WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 12-09-04:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our November 12th newsletter, based on our technical wave pattern analysis, forecasted that the DOW would have a trading range for the month between 10,100 and 10,550. The actual range was slightly wider, between 10,011 and 10,602, but still fairly accurate. The DOW, along with the other major stock indices, remained range-bound after the post-election results rally. The sharp decline within the US dollar to euro fx equivalent of $1.35 confirmed that only US investors participated in the post-election rally. We further anticipated that the US treasuries would remain under pressure in the near-term, but stated that this position could change in the near future. This projection proved to be accurate, with the US treasuries continuing their decline in price and rise in yield for the entire month.
We also discussed in detail the October 2004 employment report, which released a higher than forecasted gain of 337,000 non-farm payroll jobs. We further estimated that the strong report was the result of 100,000 to 150,000 new hires during the month due to the late-summer hurricanes, and not a possible long-term improvement in the employment situation. This one-month report proved to be an aberration, with the November non-farm payroll number, which was released just last Friday, showing only 112,000 new jobs; the previous two months’ gains were revised downward. The 112,000 new jobs were barely more than half of the 200,000 the pundits on the Street had been forecasting. This report also showed, for the third month in a row that the manufacturing sector continued to decline in its work force, losing another 5,000 jobs.
Looking forward . . .
Have we reached a climatic peak for US consumer lending? According to the Fed’s Senior Loan Officers Survey, consumer demand for loans (mortgage and non-mortgage) slowed sharply in the latest quarter. Indeed, non-mortgage loan demand is now at its lowest level since the 2001 recession. To the extent that debt is the engine of consumption, can a slowdown in spending like we saw then be far behind?
The US consumer is way over leveraged. If you look at consumption as a percentage of Gross Domestic Product (GDP), it has reached nearly 70%, the highest of any nation. This spending has mostly been driven by equity extractions from real estate and mortgage refinancing. It has not been propelled by wage growth, and that is an interesting reversal when spending outpaces real wage growth. In the last 10 years, we have become an asset-addicted economy. Simply meaning, to support our spending habits, we need two things to happen. We need our wages to increase, which is normal and should increase along with GDP growth. The other thing, which is abnormal, but needed, is a very high growth level in asset inflation. Yet above-average asset growth is unsustainable. Continued over-leveraging is not maintainable. When these two trends reverse, there will be significant problems.
The US has also been able to consistently run an “unsustainable” current-account deficit, but only because the rest of the world was willing to fund it. We contend that the US has been sucking up nearly 80% of the world’s surplus savings annually. In 1980, America was the largest creditor nation in the world, with a $360 billion surplus in net international investment. It is now the largest debtor nation, with a net deficit of $2.65 trillion. The US international debt is approaching 300% of annual exports, which might raise some concerns on the part of foreign creditors as to whether they will be repaid. After all, at one time, two struggling nations such as Brazil and Argentina saw their net indebtedness raise only modestly more, to 400% of annual exports at the height of their financial crises.
The US dollar’s status as virtually the only safe-haven currency of size has been unchallenged for decades, which is now undergoing a definite change. The euro fx has finally become a viable alternate “store of value” and “standard of value” for the world. For a variety of economic agents, from central banks managing forex (foreign-exchange) reserves to corporate treasurers to exporters in various countries, the euro fx is increasingly fulfilling the role that was envisaged for it when the common currency was proclaimed as an alternate “global” currency.
With an alternative-currency investment option, the world finally has a way to penalize the US for running unsustainable deficits. The funds can actually move elsewhere, something that was more of a theoretical possibility earlier. We suspect the global-investor community likes the idea of a counterweight to the US dollar. Our Private Account Wealth Management Services has the ability to maintain a US brokerage account at a major institution while also having the flexibility of holding foreign investment vehicles — in their currency — within the same US account. This enables us to profit from a possible continued decline within the US dollar by purchasing and maintaining various foreign investments from different countries with their currency.
Long-term conclusions and current month expectations . . .
Some of the technical indicators, which we follow for the major stock indices, are displaying similar readings to those that existed when the major stock market top (peak in price) occurred in March-April 2000 (March 2000 for the NASDAQ and April 2000 for the DOW and S&P 500). Today, we actually have the same level of bullish complacent optimism that existed at that key period in April 2000 when we projected in our April 8th 2000 newsletter the strong likelihood of a major top for the various stock indices. The DOW and S&P 500 topped four days after it’s release at 11,425, only 7 points higher than the projected level. Therefore, we are forecasting resumption in the stock market bearish trend for the major indices, with a trading range for the DOW during the month between 10,100 and 10,650. The fundamental reasons for the decline will become more readily apparent after it is well under way, displaying the advantages of our wave pattern technical analysis, as we rotate from one economic business cycle to another.
The US dollar has declined by over 10% in the past 2 months and is now due for a period of consolidation. This process of removing the oversold condition could allow the US dollar to be range-bound for a number of months. The new replacement for the Secretary of the US Treasury, could produce a countertrend rally for the US dollar; therefore, we feel the decline could be suspended, at least for the short-term. We also forecast that the US treasuries have found near-term support, with the release of the weak November employment report last Friday, and could start to rally once again. The US economy is continuing to slow due to the deterring employment situation and the expanding level of outsourcing jobs throughout the world. A US economic recovery would require steady improvements in domestic employment growth, which may remain unattainable for quite some time.
We remain concerned over the possibility of the US treasuries repricing themselves due to a sharp decline in the US dollar; however, in the near-term, we feel a rally appears more likely. Foreigners continue to own nearly 43% of all of the US treasuries outstanding, and if they loose confidence in the United States, or have concerns with the declining US dollar, they may choose to liquidate some or all of their holdings.
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 and exchange traded funds (ETFs) offered through our Private Account Wealth Management Services. The minimum investment criteria are determined after reviewing the investor’s current assets and fund allocations. This services is ideal for individuals, trusts, foundations and privately held corporations who have liquidated large stock, bond and/or real estate holdings and are seeking an active management service 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