WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 04-08-05:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Using our technical wave pattern analysis, our March 9th newsletter forecasted that the DOW would begin to rotate lower, with a trading range during the month between 10,400 and 10,984. This projection proved to be very accurate, with an actual trading range during the course of the month between 10,396 and 10,985. The DOW held the mentioned key support level of 10,385; however, once breached, will confirm a major top for this 2-1/2 year counter trend rally within all of the major stock indices. We further forecasted that the US dollar would remain within a large trading range between euro fx equivalent of $1.29 and $1.35, as it determines if the 3-year decline is nearing an end or just taking a breather. The large anticipated trading range for the US dollar was accurate, even to our amazement, with an actual trading range for the month between euro fx equivalent of $1.2881 and $1.3510. We are still trying to determine if the US dollar can mount a significant rally or if these large trading ranges over the past few months are simply a means of removing the oversold condition from such a large decline of nearly 30% in just three short years.
The US treasuries were forecasted to have established a significant bottom in price and peak in yield for the longer dated paper (10-year through 30-year maturities, with the long bond price at: 110-06) on the day of the newsletters release, March 9th. Initially, the projected price level held, but later made one final move lower to 109-06 before recovering toward the end of the month to close well above our forecasted price level at 111-26. There was one economic event, Producer Price Index (PPI), that came in above expectation that forced the US treasuries lower in price after its release, but they proceeded to recover during the remainder of the trading session day. This proved even further that forecasted inflation levels have already been factored into the marketplace, and that future concerns would now be shifting from inflation to either stagflation or the return of deflation.
Looking forward . . .
The popular press publications, like The Wall Street Journal, continue to boast that this heavy borrowing on the part of households is not a big problem because net worth’s reached a record high of $4.85 trillion in 2004. But what is not disclosed in these various press releases is that the total of household liabilities, relative to the market value of their total asset holdings, also hit a record high in 2004. In other words, households are more leveraged now than at anytime since 1952, when the data started being accumulated. Household debt is growing faster than the value of household assets. At least during the stock market bubble years, the market value of household assets was growing faster than household debt. After the stock market burst in March 2000 for the Nasdaq and April 2000 for the S&P 500, and the market value of household assets plunged, the ratio of liabilities to assets surged and has kept going up, even though the value of one household asset, homes, has also surged.
There are two ways households can increase their net worth. There is the old-fashioned way of spending less than what a person earns, called savings. And then there is the new era way, called inflated asset-price gains. Which one is dominating the increases in household net worth these days? You guessed it: inflated asset-price gains. This concept of saving is households’ “investment” in SUVs and Mansions, less their depreciation plus households’ net acquisition of financial assets (stock, bonds and deposits), minus households’ total borrowing. In 2004, household net investment accounted for only 8.6% of households’ net $3.85 trillion increase in net worth. This lack of prudent diversification away from an inflated real estate holdings, with the continued accumulation of debt and the non-existence of savings, are major concerns for the US economy going forward. These huge imbalances will force consumers to dramatically reduce their level of spending to service their outrageous levels of household debt, which will affect the inflated real estate values and cause the US economy to slow significantly.
Long-term conclusions and current month expectations . . .
The Federal Reserve has pushed it target short-term Fed funds rate from 1% last June 2004 to 2.75%, with pundits believing that there are more rate hikes to follow. Subtract inflation, using the Fed’s favorite inflation measure, the consumption deflator excluding food and energy, and a real rate of interest of just 0.9% exist. By using the past 12 months’ change in the Consumer Price Index (CPI) for an inflation measure, derives a real rate of negative 0.5%. In other words lenders are paying borrowers to take the money away, which the Fed does not like at all. Therefore, short-term rate could continue to head higher as long-term rate trend lower.
The consensus view of the pundits is that long rates will follow short rate upward, but we do not share this majority view. We remain bullish on the longer dated paper, 10-year notes through 30-year bonds, as they should continue to rally in price and decline in yield. The 10-year US treasury yield, which was at 4.9% when the Fed started raising the Fed Funds rate in June of 2004, is now at 4.43%. Even Fed Chairman Alan Greenspan calls this decline in long-rates occurrence a conundrum.
The simply fact remains that we are in a deflating world of excess workers and machines in most industries. So, despite the recent robust US economy, inflation — except for petroleum — is quite low. Leaping oil prices are far from generating runaway inflation as most have feared, but are actually a tax that is knocking a full percentage point off of Gross Domestic Product (GDP). Growth in other major countries remains weak; therefore, foreign banks are happy to recycle their trade surplus dollars into US bonds to keep their exports moving along.
We feel that the DOW could continued trending lower, providing it can produce an end-of-the-day close below the key support level of 10,385. We are forecasting a DOW trading range for the month between 10,200 and 10,565 with the expectation of a close below the mentioned key support level. The next major basing level for the DOW is significantly lower, at 9,800, and could cause an acceleration in the downward stock market decline. The fundamental catalyst for such a decline could be derived from continued poor employment numbers, like the April 1st 2005 non-farm payroll number, showing only 110,000 new jobs, compared to the expectations of more than 260,000 new workers. Another catalyst could be the US economy starting to significantly slow, which could be caused by a number of different events from continued high crude oil prices, growing federal deficit, rising trade imbalances or even some unforeseen catastrophic occurrence. We encourage investors to seek out a management service that uses investment vehicles and strategies that can generate a positive rate of return through these changing economic business cycles as outlined below.
SUGGESTED INVESTMENT ALLOCATIONS:
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 and exchange traded funds (ETF’s) offered through our Private Account Wealth Management Services. The minimum investment criteria is determined after reviewing the investor’s current assets and fund allocations. This services is ideal for individuals, trusts, foundations and privately held corporations who have liquidated large stock, bond and/or real estate holdings and are seeking an active management service to generate a positive rate of return between 12% to 35% 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
Acknowledgements: Federal Data.
Note: These newsletters have no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. These newsletters are issued for informational purposes and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. These newsletters are based on information obtained from sources believed to be reliable, but are not guaranteed to be accurate, nor are they a complete statement or summary of the securities, markets or developments referred to in the various newsletters. Recipients should not regard these newsletters as a substitute for the exercise of their own judgment. Any options or opinions expressed in these newsletters are subject to change without any notice and the Wavetech Enterprises, LLC newsletters are not under any obligation to update or keep current the information contained within. Past performance is not necessarily indicative of future results. Wavetech Enterprises, LLC and its newsletters accept no liability for any loss or damage of any kind arising out of the use of any or all parts of these newsletters.