WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 12-13-06:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our recent newsletter, dated November 13th, anticipated that the Dow would resume the downward decline, with a trading range for the month between 11,600 and 12,200. The actual result saw the DOW elevated above our forecasted range, between 11,965 and 12,361. The major stock indices were supported with the slew of mergers and acquisitions, producing inflated valuations for the applicable companies and an overall floor the stock market.
The US treasuries were expected to remain defensive through growing inflation concerns, with a peak yield on the 10-year note at 4.55% during the month. We further stated that a decisive move outside the current 10-year note yield range, between 4.55% and 4.80%, would give us additional indications of its longer-term direction in price and subsequent yield. The month saw the break the 10-year note yield of 4.55%, declining to 4.46%, as concerns grew that the declining housing market would have a larger impact on the overall US economy. There remain some inflation concerns, due to the tight employment situation and rising wage pressures, but it is still unclear if these components, along with the energy sector, will have enough of an impact toward raising core inflation levels.
The US dollar was forecasted to remain within a narrow trading range during the month, between euro fx equivalent of $1.25 and $1.29. We also stated that the longer-term trend for the US dollar could be more clearly defined with a breach of the six-month trading range between euro fx equivalent of $1.23 and $1.30. Comments by the Chinese Government on the possible liquidation of some of their US holdings, caused the US dollar to break-through this defined range, with an actual trading range for the month between euro fx equivalent of $1.2710 and $1.3285.
Looking forward . . .
We are hard-pressed to recall the last time there was so much money sloshing around and where people seem determined on getting rid of it. The total amount of merger deals announced just this past week was around $88 billion globally, with half of this pile of dough being for transactions in the US. The value of global mergers and acquisitions for 2006 has reached a record $3.365 trillion, beating the previous high set in 2000 at $3.332 trillion. Many of these transactions were for cash. It is as if these deal makers all decided they wanted to trash their cash.
If there is a warning sign on the horizon, it is that so few of these deals being announced have a strategic purpose. It is an increasingly rare occurrence to see an old-fashion merger between two similar businesses, like industrial companies joining forces. Most transactions are merely financial speculation dressed up as high finance. In fact, these transactions are actually far removed from the financing of the capital development within US or other countries.
These leveraged transactions are dominating the financial markets to an extend that we have never seen before, and it remains unclear if whether they are diverting resources that could be used for more productive purposes. We are, however, convinced these companies are diverting intellectual resources that could be devoted to more useful purposes, such as scientific research or the ethical improvement of mankind, but that would be asking too much.
Long-term conclusions and current month expectations . . .
What may bear watching in the weeks ahead is the US dollar. Recently, China said that it would diversify its foreign currency holdings, but it is unclear in exactly what way. It would seem unlikely to mean outright selling, since their US dollar holdings are so large and would only harm themselves. It could also mean that the mix of dollar-denominated holdings might change in the future. Or, it could mean that, in the future, there will be fewer dollar-dominated securities and more denominated in euros, francs or yen.
China has been reluctant to allow their currency, the yuan, to float freely within the global currency markets, since it could allow it to appreciate in value — making their export prices less competitive as compared to those offered in both India and Vietnam. The actual free floating of the Chinese yuan could lead to massive job cuts throughout China and possibly civil unrest. The US dollar will likely remain within a large trading range this month, between euro fx $1.28 and $1.34, as the various global market continue to define their level of confidence within the US markets, and China’s longer-term currency direction.
The Fed will likely find it more difficult to establish an explicit inflation target going forward, with the newly controlled Senate and House by the Democrats. Instead, the Fed will be forced to be more overly concerned about the growth side of its balancing-act mandate. We know that Federal Reserve Chairman, Ben Bernanke, is a proponent of inflation targeting, so this sets up an interesting dynamic that will play out when he is next called to testify on Capitol Hill.
Moreover, the Federal Reserve has made it clear that it has no intention to cut the fed-funds rate anytime soon, and in fact, is more inclined to raise interest rate further. In a major economic speech on November 28th, Chairman Ben Bernanke stated that “core inflation remains uncomfortably high.” He noted that outside of housing and autos, economic activity has, on balance, been expanding solidly as evidenced by the strong labor market, and that the economy is likely to expand at a moderate pace going forward.
Chairman Bernanke then concluded by stating: “The Committee has continued to emphasize the upside risks to inflation and the high costs that would be associated with a failure of inflation to moderate gradually as expected.”
Similar concerns were expressed on the same day by the Philadelphia Fed President, Charles Plosser, who said there is ‘a significant possibility’ that inflation will remain at elevated levels for some time and that this may force the Fed to raise rates again. Finally, Fed Governor Jeffery Lacker has dissented at each of the past three Fed meetings and called for an immediate increase of 25 basis points in the fed-funds rate.
The market continues to be prices for several interest-rate cuts in 2007, despite clear statements that the Fed remains biased toward raising the fed-funds rate further. The recent data pointing to the slowing in sectors related to housing were fully anticipated and quite welcomed by the Fed, since it is the only way to deflate an asset bubble.
The Federal Reserve met again yesterday for their Federal Open Market Committee Meeting (FOMC) and decided to leave the fed-funds rate at the prevailing rate of 5.25%. They further reiterated their concerns of core inflation growth and also recognized that the slowing housing market could overall affect the US economy in an adverse way. Therefore, we anticipate the US treasuries this month will likely have a base low-yield on the 10-year note at 4.50%. The conflicting economic data, from the tight employment situation to the reduced core inflation on a consumer and wholesale level, will create quite a conundrum for the Federal Reserve. They will likely hold the prevailing fed fund rate steady for a prolonged period until there is a clear and justifiable reason to either raise or cut the prevailing fed funds rate.
The DOW, along with the major stock indices, are close to completing their topping-in-price actual ascension, which has occurred over the past few months. Our technical analysis further confirms the stock markets reduced level of upward momentum and the ever growing divergences through this gradual, but extended advance. We are expecting a DOW trading range for the month between 11,700 and 12,370, as the stock market resumes the bear market decline. The thin December trading volume could see the DOW break through the support level at 11,700 and continue lower to 11,150 or even as low as 10,700. The possible fundamental reasons for such a large decline could be from rising crude oil prices, additional economic data confirming the slowing of the US economy or the continued decline of the US dollar — causing foreign investors to reduce their US 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 (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 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, Ritholtz Research & Analytics, The HCM Market Letter, Riversource Investments, PanAgora Asset Management.
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.