WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 08-11-04:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our July 9th newsletter forecasted that the DOW, based on our wave pattern technical analysis, would resume the primary bearish stock market trend and would have a larger trading range for the month between 9,800 and 10,450. This forecast proved to be very accurate with the actual intra-day low and high trading range for the month begin between 9,914 and 10,445. We further stated that the US treasuries had bottomed in price and peaked in yield on June 14th, with the 10-year US treasury note yielding 4.79%. For the remainder of the month, even with the Fed raising the prevailing Fed Funds rate on June 30th by 25 basis point to 1.25%, the entire yield curve declined as the bond market rallied. Since the projected bottom, the 10-year US treasury note price has increase by nearly 5% and the yield has declined to 4.25%.
Looking forward . . .
The New York City Restaurant Index has dropped to 11, an anemic reading even after accounting for the expected seasonal summer decline. This weak result might indicate a slip in consumer confidence that could put the Fed’s rate-raising campaign on hold. The NYC Restaurant Index, a tongue-in-cheek economic survey measures the difficulty of getting a reservation at New York’s most popular restaurants. The latest reading gives an 11 on a scale of zero to twenty, where 20 is the highest and 0 the lowest.
The methodology is simple and merely surveys the most popular restaurants in NYC to determine table availability. The less availability, the higher the reading. The relatively low result of 11 indicates that there are a fair amount of open tables at city restaurants. Some falloff in the summer months is normal, but this is fairly steep. It appears to be a good time to book a table at your favorite restaurant and make defensive changes to your investment portfolio.
At present, the spread between real average hourly earnings and real retail sales is at one of its widest points in two decades, suggesting that spending by consumers is likely to decelerate over the near-term.
In our analysis, we used monthly data on real retail sales and real average hourly earnings, and also compared the quarterly movements in real personal-consumption expenditures to quarterly changes in real average hourly earnings. Whenever the spread between real retail sales and real wages exceeds the long-term average of 2.2% for an extended period, it tends to be followed by a sharp deceleration in consumer-spending growth. This is noteworthy, given that the gap between real retail sales and real average hourly earnings now stands at 6.7%, one of the widest spreads in the last two decades. Spikes in the spread have tended to be followed by slowdowns in real consumer spending, which can represents up to 70% of the US Gross Domestic Product GDP).
It is hard to believe that Alan Greenspan really cannot recognize the great credit-bubble that has formed. Even more unbelievable is the Fed Chairman’s statement that the carry trade in normal and justified. He must no longer remember 30 years ago how the Franklin National Bank failure happened. The failure was precisely because of carry-trade abuses resulting from Fed-induced short-term rates that were held below free-market rates. Until the 1990s, borrowing short and lending long was taboo in the banking industry because of its riskiness. Now, of all people, the Fed Chairman endorses it.
The bubble in home-mortgage refinancings has already come down substantially. The stock market has also formed its own bubble, which is on the verge of bursting. On July 24th, the NASDAQ broke down to a new yearly low, and proceeded even lower after the confirmation of a bearish employment report released last Friday. The S&P 500 was barely holding above yearly lows, but also broke lower with the surprise employment report, setting new lows for the year. The amazing aspect about the July stock-market decline is that it has generated absolutely no fear, and bullishness still rules. But that bullishness will soon turn to panic as the array of bubbles continue to burst and a crash looms.
This bearish employment report only showed an increase of 32,000 non-farm payroll jobs, compared to the streets expectation of between 220,000 and 300,000 new jobs. Even worse, the two previous months’ payroll gains were trimmed sharply, May’s, originally reported as 248,000 and initially revised to 235,000, was further sliced to 208,000. June’s original tally of 112,000 melted on revision to 78,000. That is a combined shrinkage of over 70,000 jobs from the original count.
The declining New York City Restaurant Index, the increasing spread between real retail sales and real wages, and the sharp decline in job growth further confirms that the US economic is quickly slowing. Therefore, we feel the DOW will continue its bearish decline and are forecasting a trading range for the month between 9,200 and 9,950. Additional fundamental catalysts should appear later this month to justify the further stock market decline.
The US treasuries, even with periods of anticipated consolidation to remove its overbought condition, should continue to rise in price and decline in yield as inflation concerns dissipate and deflation expectations grow in the coming months. Even with the Federal Reserve raising the Fed Funds rate by an additional 25 basis points yesterday to 1.50%, the US economy is still continuing to slow. The adjustment by the Fed was simply a means of narrowing the gap between the current prevailing Fed Funds rate and the future anticipated interest rate levels by the various markets. The response by the US treasuries, after yesterday’s 25 basis point increase, represented only a minor decline in price. This reaction further confirms that the US economy is not as strong as stated yesterday by the Federal Open Market Committee (FOMC), even after their interest rate adjustment.
SUGGESTED INVESTMENT ALLOCATIONS:
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 offered through our Private Account Wealth Management Services. The minimum investment criteria is determined after reviewing the investor’s current assets and fund allocations. This services is ideal for individuals and privately held corporations who have liquidated large stock, bond and/or real estate holdings and are seeking an investment vehicle to generate a positive rate of return between 12% to 19% 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
Acknowledgments: JB Global Macro Compass, Steve Puetz, JPMorgan Fleming Commentary.