Private Account Wealth Management Services
Newsletter Issued 08-11-06:
By: John T. Moir
Chief Editor: Sara E. Collier

Position overview . . .

Our recent newsletter, dated July 11th, anticipated that the major stock indices would resume the long-term bearish stock market trend, with a DOW trading range for the month between 10,525 and 11,260. The actual result was fairly close to our projected movement, between 10,683 and 11,257. The stock market has remained within a large trading range for the past few months and appears to have been support by the recently released second quarter earnings’ reports. The period of consolidation from an oversold condition is quite understandable, considering the large decline in the major stock indices, from mid-May to mid-June of this year. We are close to resuming the primary bearish trend, and a breach of the formidable support level of DOW 10,700 would confirm it.

The US dollar was forecasted to remain within narrow trading range for the month, between euro fx equivalent of $1.24 and $1.30. This proved to be accurate, but with a slightly narrower range, between euro fx equivalent of $1.2505 and $1.2918. The large trade imbalance and current-account have failed to propel the US dollar lower, at least for the near-term. The longer view for the US dollar remains uncertain, from a technical standpoint, but could become much more defined in the coming months.

The US treasuries were projected to continue their rally in price and decline in yield, as they start to anticipate a slower US economy, with a forecasted peak yield for the US Treasury 10-year Note at 5.22%. This projection was very accurate, with the peak yield for the 10-year Note exactly at 5.22%, and it proceeded to rally in price and decline in yield for the remainder of the month.

Looking forward . . .

History is not on the side of the cheerleaders who hope that an end in the interest rate hikes will propel the stock market higher. Declining interest rates — as the Federal Reserve at their recent August 8th Federal Open Market Committee Meeting (FOMC) holding the fed funds rate at 5.25% — are not necessarily a prelude to a stock market advance. In 2000 when the Federal Reserve changed course in August and rates began to ease, the stock market rallied — but not for long. A year later, the S&P 500 Index was off over 26%, the Nasdaq more than 67%, and the emerging markets by nearly 30%. That was, of course, when the great equity bubble burst, and popped despite the exertions of the Federal Reserve.

As mentioned in our previous month’s newsletter, there is another great bubble — that in housing — is in the process of bursting and the economic fallout could be more severe than that from the awesome break in equities six years ago. To lose money is unpleasant; to lose your house can be catastrophic.

The condo market in both the Southeast and Southwest coasts of Florida appears to be in serious trouble. And, the single-family housing market, more specially in Orlando, Tampa and Port St. Lucia/West Palm Beach, appears to have similar concerns as well. The speculative excess over the past couple of years in these market are starting to take hold.

There was a recent article in the Orlando Sentinel titled, “Turn the Key and the Home is Free!” It refers to a promotion of which Lennar is offering to give away 110 homes in Central Florida this month for visiting one of their communities and participating in a drawing. They are offering several promotions including:

* “Your first-year mortgage is on us.”

* “No money down. No closing costs.”

* “Free pool, $1 moves you in, 12-month locked-in rate, lower your payment with a 50-year loan.”

* “Guaranteed pricing is here — if at the time of closing, the price of the home has been lowered, we will reduce the price to match.”

* “Zero, Zip, No matter how you say it, it still means no money down!’

* “Guaranteed buy-out program for your present home.”

Sold-out communities are like ghost towns in Southern Florida. Many of the communities that are nearly sold out are essentially ghost towns. They are currently 20% to 40% occupied, half of which are likely by renters. The remainder consists of unoccupied homes, most of which have lock boxes and for-sale or for-rent signs either on the lawns or in their windows. Several of these homes are for-sale-by-owner, thus they do not appear in the inventories reported by the Multiple Listing Services.

Most of the investors and brokers have sat on these empty homes for six to eight months, and though they may have dropped their asking price from their initial levels, they are still asking for a few thousand above their cost. Very few are mentally prepared to accept losses. A few are asking for prices that are 10% to 20% below “market” prices, and yet have received no offers.

The employment situation has continued to decline nationwide, as outlined within the latest report released this past Friday for the month of July. The crowd’s expectation for adding 140,000 non-farm payroll jobs was well above the actual results of a meager 113,000 new positions being filled. And, the unemployment rate ticked up to 4.8%, the highest in five months, from June’s 4.6%.

The only good news within the report was limited to a brisk rise in average hourly wages: 0.4%, for the second month running. We remain concerned over the employment showing and noticed that half of the July gains was chipped in by health care, which generated 23,000 payroll additions, and bars and restaurants, which accounted for 29,000 of the new jobs. Neither, obviously, is an occupational area renowned for exceptional high wages. In contrast, manufacturing shed 15,000 jobs and the slump in housing unsurprisingly took its toll last month in the form of 9,000 lost positions as well.

Long-term conclusions and current month expectations . . .

Investors have a great deal to worry about when considering the outlook for the consumer sector. Spending has grown faster than after-tax income for the past three years and this is continuing in 2006; the savings rate has fallen steadily and is now below zero; spending for ‘essential’ items, like interest payments and energy, is rising as a share of income and is squeezing other purchases and huge amounts of home equity have been cashed out and are presumably supporting spending, but this will slow sharply as house prices stop rising and high interest rates discourage refinancing.

These remain valid concerns and suggest that the second quarter of 2006 in consumer spending may have further to decline, especially since consumers accounts for 70% of the country’s Gross Domestic Product (GDP). Interestingly, consumers are spending more money on necessities such as medical care and utilities, but less on durable goods like automobiles.

Also, if the companies that are taking the goods to market are losing ground, the economy as a whole is softening. The DOW Transports recently made a new six month low, due to the prospects for a softening economy and rising prices. The Federal Reserve, lead by its fairly new Chairman, Ben Bernanke, may be actually providing a “growth-removal service.”

Both the DOW and the S&P 500 Index are down about 4% since their May peaks. The Nasdaq, which peaked in April, is down almost 12%. Small-cap indices are down similar amounts. Stocks have fared poorly due to concerns of the slowing US economy.

Ironically, the previous week’s rally was in reaction to evidence that the economy is indeed slowing, and investors cheered because it dramatically improves the odds that the Federal Reserve will not just pause on further interest rate hikes but actually stop them altogether. This, as mentioned earlier, is a misconceived expectation for a equity advance, but in the long run, an actual stock market decline. Therefore, we are expecting the DOW to resume its primary bearish trend, with a forecasted trading range for the month between 10,550 and 11,345.

We presently have slowing economic growth, some concerns over inflation, less optimistic CEO’s, higher energy prices, the end of the housing boom, and more extended wars in the Middle East. Do these sound like good reasons to expect higher stock prices?

The bullish stock market pundits will point to corporate profits, where S&P 500 companies will likely post average year-over-year operating earnings growth of just under 10% for the second quarter of 2006. That is good news, isn’t it? Well, if this is the case, the second quarter of 2006 will mark the first quarter in 16 periods (4 years) that earnings growth fails to hit double digits.

The earnings guidance going forward has been below expectations, with some of the companies sounding as if their fundamentals have never been stronger, while others cite a weakening economy as the culprit for lower projected figures. In fact, it reminds us of the year 2000, when the first companies that hinted at a broad slowdown were scoffed at and the strength of the others led us to believe a recession was inconceivable.

The interest rate yield curve, from the 3-month T-Bill to the 30-year Treasury Bond, continued to remain flat and slightly inverted. This result of higher interest rates for the shorter maturations versus the longer dated paper has been the prelude to a recession nearly 70% of the time, if history is any guide. Many commodities have started to decline, by over 4%, further confirming the upcoming slowing economy and probable recession. We could be seeing the first rate cut sometime in the first quarter of 2007, if the Federal Reserve is correct in their analysis. In fact, the Fed has already cut their estimates of economic growth for the remainder of 2006 to 2% from nearly 3%, just a few weeks ago. The recent positive advance in price and decline in yield for the entire US Treasury Bond yield curve versus the decline in stocks, has made them the most desirable investment for the first time since late 2001, when they were last favored, especially in a declining stock market. We are anticipating the US treasuries to continue this rally in price and decline in yield, with the 10-year Treasury Note having a peak yield for the month at 4.98%.

The US dollar has remained within a narrow trading range for several months, as global investors have been uncertain of its long-term direction. The large trade imbalance and current-account deficit have deterred any major US dollar advance, but our technical analysis still is projecting a rally against the major foreign currencies. Therefore, we are forecasting a US dollar trading range for the month between euro fx equivalent of $1.25 and $1.30. The large decline in the US dollar over the past few years has created an oversold condition, which has resulted in a period of consolidation. The US dollar still could remain the safe haven currency of choice, even with the growing imbalances, partly due to the prolonged Middle East conflicts. The primary direction of the US dollar will become more readily apparent when we finally extend outside this narrow trading range, with either a continued near-term rally in price or resume the multi-year decline in value.


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 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

Acknowledgements: Federal Data, Stephanie Pomboy of MacroMavens, JMP Securities, Economics from Washington, Phillippa Dunne and Doug Henwood of the Liscio Report,Todd Market Forecast, Forbes Growth Investor, Value Stock Picks, Hinsdale Associates.

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.

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