WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 08-10-07:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our recent newsletter, dated July 10th, stated that the DOW was continuing its topping-in-price process and close to resuming either a correction or a major decline, with a projected trading range for the month between 12,700 and 13,675. The actual result produced a slightly elevated and narrower trading range, between DOW 13,199 and 14,015. The continued announcements of more merger and acquisitions (M & A’s) as well as stock buy-back’s, added to the froth premium within the stock market, resulting in an extended advance. Hedge funds and private equity firms have continued to artificially support the stock market, creating this stealth advance, but not for much longer.
The US dollar was forecasted to resume its decline, with a projected euro fx equivalent trading range for the month between $1.35 and $1.39. The deteriorating support for the US dollar caused it to move lower as anticipated, and produced a very accurate result, with the actual euro fx equivalent trading range during the month between $1.3572 and $1.3861.
The US treasuries were projected to remains within a large yield range for the month, as global investors continue to decide if they will purchase US treasuries in the coming months, with a forecasted 10-year Note yield range between 4.75% and 5.20%. This technical projection proved to be very accurate, as the 10-year Note actual yield range for the month was between 4.77% and 5.19%.
Looking forward . . .
We are seeing signs of contagion — the spread of damage from the five-year housing bubble and related financing. Subprime woes are causing hedge funds to lock-out investors, and are not allowing them to retrieve their investment within the contractually specified one to three-year lock-in period. There are investors flying to various locales to chase down their hedge fund investments that they are unable to extract.
We anticipate that there will be public evidence of counter party risk failure in derivatives, as some financial-sector players get re-rated, which was discussed in great detail within our previous month’s newsletter. Some of this paper is worth 50 cents on the dollar, and is carried at book value, not at market value. Many of these firms are insolvent, at market value.
We had a federal insurance program, in the past Savings and Loan crisis. This time, we have hedge funds and private-sector investors, not Savings and Loan. Bank exposure exists, of course, but it is not really deep enough to threaten the overall banking system. Banks will likely take losses as well and some will fail. The Fed will not have to act as lender of last resort, but will watch this process, which we expect will take several years to unfold and resolve. Meanwhile, we are going to see the re-rating of a large amounts of debt, in the trillions of dollars.
We would estimate that there are $10.4 trillion worth of mortgages outstanding in the US, and about $2.4 trillion is in the subprime and alternative exotica-related type mortgages. Therefore, it is possible that we could see between $300 to $400 billion in mortgage write-offs in the next two years, which will directly affect the balance sheets of banks, lenders, and the still-in-business mortgage brokerage firms.
The US economy is more leveraged now than ever. Aggregate debt is about 350% of the US overall Gross domestic Product (GDP). Non-financial related-debt is more than 200% of GDP, and any benefits of the very low interest rates of a few years ago are gone or are quickly fading.
Long-term conclusions and current month expectations . . .
The US government excludes food and energy from the nation’s “core” inflation statistics because of their alleged “short-term” volatility, but, since August 2004, crude oil has averaged well above $50 a barrel. Three years should be long enough to admit that high oil prices could persist and ought to be included in the Consumer Price Index (CPI). Grain prices have risen over the past year, but it remains hard for the US government to envision that higher food prices are not permanent. The Producer Price Index (PPI) shows the raw food component up 25% in April and 30%-plus in May. It is just a matter of time until they bleed over into prices at the supermarket, when these sort of increases occur.
The number of people who may lose their homes has hit a record high, with subprime borrowers leading the way; lenders estimate that 15 million more homes may end up being foreclosed — increasing supply as demand is falling. Interest rates and mortgage rates could be going much higher, in the long-term, if the mega-upward reversal in interest rate stays intact. This would put continued pressure on bond prices, resulting in higher yields and rising mortgage interest rates. That will likely keep downward pressure on the stock market as well. The PPI have already been surging over the past seven months, at nearly a 10% annualized rate.
The US treasury 10-year Note could prices decline and see yields rise, but may also become a safe-haven, as the stock market declines. We are expected the 10-year Note yield to remain below 4.90% this month, as US treasury prices are supported through a continued declining stock market, resulting in lower yields. Inflation pressures, as mentioned, still remain, but for the near term we could see yields decline as US treasury prices rise.
The stock market decline over the past three weeks has been propelled by the change in credit: Risk appetite for anything less than triple-A, has waned. There have been a number of sources that have supported the stock market, which are: Share buyback’s; Merger and Acquisitions; liquidity; reasonable valuations; private equity/ Leverage Buyouts (LBO’s); high corporate profits; consumer spending.
The two biggest drivers for the stock market have been share buyback’s and LBO”s, which are now coming to an end. What is occurring today is a full-blown re-pricing, as the liquidity spigot is slowly being turned off. Therefore, we are anticipating that the DOW will continue the downward trend that began in July, with a projected trading range for the months between 12,450 and 13,700.
Consumer spending actually peeked in the third quarter of 2005, with ample availability of credit, and has been declining ever since, as the amount of new borrowing — net new borrowing — has been going down. This is referring to all borrowings, whether it is with a credit card, a line of credit, a mortgage or personal lines. Clearly the consumer has lost their appetite for more debt, as interest rate have risen, as the housing market began to crumble, and as their sense of financial better-off-ness was put at risk.
The mushrooming growth of leveraged loans, some $545 billion globally in the first half of 2007 and up a notable 60% when compared to the 2006 totals, is very much reminiscent of the equivalent gain in price of the Internet and technology stocks in the last six months of 1999.
There are similarities between all of the attention paid to the online and tech stars as compared with the current hoopla over the new LBO masters of today. More than likely, the new goldilocks age will end as it did with its predecessor six year ago.
The currently overstretched, over leveraged financial system will likely see in five years the closure of at least one major bank, as many as half of the hedge funds and a substantial percentage of the private-equity funds now throwing their money and weight around, will ceased to exist. It is fair to say that our expectations have almost never been this dire, but the feeling we currently have is that of watching a very slow motion train wreck. It appears that the train wreck has picked up speed and suspect that nightmarish ride is far from over.
The US economy is gradually slowing, even though there was a stronger-than-expected second quarter GDP at 3.4%. This softening is even more noticeable within the employment report, released last Friday, that showed an addition of 92,000 new non-farm payroll jobs, compared with the pundits estimate of 135,000 new additions, and a higher unemployment rate of 4.6%, when the consensus was for 4.5%. The fed is going to be faced with an interesting dilemma, as the US economy slows. We could see the US dollar decline substantially, if they cut the prevailing fed funds rate from 5.25%, to try and encourage renewed economic growth. This would lead to lower US treasury prices and subsequently higher yields, which would continue to adversely affect the housing sector, M & A’s, LBO’s and share buyback’s — the areas that have supported the US economy over the past five years. We feel that the US dollar, at least near-term, could be supported, and are anticipated a euro fx equivalent trading range for the month between $1.35 and $1.39.
We would encourage investors to consider the investment allocations suggested below, especially through these changing economic conditions, since the unique and flexible management services mentioned can derive a long-term — above average — positive rate of return on investment, through either a rising or declining stock, bond or real estate market. The long-term performance summary is available for review within our web site.
SUGGESTED INVESTMENT ALLOCATIONS:
1. A 85% to 95% 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 5% to 10% 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, Investment Strategy by Jeffery Saut with Raymond James, Aden Forecast by Mary Anne and Pamela Aden, Cumberland Advisors by David Kotok, Ritholtz Research & Analytics by Barry Ritholtz, Jeremy Grantham with GMO, Joseph Battipaglia with Ryan, Beck & Company.
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.