Private Account Wealth Management Services
Newsletter Issued 04-16-07:
By: John T. Moir
Chief Editor: Clare Mc Kendrick

Position overview . . .

Our recent newsletter, dated March 16th, forecasted that the DOW was in the process of resuming the a major decline, with an anticipated trading range for the month between 11,600 and 12,350. The actual result was a large elevated trading range, between DOW 11,939 and 12,511. There are pundits that believe that as the US economy slows, the action of the Fed cutting interest rates will support the stock market and create a renewed advance. This theory has supported the stock market recently, even as the US economy continues to slow.

The US treasuries were projected to remain price-supported, with a peak yield on the 10-year Note at 4.60%, until further economic data could confirm one way or another, if inflation was continuing to grow. We further stated that stagflation was a near-term concern, which still appears to be the case. The US treasury 10-year Note dropped in price and inversely saw its yield rise, as recently released economic data increased concerns of growing inflation, with the yield rising to 4.66%, during the course of the month. Rising crude oil prices in conjunction with increased wages have caused US treasuries yields to ascend during the month.

The US dollar was anticipated to remain within a narrow trading range, between euro fx equivalent of $1.290 and $1.325, which has persisted for the past several months. The actual result saw the US dollar declining further, with the trading range for the month between euro fx equivalent of $1.3081 and $1.3441. The US dollar may have resumed a long-term decline in value, which could be confirmed if it remains at these weak critical levels for a sustained period of time.

Looking forward . . .

The Bureau of Labor Statistics released the March employment situation, showing 180,000 new jobs were added, some 50,000 more than anticipated by the consensus. The unemployment rate dropped in March to 4.4%, from 4.5%, the lowest it has been in five months. The average workweek weighed in with an impressive gain of 0.6%.

This was a “good” employment report, but not as strong as most pundits perceived. For openers, the poor job additions in February were partially the result of undesirable weather. March’s upside surprise got a compensatory weather adjustment lift.

The strong employment rise, however, was concentrated in relatively few sectors, with health care, bars and restaurants being the major sources of fresh hiring. These sectors are not typically high-paying jobs, resulting in a limited amount of additional consumer-driven spending. Retail did pick up a bit, but manufacturing continued to shed jobs.

Professional and business services, the heart of the post-industrial economy, lost jobs — its first decline since November 2004. The temp job employment situation made it two months in a row on the minus side, indicating not a lot of pent-up hiring demand for the coming months.

Household total additions was up an impressive 420,000, but only after an extraordinarily depressed February, which suffered a loss of 278,000 slots. That works out to a pretty feeble average over the past two months of 71,000, hardly suggestive of underlying strength for further job growth.


Defaults and delinquencies in subprime mortgages have always been higher than in prime mortgages. The real concern is if this subprime mortgage collapse can cause an overall credit crunch.

Rapid growth in subprime lending has accounted for much of the incremental home-purchase demand in recent years. Removing this segment will soften the already slowing demand. Weaker demand — plus excess inventory — could push home prices lower. Falling home prices would reduce the equity cushion for homeowners, refinancing activity would virtually stop, and banks would become more cautious. Then, the cycle repeats, with tighter lending standards and a lower level of housing activity. The housing contraction means fewer jobs, which could hurt the mortgage-loan performances, resulting in a credit crunch.

One recent concern is that subprime woes will afflict other types of debt, if they are mispriced for their risk. Other subprime forms of consumer debt — securitized credit-card or auto-loan receivables — went through their difficult and formative years long ago. Corporate debt, including high-yield debt, is even better understood.

A second concern — to which we are more sympathetic — relates directly to the housing market. Many home mortgages that were underwritten at the market’s peak, in the summer of 2005, are now coming due for payment reset. A quick and affordable refinance may be hard to come by, with house prices falling in some markets, and lending standards widely tightening. Borrowers are more likely to default, with monthly mortgage payments rising and real-estate equity shrinking, putting more homes on an already glutted market and further downward pressure on home prices.

We first publicly released our cautionary housing valuation research, at the peak of the housing boom, in our August 2005 Newsletter, when euphoria ran rampant. A large majority of Americans said it was a “good time to buy” and an equally large majority of builders considered sales prospects to be “good.” No one can dispute how wrong those sentiments were, with the benefit of hindsight.


American’s total debt load has climbed to a towering $44.5 trillion, or 331% of Gross Domestic Product (GDP), and poses considerable secular risks. This ratio is about twice the level of 30 years ago. The last time it was anywhere near as high as it is now was during the Great Depression, when it climbed above 250%.

This is America’s debt bomb, which also includes mortgages in the provided tally. Some pundits argue that mortgages are well secured by a piece of real estate that nearly always rises in value. It would be fair to say that the current situation in Mortgage Land casts some doubt on those notions.

Some level of debt is indeed good, but the current levels simply create an “illusion of wealth” and can sap America’s long-term economic strength. It has tied the hands of individuals and companies with historically high debt service levels, even when interest rates are at record-low levels.

The current debt bomb will eventually affect the stock market, creating large disruptions and corrections. We may live in a brave world awash in liquidity, but there are also brave new risks as well.

Long-term conclusions and current month expectations . . .

Investors are likely to find the apparent strength of the job market as a means of discouraging any thought the Fed might have considered cutting rates to shore up the economy. We suspect that — to judge by the abundant evidence that the economy is slowing and will continue to do so as the collapse in housing plays out and the consumer’s urge and ability to spend fade — there will be more than one disappointing employment report in the months to come. Hence, the US treasuries are likely to find yield support this month, with the 10-year Note at 4.75%, as prices begin to rise and yields inversely decline.

The US trade deficit declined to $58.4 billion in February — from January’s $58.9 — was boosted as a sign that the US is getting its global fiscal house in order. A sizable chunk, however, of what was in any case a modest decline, can be credited to the drop in the US bill for oil imports. Crude oil prices, unfortunately, have rebounded smartly since February.

Moreover, US imports from China shrank some because the Chinese closed a number of ports in February to celebrate their new year. Future months, in all likelihood, will surely take up the slack.

The currency markets were less than impressed by the trade numbers, with the weak US dollar weakening further, to a two-year low. The descent of the US dollar has been avidly encouraged by Congress and the administration as a means to spur exports, may be coming true.

A weak US dollar could be more than a little hurtful for the world’s leading debtor. It could act as a stimulant for inflation (by hiking import prices), and a depressant for the US economy — by forcing the Fed to raise interest rates to prevent an outright run on the US dollar — sparked by panicky foreign holders of US paper like various Government Notes and Bonds.

The failure to envision the evil that might occur from a plunging US dollar could be the single biggest flaw in the market’s persistently rosy view. The US dollar may find technical support this month, with a euro fx equivalent trading range between $1.33 and $1.36. This renewed buying of the US dollar could be purely a technical bounce from oversold levels, but we should have a clearer understanding in the next few months.

The stock market continues to remain within a large trading range, which could change very shortly with the upcoming release of first quarter corporate earnings. The US economy has substantially slowed, with corporate earnings being reported in the fourth quarter of 2006, averaging over 11.4%, to a expected first quarter 2007 level of under 3.4%. This will represent the first quarter in 3-1/2 years (14 reporting periods) that corporate earnings has fallen below the 10% level.

The recent advance in the major stock indices was in anticipation of these lower earnings report levels and the expectation that the Fed will cut interest rate sooner rather than later. The majority of the forthcoming earnings reports have already been factored into the marketplace, leading us to further conclude that we are close to rotating lower. We are forecasting the DOW to have a trading range for the month between 11,950 and 12,735, with prices peaking just prior to the majority of corporate earnings reports being released.


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 Wavetech Enterprises’ Private Account Wealth Management Services. The minimum investment criteria are determined after reviewing the investor’s current assets and fund 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.

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
E-mail: JOHNTMOIR@aol.com

Acknowledgements: Federal Data, DWS Scudder, National City Corporation, Ned Davis Research, Liscio Report by Philippa Dunne and Doug Henwood, CMC Markets.

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