WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 04- 11- 08:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our recent newsletter, dated March 10th, stated that the proceeds from the sale of leadership stocks are not yet being reinvested into the broader market, but simply used to pay down debt. We also expected international stocks to be the next shoe to drop, creating more proceeds with which to pay off debt and move back into safer domestic heavens. The DOW was projected to continue its bear market decline, with a trading range for the month between 10,880 and 12,350. We anticipated a larger range, as the period of consolidation after the large decline that occurred in January 2008, was now completed and would be resuming the downtrend. Actually, the period of consolidation continued longer than expected, producing a narrower as well as elevated trading range for the month, between DOW 11,731 and 12,622.
We expected the Federal Reserve to cut the prevailing fed-funds rate to 1.75% by the end of this year, from the current 3.00%, but even that aggressively of a response would not be any quick cure, since economic growth cannot resume until the banking system and the credit markets begin to function more normally. The Federal Reserve did cut the fed-funds rate part-way, to 2.25%, and ushered in a one-day positive response from the markets. The US treasuries were projected to be price-supported, at least for the near-term, with the anticipation of further interest rate cuts by the Federal Reserve, resulting in a US 10-year Note peak-yield for the month of 3.65%. This proved to be very accurate, as the price of the US 10-year Note was supported, inversely causing yields to decline, with an actual yield range for the month between 3.31% and 3.70%.
We stated that the US dollar would remain under pressure and could motivate foreigners to eventually start reducing their US dollar holdings, as the decline in interest rates makes it less attractive for them to hold. We anticipated the US dollar to have a euro fx equivalent trading range for the month between $1.51 and $1.57. The actual result saw the US dollar continue its decline, as the US economy slowed even further and the Federal Reserve cut the fed-funds rate once again, with a euro fx equivalent trading range for the month between $1.5155 and $1.5835.
Looking forward . . .
There was another dismal report released this past Friday, by the Bureau of Labor Statistics, showing that payrolls shrank last month by 80,000, making it three months in a row of minus growth. The private sector lost 98,000 slots, increasing the three-month total to a hefty 296,000. The overall figure would have been more than 100,000, if local and state governments did not post an addition of 18,000 jobs.
The biggest losers continue to be construction and manufacturing, which shed 51,000 and 48,000 jobs, respectively. Construction has lost a formidable 356,000 jobs over the past year, with residential and nonresidential building both contracting. Overbuilding in the nonresidential sector has prompted builders to cut back as well as remove jobs.
The jobs at retailing establishments were down by more than 12,000 spots, and temporary help, which is often cited as a guide to future employment, lost 21,600 positions. Just about the only categories that bucked the downtrend trend were health care and restaurants. The job growth in restaurants, however, may be an illusion, since over the past four months eateries and bars have shown a gain of 58,100 jobs, but thanks to the infamous birth/death mythical measure, that figure has been inflated to 85,000. This inflated figure would only make sense if the economy were still growing briskly, which is not the case.
The unemployment rate last month took a big leap upward to 5.1%, from the 4.8% in February.
There will likely be more depressing job reports in the months ahead, with the private-sector jobs losses topping the 100,000 a month level, real wages declining and the plunge in house prices destroying home equity at a ferocious annual rate of over $2.5 trillion.
THE AFFECTS OF THE DECLINING JOB MARKET:
The problems in housing, Wall Street and the auto sector hint at widespread pain as well as a deeper downturn ahead, even if some people’s jobs are safe.
Many individuals who think their jobs are safe, may not be spared the pain resulting from the weak labor market. The debate over whether there is a recession is pretty much over, with the loss of nearly a quarter-million jobs so far this year and a jump in the unemployment rate. There is a recession, with the questions now being how deep, how long, and how much worse can economic conditions deteriorate.
There are a number of conditions that a deteriorating job market could lead to an even worse recession than many are predicting.
First of all, a weak labor market could lead to smaller wage increases for workers in all types of industries, as employers get more conservative. A recent survey found that 6% of US employers are already trimming their compensation budgets and another 10% are considering further cuts. However, the real problem for workers is that slim salary increases may not keep up with inflation, especially with food and energy prices soaring.
Average hourly wages, from November through February, have fallen compared to a year earlier, when adjusted for inflation. The modest gain in wages reported for March will likely be wiped out by price gains when the Consumer Price Index is reported later this month.
Inflation pressures could intensify further if the Federal Reserve continues to slash rates in an effort to spur the economy, which has also been one of the factors behind the weak US dollar.
A weaker US dollar means higher prices of imported goods, especially commodities like crude oil. The record high for gasoline and the record lows for the US dollar is not a coincidence. It is difficult for the US dollar to make any recovery if the Fed keeps cutting the prevailing fed funds rate even further.
It now appears that the recession started late last year, but the labor market was the one bright spot for much of 2007. Now, a rising unemployment rate has the potential to further dent consumer confidence and put a crimp in spending.
People had the sense they could continue to spend and count on improving income, as long as the unemployment rate was low, which as all dramatically changed since the summer of 2007.
An even bigger fear is that the most troubled spots in the US economy — housing, Wall Street and the auto sector — will suffer even more.
The housing market has already taken a major hit, and the plunge in home values — the worst since the Great Depression — happened even with the labor market being relatively healthy last year.
Normally, home sales and prices do not plunge unless there is a weakness in the job market, which now there is one — another big concern for the already battered real estate market.
Some homeowners who lose their jobs may not be able to afford their mortgage payments because of a loss of income, which could force more people to sell at distressed prices, or have their homes go into foreclosure, if they cannot find a buyer.
This could hurt all consumers, even if they have a safe job and their homes are fully paid off, since it may mean that their house will now be worth less than previously through more desirable economic conditions.
The housing problems triggered a meltdown on Wall Street last year, with the aftershocks of which are still being felt. Big problems occurred for securities backed by those riskier home loans, when mortgage defaults and delinquencies on subprime mortgages started to rise.
This could affect safer loans backed by government-sponsored mortgage finance firms of Fannie Mae and Freddie Mac, if more people who have conventional home loans find themselves out of work and have difficulty paying their mortgages.
A rise in defaults of mortgages made to people with good credit, Fannie Mae’s and Freddie Mac’s bread and butter, would put more strain on their already stretched capital reserves.
They might need their own government-sponsored rescue, in a worst case scenario. Subprime loans went bad first, but a lot of the prime loans will go bad as well. Fannie Mae and Freddie Mac will likely need some form of help before this is over.
Moreover, Wall Street is awash in securities backed by other types of consumer debt, including car loans and credit card balances. There is a strong possibility of more unpleasant surprises ahead in the credit markets, if rising unemployment causes higher delinquencies with those types of loans. We will likely see another investment bank get itself into trouble in the near future.
The auto industry was battered by high gas prices last year, with sales falling 2.5% in the United States. This year started out even worse, with first quarter sales down 8% compared to a year ago, and the weak economy is starting to hurt overseas automakers, which also saw US sales fall in the same period.
Automobile buyer traffic is sharply lower across the industry, and floor traffic at dealerships has plunged nearly 30% in the second-half of March — the largest drop since the early 1990’s.
This trend is likely to continue, if more people find themselves out of work. This could spell trouble for employees of leading Asian automakers, which are now making about half the cars and trucks they sell in the US at North American plants.
Many of these manufacturers, so far, have avoided the temporary shutdowns and closings common at US automakers, but weak demand could lead to job cuts and reduced hours at major Asian automakers as well.
This could be bad news for many companies that depend upon the auto industry, from parts makers to dealerships and even to media companies that depend on advertising from various car companies.
Simply put, fewer auto sales could lead to an even deeper recession.
Long-term conclusions and current month expectations . . .
We realize that no profit-motivated banker would lend against deflating collateral, but that is what the Fed is doing so itself. The Fed is allowing banks to pledge dubious mortgage “assets” at its Term Auction Facility (TAF), now it’s the Term Securities Lending Facility (TSLF), is essentially the Fed’s way of lending against rapidly deflating assets.
Give us your tired and your poor-quality paper — the Federal Reserve Chairman, Ben Bernanke, now beckons to the financial markets — and we will take it onto the balance sheet of the central bank, where the risk effectively is borne by the US taxpayer.
The leveraged losses inflicted on banks, broker-dealers, hedge funds and government-sponsored outfits by the cruel credit crunch has risen to a cool $460 billion, and that is after loan-loss provisions. About half of those losses are on residential mortgages and perhaps 15% to 20% from commercial mortgages. US leveraged institutions have written off less than half of their projected losses, even though progress has been made in the residential-mortgage area.
The $460 billion that is expected to go down the drain is only part of the total credit losses, which is anticipated will reach a tidy $1.2 trillion. However, the leveraged losses are especially critical, as they cause a significant tightening of credit, as institutions curb their lending to conserve shrinking capital reserves.
This ominous sum of $460 billion about equals the net worth of the major institutions. The Fed’s recent actions in offering to lend against dodgy assets, is the fond hope that these assets will have some collateral value.
The whole system is tottering on the edge, as the Fed is now becoming the owner of last resort of dodgy subprime assets, which is downright scary. The banks and leveraged asset-backed securities are not the problem, but it is simply a economic bubble financed by ridiculously loose monetary policy, which is beginning to unravel and will put additional pressure on the stock market. The DOW appears to have completed a three-month period of consolidation and is resuming the primary downtrend, with a projected trading range for the month between 11,525 and 12,750.
There is now a sequel brewing for the collateralized debt obligations (CDO’s) — those now-toxic investment vehicles composed of sliced and diced subprime mortgage securities, that garnered triple-A credit ratings only to be exposed as garbage. Some banks are looking to revive collateralized-fund obligations-structured products that are backed by pools of hedge funds or private-equity funds, instead of mortgages and other debt securities, which are even more complex and illiquid than CDO’s.
These new instruments will simply make things worse, not better, causing foreigners to loose even more confidence in the US dollar and motivate the Federal Reserve to keep cutting the prevailing fed-funds rate, currently at 2.25%. The US dollar is expected to remain under pressure, with a projected euro fx equivalent trading range for the month between $1.54 and $1.60. The Federal Reserve’s response of cutting rates will simply help create the next asset bubble in commodities and precious metals, which have been purchased since there is no global safe heaven currency of choice, with the declining US dollar. The Federal Reserve may eventually be successful in re-igniting growth within the US economy, but at what price to overall long-term growth, the rate of inflation and global economic stability.
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 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.
Call the number provided below or e-mail us today and we would be happy to provide further clarification, if there are any questions regarding the information discussed within this newsletter or our unique Private Account Wealth management Services.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, Lakshman Achuthan, Managing Director of the Economic Cycle Research Institute, Mercer Human Resources Consulting, Bernard Baumohl, Executive Director of The Economic Outlook Group (Economic Research firm), Dean Baker, Co-Director of the Center for Economic and Policy Research, CNW Automotive Market Research, MacroMavens by Stephanie Pompoy, Andrew Tilton, Economist with Goldman Sachs, Albert Edwards with Societe Generale, Dow Jones Newswires.
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