WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 04- 13- 09:
By: John T. Moir
Position overview . . .
Our recent newsletter, dated March 18th, stated that normally savings are a buffer to support consumption during an economic slowdown, but now consumer spending has been hit by the slowing economy plus the negative-wealth effects associated with falling home values and stock prices as well as the need to replenish savings. Saving rates should return to at least the long-term average of 7%, but the return to forced savings will not pull the economy out of recession. We anticipated that the DOW was entering into a period of consolidation before resuming the primary bearish downtrend, and projected a trading range for the month between 6,400 and 8,800. The actual result saw the DOW enter a period of consolidation, with a trading range between 6,469 and 7,931 — a fairly accurate forecast.
We stated that the US treasuries could be price-supported, at least for the near-term, due to the decisive action by the Federal Open Market Committee (FOMC) to purchase various US treasuries and agency securities to push mortgage rate down. We anticipated the US 10-year Note to have a base-yield for the month of 3.47%. The actual result saw the US treasuries rally in price, inversely driving yield downward, with a US 10-year Note yield range for the month between 2.89% and 3.46 — a very accurate forecast.
The US dollar was anticipated to decline in value, as lower US treasury yields would make the currency less attractive, at least for the near-term, and a projected euro fx equivalent trading range for the month between $1.25 and $1.35. The actual result saw the US dollar decline in value, with a euro fx equivalent trading range between $1.2544 and $1.3744 — a fairly accurate forecast.
Looking forward . . .
Deflation still remains a credible threat, since total consumer price index (CPI) rose by 0.2%, on a year-over-year basis, while the core CPI rose by 1.8% in February. The core CPI excludes the volatile food and energy. The headline CPI increased by 0.4% in February, the largest monthly increase since June 2008, while the core CPI turned in its second consecutive 0.2% monthly increase. Higher retail gasoline prices helped push the headline index higher, but they are not solely to blame for the slightly higher-than-anticipated increase, as expectations were for a 0.3% increase. On a year-over-year basis, the headline CPI rose by 0.2% relative to February 2008.
The February CPI data showed an 9.3% increase in retail gasoline prices, between January and February, yet retail gasoline prices remain 35% below their year-ago levels. Reported increases in prices for apparel and new motor vehicles contributed to the jump in the headline index, with apparel prices rising by 1.3% during February, an increase at odds with reports of widespread discounting by retailers desperate to clear inventories. Food prices declined by 0.1% during the month, the first such decline since April 2006. Prices of new vehicles are reported to have risen by 0.8%, more than offsetting the reported 1.7% decline in prices for used cares and trucks, even as sales data showed further declines in sales during February. There is little evidence of inflations pressure in February’s data, aside from these items.
The reported increase in consumer prices on both the headline and core levels in February may lead one to discount concerns over deflation, but closer look suggest it is too soon to cast these concerns aside, with the labor market continuing to erode at a rapid rate, aggregate earnings will remain under downward pressure, which would be a key element of a period of deflation. For these reasons, while perhaps not the most likely outcome, deflation still poses a credible threat to the US economy.
The Bureau of Labor Statistics (BLS) recently confirmed the erosion in employment, as payrolls shrank by 663,000 jobs — and the total further swelled when the 86,000 jobs missed in the initial count for January and February. Moreover, the 114,000 additions conjured up out of the thin air by the BLS with the aid of the magical birth/death model, mildly supported the already weak jobs report.
The unemployment rate shot up to 8.5%, from 8.1% in February, the highest in more than a quarter of a century. Furthermore, if you include folks working part time, because they can not find full-time jobs, along with those miserable, discouraged souls who gave up even looking for a new position, the percentage mounts to a formidable 15.6%, a new high since the BLS began keeping track in 1994.
Over 5.1 million jobs have gone up in smoke, since the onset of recession in December 2007, with nearly two-thirds of them in the past five months alone. There are now more than 13 million workers involuntarily idled, while another nine million are part-time because they have either had their hours slashed or can not land a full-time spot.
The pink slips handed out last month were prominent throughout the broad sweep of commerce and industry. Construction continued to take some painful lumps, as 126,000 jobs were lost in the building trades, as nonresidential construction took a bigger hit than its residential counterpart. Manufacturing, despite all the rumors to the contrary on Wall Street, continues very much on the rocks, as evidenced by the 161,000 layoffs in the sector.
Even someone with a job might have reason for concern, as the slack labor market shows up in the reduction of the work week to an all-time low, and in the mild uptick in average hourly earnings. It seems likely that wage gains will erode further in the coming months.
The humongous stimulus injected into the US economy, and the Fed’s open spigot to provide a lift to the economy, will not prevent businesses from continuing to slash jobs in an effort to weather the still-harsh going expected ahead, possibly for several years to come.
Long-term conclusions and current month expectations . . .
The housing market collapse is still in the process of wreaking havoc on both the credit market and the overall US economy, compliments of the disseminating collateralized debt obligations (CDO) and asset backed securities (ABS).
Those structured monsters, were a big driver of the surge in financial outfits’ increasingly bloated profits. To produce ABS’s and CDO’s, Wall Street needed a lot of loan product, of which mortgages provided a bountiful source. It is unfortunately quite simple to generate ever-higher volumes of mortgages. All they needed to do was lend at higher loan-to-value ratios, with ultra-low teaser rates, to uncreditworthy borrowers, and do not bother to verify their income and assets.
The only catch is that the chances of such a mortgage being paid off are just about nil, a trifling caveat that bothered neither lenders nor pushers of the mortgages. The result of that cavalier approach, as we all have reason to believe, in the end has been anything but happy: Today, mortgages securitized by Wall Street represent 16% of all mortgages, but a staggering 62% of seriously delinquent mortgages.
As for home prices, the unbroken monthly decline since they peaked in July 2006 will continue to make buyers hesitant and sellers desperate, while the tidal wave of foreclosures will maintain the huge imbalance of supply over demand. In January, distressed sales accounted for a formidable 45% of all existing home sales and there will be millions more foreclosures over the next few years.
We expect housing prices to continue to decline, and warn that the huge overhang of unsold houses and the likelihood that sellers will come out of the woodwork at the first sign of a turn argues against a quick or vigorous rebound in prices. Also, the US economy is unlikely to provide a tailwind, since it will contract the rest of this year, stagnate next year and grow tepidly for some years after that period.
The first stage of the mortgage bust featured defaulting subprime loans and their risky kin, so-called Alt-A loans. The next phase, together with an additional messy mass of Alt-A loans, will be paced by defaulting option adjustable-rate mortgages, jumbo prime loans, prime loans and home-equity lines of credit.
We estimate the losses suffered by financial companies from mortgage loans, further swelled by nonresidential reckless lending, will run between $2.2 trillion and $3.7 trillion, and less than half of that fearsome total has been realized. We are likely only in the middle innings of an enormous wave of defaults, foreclosure and auctions.
Why does the US taxpayer have to guarantee every single transaction done on Wall Street? Since when is that our obligation? Don’t taxpayers have the right to try to prevent systemic risk, if they are on the hook to bail out systemic risk? Or, alternatively, reserve for and insure?
We keep hearing that Wall Street must be free to innovate, but we can not say we have seen much in the way of brilliant insight or creativity. Improper innovation has led to an enormous transfer of wealth from shareholders to senior executives, then from taxpayers to bankrupt firms, and their counter parties. The entire industry has been hijacked by a few rogue finance engineers.
Consider the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits of $100,000, or now $250,000, with banks paying a small insurance premium on every account. All of trillions of dollars in bailout expense plus the conversation about restricting innovation has led us to the unfortunate conclusion: We need Wall Street insurance — setup a reserved insurance fund. This means every transaction — merger and acquisition, initial public offerings, bond underwriting, stock trades, collateralized debt obligation, credit-default swap, every residential-mortgage-backed security, etc., has a 1% premium on it. This would add up to a few trillion dollars, and allow us the ability pay for the next debacle, when it comes along.
Too much technical damage from the massive decline has been inflicted to consider an advance as anything but a bear-market rally. Bargain hunters should note that a bottom is not a place — it is a process that can take years and requires an active money manger to generate profits in either a rising or declining stock, bond or real estate market, as offered below. We would anticipate the DOW to continue within a period of consolidation during the month, before resuming the primary bear market decline, with a projected trading range of between 7,400 and 9,600.
The US dollar is anticipated to decline in value during the course of the month, based on our technical prospective, at least for the near term, and are projecting a euro fx equivalent between $1.31 and $1.41. This short-term weakness in the US dollar could be partly the result of the lower less desirable yields offered by US treasuries. We are, therefore, forecasting that the US 10-year Note to be under price pressure during the month, with a base-yield of 2.85%
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 them Online.
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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.
We operate within the “Exemption from Registration” provision provided by the Code of Federal Regulations (CFR) Title 15, Chapter 2D, Subchapter 2D, Subchapter II, Section 80b-3. This provision allows investment firms to grow their business prior to registration, and the large expenses associated with such a process. Investors’ funds remain securely in their name at major brokerage firms and/or banks, while, we, at Wavetech Enterprises, LLC., manage the funds “Online.”
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John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, Whitney Tilson and Glenn Tongue with T2 Partners, Richard Moody with Mission Residential, Barry Ritholtz with Fusion IQ, NA-Market Letter by Ron Meisels and Olaf Sztaba, Liscio Report by Philippa Dunne and Doug Henwood, Sung Won Sohn with Smith School of Business at California State University.
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.