WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 08- 09- 08:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our recent newsletter, dated July 14th, forecasted that the major stock indices could continue to remain under pressure, and projected a DOW trading range for the month between 10,200 and 11,450. The actual result saw the DOW slightly supported, still working off the oversold condition from the large decline in June, producing a trading range for the month between 10,827 and 11,698. The stock market will routinely consolidate within a supported and elevated range before resuming its primary trend, which was the case this past month.
We stated that the uncertainty of Fannies and Freddie’s ability to guarantee the various mortgages could cause US treasuries to decline in price, inversely making yields rise, but in the near-term, felt that they would be price-supported, with a peak-yield for the month of 4.00%. The US treasuries, during the course of the month, were price-supported as a safe-heaven through a declining stock market, as well pressured with the uncertainties still existing with Fannie and Freddie, resulting in an actual yield-range of between 3.81% and 4.14%.
The US dollar was anticipated to resume the downtrend, after a period of consolidation, and we projected a euro fx equivalent trading range for the month between $1.56 and $1.60. We further stated that there was significant support for the US dollar at euro fx equivalent at $1.60, and it would be interesting to see how the currency would perform at that key level — hold and be price-supported or breaking-through and continue to decline even further. The actual result saw the US dollar decline as projected, with a euro fx equivalent trading range for the month between $1.5486 and $1.5955. This proved to be a very accurate forecast, and it was interesting to watch the US dollar decline very closely to, but not touching, the euro fx equivalent key level of $1.60 before reversing course and being price-supported.
Looking forward . . .
The Bureau of Labor Statistics (BLS) released the employment report this past Friday, further confirming the downbeat US economy has “recession” written all over it. The joblessness report shot up to 5.7% last month, from 5.5% in June, and payroll employment was down another 51,000 jobs, extending its losing streak to seven straight months.
Moreover, although over the past 12 months the BLS payrolls have declined by a net 535,000, during that stretch, our favorite piece of contemporary fiction — the BLS’s birth/death adjustment — added a net of 853,000 jobs. The official tally would have shown a payroll drop of 1,388,000 or roughly three times as great as the Bureau reported, if the mythical additions were not included.
All of the other government economic statistics that are derived from non-farm payrolls are also inaccurately biased upward, if the birth/death adjustment is inaccurately biasing upward the private non-farm employment as well. The so-called helpful adjustment is preventing the US economy from looking even more dire, misleading all of us.
The broadest measure of labor underutilization, which includes the officially unemployed, are those employed part-time, but desiring full-time employment, and those who are willing and able to work but have given up hope on employment, jumped 0.40% in July to a true unemployment level of 10.3% — the highest since September 2003.
This period still reflected the two major hits to the US economy of the dot-com bust and 9/11, but apart from 2003, the last time that all-inclusive measure of joblessness came close to these heights was in October 1994, when the economy was dampened by a spate of Fed tightening. This period saw the true unemployment rise to 11.8%, and we seem to have a good shot at even topping that previous peak.
The actual loss of jobs jumps to 169,000 versus the reported 51,000, when using real-time tax deposits from all US tax-payers to compute employment growth. The total jobs lost since the start of this year weighs in at 734,000 or 37% more than the BLS count, using this computation form of employment growth.
The BLS is seriously underestimating the harm high oil prices are inflicting on the US economy, but not to worry, since they will finally report that the US labor market was in trouble in 2008 sometime next year — what a relief.
Meanwhile, we are currently suffering the worst financial crisis since the Great Depression, which could affect hundreds of small banks loaded with real estate that will go bust and dozens of large regional and national banks that will also find themselves in deep problem.
There will likely be no major independent broker-dealers left in the US, which will either close their doors or merge, victims of excessive leverage and a badly flawed as well as a discredited business model.
The Federal Deposit Insurance Corporation (FDIC), after it completes picking up the pieces of IndyMac Bank, will sooner or later have to get a capital transfusion, because its insurance premiums would not cover the tab of rescuing all the troubled banks. The credit losses could ultimately reach at least $1 trillion and broadly affect all facets of the already-wounded credit industry.
The poor consumer is virtually shopped out and being hammered by falling home prices, falling equity prices, falling jobs and income levels as well as rising inflation concerns. This recession will be prolonged, and the rest of the world will not escape it, with a hard landing anticipated for the 12 major economies.
Long-term conclusions and current month expectations . . .
It hardly instills deep confidence in officials of the US government when, after nearly a year, its prime strategy is to react to the latest financial crisis with yet another last-minute solution. This is one of the longer-term implications of the bailout plan for Fannie and Freddie.
It is hard to understand why after nearly a year Hank Paulson (Head of the US Treasury) and Ben Bernanke (Chairman of the Federal Reserve) are still in the reactive mode, for all the near-term good that could be construed from the latest financial wildfire containment. It is most disturbing to hear the hurried pitch from unlimited backstop funds for Fannie and Freddie, given all the resources at their disposal and all the warnings that are plain for everyone to see.
There is a scenario building where the write-down contagion spreads upward, within the quality spectrum, which in the case of mortgages, involves Alt-A’s, near-prime as well as prime, and the other categories, such as credit cards, auto loans, and corporate debt, are all threatened by the reactionary mode of US government.
The economic dangers that at least $1 trillion in banking losses would produce cannot be fully measured, but what can be assumed, with a fair degree of certainty, is that the deleveraging process that such a credit-creation contraction would generate could affect an already fragile global economic and financial situation, if not tip it into a depression.
Banks will continue to frantically reduce their exposure to real estate, as long as values continue to decline. This is why it seems irrational to anticipate a bottom in financial’s before the bottom in housing prices are in place.
Spreads on mortgage bonds are near where they were before the Bear Stearns collapse, corporate-bond yields have followed to a significant degree, and bank borrowing from the Federal Reserve discount window remains quite high. The US treasuries will likely remain a price-supported safe-heaven for investors this month, at least for the near-term, with a projected peak-yield for the US 10-year Note at 4.05%.
Companies have aggressively trimmed work hours to limit the amount of employee layoffs, but strategy has run its course, with the workweek shrinking to a record low of 33.6 hours in July. Businesses are going to be forced to step up their layoffs to protect their margins. We could see monthly payrolls slashed by 200,000 before the fourth quarter, and place additional pressure on the stock market going forward. The DOW, during the course of this month, is projected to have a trading range between 10,850 to 11,775, as the major stock indices remain within a period of consolidation, before resuming the primary downward trend.
Households, not just banks, must also de-leverage, reducing the ratio of household debt to income from a recent 140% to about 100%. All this means paying down or walking away from debt — as much as $2 trillion worth of obligations will have to be wiped off the books before we can embark on the next economic expansion and bull market.
The human nature of the market is to hope for the best, and many investors would still rather fail conventionally — clinging to a loss suffered within the market — than succeeding unconventionally, like with the unique Private Account Wealth Management Services, outlined in further detail below. Investors have a pervasive reluctance to stray from the pack to be criticized or bet against a sector.
The still-optimistic bent may also explain the violent flip flopping of indices this past week, itself a sign that buyers lack conviction. The biggest fear with investors is still not losing money, but actually missing a rally. In fact, the stock market may not hit a true bottom until all of the various pundits’ stock market calls of declaring-a-bottom have completely dried up.
The US dollar has seen renewed strength recently, but could be contributed to an un-winding of various currency spreads, resulting in a sharp short-term rally. We would estimate that the rally has virtually run its course, and are looking for the US dollar to resume the primary downward trend, with an anticipated euro fx equivalent trading range for the month between $1.50 and $1.56. There still remains key support for the US dollar at euro fx equivalent of $1.60, which we could retested, once again, in the near future, as the various uncertainties within the US and global economies continue to unfold.
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John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, Nouriel Roubini, Professor of Economies at NYU Stern School of Business, Vinny Catalano with Blue Marble Research, MacroMavens by Stephanie Pomboy, Paul Kasriel with Northern Trust, Chuck Biderman with Trim Tabs, David Rosenberg, Economist for Merrill Lynch, Barry Ritholtz,CEO and Director of Equity-Research for Fusion 1Q.
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.