WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 12-12-07:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our recent newsletter, dated November 6th, stated that both nonprofessional and professional investors in recent polls were looking for higher prices and remained fully invested. We further stated that historically this was a dangerous time to be fully invested and projected the DOW to continue a broad rotation lower, with an anticipated trading range for the month between 12,700 and 13,975. The DOW’s actual range for the month, with enhanced volatility, was between 12,724 and 13,924 — a very accurate forecast.
The US treasuries were expected to be price-supported, as the US economy continues to slow, with a anticipated peak-yield for the US 10-year note at 4.45%. Economic data was released throughout the month confirming our belief of a slowly deteriorating US economy, causing the US treasuries to rally in price and inversely yields to decline, resulting in a US 10-year note yield-range for the month between 3.86% and 4.47% — a very accurate forecast.
The US dollar was anticipated to have a euro fx equivalent trading range for the month of $1.42 to $1.46, but we also stated that the expectation of lower interest rates could cause the US dollar to decline even further. Interest rates did trend lower during the month, causing the US dollar to remain under pressure, resulting in an actual euro fx equivalent trading range for the month between $1.4415 and $1.4905 — slightly elevated above the forecasted range.
Looking forward . . .
The effect of soaring home foreclosures still lie ahead, even as the current impact of the credit losses are being downplayed. The likely surge in foreclosures next year has no historical precedent, as the resets of rates paid by the weakest borrowers will push up foreclosures while tightening lending standards will keep potential buyers out of the market.
We anticipate seeing foreclosures soaring to an annual rate of 1.8 million units by the fourth quarter of 2008, from 660,000 previously seen in 2006. That would be equal to 45% of existing home sales by the end of next year, which will fall from the cyclical peak of about seven million units to under five million units.
This means that next year will see a shift of housing supply to forced sellers from traditional sellers. The foreclosure supply will add the equivalent of three months’ sales to inventories, to a total of five months. These forced sales typically go for a 20% to 25% discount or more to traditional sales, with subprime and alt-A lending concentrated in areas such as California and Florida, which should bear the brunt of these foreclosures and is already apparent.
Clearing the market requires that homes once again become affordable. The subprime creation was needed to get buyers into homes that they really could not afford. We estimate that home prices will have to fall another 15% to 20% to bring affordability back into its historical averages, absent a substantial drop in mortgage rates.
Government intervention in an election year, with a massive drop in mortgage rates, is a possible mitigation scenario. Congress could find the Section 8 low-income housing program to provide low-cost mortgages, without any further enabling legislation. Others in Washington look to Fannie and Freddie to pick up the slack, which would not have a direct impact on the budget.
Whatever the case, having a million or more people losing their homes in an election year does not square well with political reality, and will prevent a continued economic expansion or a bull market.
The Treasury Secretary, Hank Paulson, has a plan to fix billions of dollars of broken Adjustable Rate Mortgages (ARM’s) by “temporarily” freezing interest rates on selected troubled subprime residential mortgages.
The details — who would be eligible and how long the freeze would be in place, not the least of them — were still being worked out, so we will forgo any specific comments until they become available. Compliance with the freeze on the part of mortgage lenders and investors will be strictly voluntary.
The Treasury is attempting to impose a Japanese solution to the debt problem, which did not work well in that country and will not work well here either.
There were warnings aplenty even two years ago — as discussed in detail within our August 2005 Newsletter — of the potential for real trouble in the way houses were being sold and mortgages structured, but the lenders, the borrowers, the Federal Reserve or the US Treasury paid none of these signs the slightest bit of attention.
Signs of stress continue in the Libor (London interbank offered rate) market, with the three-month rate at which banks lend money to each other remains stubbornly high at 5.13% — normally, it yields 0.10 to 0.15 of a percentage point above the fed-funds rate. Yesterday, the fed cut the prevailing fed funds rate by 25 basis points (0.25%), from 4.50% to 4.25%, widening the gap even further when compared to the current Libor rate.
The Fed — in coordination with the Bank of Canada, European Central Bank, Bank of England and Swiss National Bank — are attempting to stoke short-term lending by creating a temporary credit facility that banks could tap to make loans to individuals and businesses. It plans to hold four auctions between December 17th and January 28th, with the first two auctions being for up to $20 billion. The amount of the third and fourth auctions will be determined in January 2008.
Banks will be able to submit bids through the local Federal Reserve banks and must put up collateral for the proceeds. The Fed, in essence, is giving beleaguered banks the opportunity to access funds it might need for year’s end without having to borrow money directly from the Fed at the discount rate of 4.75% Some banks could likely avoid the so-called stigma associated with the discount rate and borrow money through the auction process at a lower rate than the discount rate.
It is unclear if this global effort to induce short-term lending will help the credit crunch in the long-term, due to its ever growing global size.
Long-term conclusions and current month expectations . . .
There are numerous negative divergences pointing toward sharply lower worldwide equities and commodities prices, with the most significant outlined below:
Semi-conductor shares recently broke below their August 16th lows, and currently stand at their most depressed valuation in more than a half-year. This is one of the clearest early-warning signs that equity markets around the world are set for a substantial pullback that will probably persist, with periodic minor upward bounces.
Funds and indexes of commodity producers have been consistently under performing their respective commodities. Producers’ shares have been a prelude of commodities’ behavior both on the upside and also on the downside.
The number of stocks advancing as been progressively sliding, while the number of stocks declining has been rising, even in the hottest markets. The narrowing of the bullish rotation pattern is an omen of trouble for global equities. The average market participant has overly rosy expectations at a time when reducing positions would be a far more prudent course of action.
The relative-performance of the Nasdaq 100 versus the Standard & Poor’s (S&P) 500 remains at a multi-year over-bought extreme, which suggest that more near-term relative under performance is likely. This is important to the broad US stock market, because technology stocks have led the S&P 500 both higher and lower since the US cyclical bull market began in late 2002. Therefore, any further relative under performance by the Nasdaq 100 should put more downward pressure on the S&P 500 as well.
Rallies in bear markets, like the one we have experienced during this fortnight, are among life’s pleasant inevitable interruptions. They can be pretty vigorous, the better to tempt the unwary and set them up for an even fiercer shellacking, which is why we believe that any bounce worthy of its name that rekindles speculative interest should be approached with extreme caution and relished as an opportunity — to sell.
The credit crisis is threatening to radically and fundamentally transform the investment landscape. We have had three decades of mostly bull markets fed by cheap and abundantly available credit and an insatiable lust for leverage, which is fast coming to what we suspect will be a crashing end. The financial system will be first to break down, followed closely by the US consumer, who will become very stressed, overburdened, and be forced to cut back because of rising unemployment. This will cause the US treasuries to be price-supported, at least for the near-term, and we are anticipating that the US 10-year note will likely have a peak-yield for the month at 4.17%
It is likely to be replaced by a much tamer, more sober and highly regulated investment environment. The financial engineering that created so much wealth and interest will lose the appeal it so enjoyed as well as excessively exploited.
Part of the change will be a purge of the hedge funds, the private-equity operators, and the investment banks driven by a casino mentality, who have served as the icons of this gilded age now teetering toward its close. Their numbers and, more importantly, their profits will be drastically reduced.
Long-term support is being seriously challenged, and overseas markets are looking vulnerable as they develop negative divergences. It will not take very much to start a major decline. The November correction in the major stock indices was the worst decline in five years. The bears are growing increasingly stronger and the bulls weaker, as we transition toward a prolonged bear market. The DOW is projected to extend these declines with a anticipated trading range for the month between 12,200 and 13,785.
The US dollar has recently found some support at euro fx equivalent of $1.49, and we are expecting it to remain supported during the month, with a forecasted euro fx equivalent trading range between $1.43 and $1.48.
PRIVATE ACCOUNT WEALTH MANAGEMENT SERVICES:
We, at Wavetech Enterprises, LLC, offer our Private Account Wealth Management Services, which is a conservative, flexible, and actively managed investment strategy. Investor’s ordinary and/or tax-deferred funds remain securely in their name at major financial institutions and/or brokerage firms, while we manage their funds Online.
Our wealth management services outperforms others, since we use a unique and proprietary culmination of the following: fundamental analysis of relative valuations, technical analysis of the changing market conditions, evaluations of various economic business cycles, diagnosing sector market psychology, and strategic investment selections with appropriate allocations.
These services are ideal for individuals, trusts, foundations and privately held corporations that 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.
Please call the number provided below or e-mail us and we would be happy to provide further clarification, if there are any questions regarding the information discussed within this newsletter or our unique wealth management services.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, Dale Westhoff and V. S. Srinivasan with Bear Stearns, Richard X. Bove with Punk Ziegel, Steven Jon Kaplan with True Contrarian, Principles of the Stock Market by Richard Schwartz, John Kosar with Asbury Research, Dennis Slothower with Eastman Communications, Moody’s.
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.