rates (LIBOR), which have been rising, not declining. The US treasuries are expected to be price-supported this month, as the US economy continues to slow, with a anticipated peak-in-yield for the US 10-year note at 4.45%.
The US dollar could continue to decline, with expected lower interest rates and subsequently lower US treasury yields, making the US dollar less attractive. We are anticipating the US dollar to have a euro fx equivalent trading range for the month between $1.42 and $1.46. The technical prospective of the US dollar shows that there could be a strong advance, if it can effectively trade above the euro fx equivalent of $1.40. Only time will tell if US policymakers will start to support the US dollar in the hopes of rebuilding global confidence in the currency.
PRIVATE ACCOUNT WEALTH MANAGEMENT SERVICES:
We, at Wavetech Enterprises, LLC, offer our Private Account Wealth Management Services, which is a conservative, flexible, and actively managed investment strategy. Investor’s ordinary and/or tax-deferred funds remain securely in their name at major financial institutions and/or brokerage firms, while we manage their funds Online.
Our wealth management services outperforms others, since we use a unique and proprietary culmination of the following: fundamental analysis of relative valuations, technical analysis of the changing market conditions, evaluations of various economic business cycles, diagnosing sector market psychology, and strategic investment selections with appropriate allocations.
These services are ideal for individuals, trusts, foundations and privately held corporations that have large stock, bond and/or real estate holdings and are seeking an active management service to generate a long-term average rate of return on investment between 15% to 20% per year (after fees) through either a rising or declining stock, bond or real estate market.
Please call the number provided below or e-mail us and we would be happy to provide further clarification, if there are any questions regarding the information discussed within this newsletter or our unique wealth management services.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, Klaus-Peter Muller, CEO of Commerzbank in Germany, Capital One earnings report, Michael Darda with MKM Partners, Washington Mutual earnings report, Citigroup earnings report, J.P. Morgan Chase earnings report, Bank of American earnings report, Merrill Lynch earnings report, Kevin Duignan, Managing Director at Fitch, Meredith Whitney, Banking Analyst at CIBC, Christopher Marshall, CFO of Fifth Third Bancorp, Michael Mayo, Banking Analyst at Deutsche Bank, Dennis Moroney, Analyst at TowerGroup, Gary Crittenden, CFO of Citigroup, Steven Roach, Chairman of Morgan Stanley Asia, Stephen Mack with Mack Investment Securities, Doug Kass with Seabreeze Partners, David Rosenberg, Economist with Merrill Lynch, Robert Dye and Stuart Hoffman with PNC.
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