WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 02- 07- 08:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our recent newsletter, dated January 9th, stated that domestic fears of a recession would fuel a contraction in most developed countries and a significant slower level of growth among fast-developing nations. This would result in the continued downward trend in equities, with inflation pressures remaining. We anticipated a DOW trading range for the month between 12,100 and 13,280, as these concerns as well as others would propel the major stock indices lower. The actual DOW trading range for the month was between 11,645 and 13,278 — a larger range than anticipated, but an overall accurate forecast.
We projected that US growth would decline to nearly 0% in the fourth quarter of 2007, and that efforts by the Federal Reserve in cutting interest rates would have a minimal lasting effect on the economy and the stock market, but would price-support the US treasuries, with a anticipated peak-yield for the US 10-year Note during the month of 3.90%. The US economy did slow dramatically, causing a flight to safety within US treasuries, resulting in a yield range for the US 10-year Note between 3.44% and 3.91% — a very accurate forecast.
The US dollar was projected to resume its decline in value, as US treasury were price-supported and inversely yields driven downward, anticipating a euro fx equivalent trading range for the month between $1.46 and $1.50. The US dollar was both pressured and supported during the month, resulting in an actual euro fx equivalent trading range between $1.4488 and $1.4902 — an expanded range with enhanced volatility, but still a fairly accurate forecast.
Looking forward . . .
Most economists agree that the stimulus package now working its way through Congress will boost the economy, but the question remains how many jobs it will create is still up for debate
The Bush administration has estimated that the stimulus package will add 500,000 jobs to the economy. Last Friday’s job report showed US employers trimmed 17,000 jobs from their payrolls in January.
President Bush and other politicians argued Friday that the drop in employment is further reason to pass the $150 billion stimulus plan, which is equal to about 1% of the nation’s Gross Domestic Product (GDP).
The thought is that if consumers have more money to spend, once they get their rebate checks later this summer, will need to hire new staff to deal with increased demand. Many economists, however, argue that companies would not hire more permanent workers just because taxpayers receive a one-time rebate of about $600.
Businesses do not change their hiring or investment habits for a one-time check. There is no overriding need to hire workers for anything more than a temporary basis.
There is research by economist, Milton Friedman, in 1957, called the permanent-income hypothesis, which essentially suggests consumers and businesses change spending activity based more upon their long-term income expectations. Consumers and corporations do not change their spending significantly, if they think a change in income is only temporary — that is the case if they see a sharp drop in income or a sudden windfall.
Some liberal economists who often find themselves disagreeing with Friedman suggest that, on this point, he could be right.
The tax rebates in 2001 played a role in lessening the length and severity of the last recession, but the economy still ended with a pretty painful jobless recovery. Even economists who believe the stimulus plan will help the job market argues that it will be felt from limiting layoffs, not spurring new hiring.
We do not think the stimulus is going to produce a burst of hiring, it is just going to prevent firing that might otherwise take place.
POSSIBLE SCENARIOS FOR THE CURRENT RECESSION:
The sputtering US economy has gotten everyone from the financial markets to the Federal Reserve to Congress in a panic, and there is a disheartening message for those already worried about economic growth — it could get much worse.
Most economists who believe a recession is already here or at least near are looking for a relatively short and mild downturn, perhaps lasting only two or three quarters. Many, on the other hand, say they also can envision a worst-case scenario where spending by consumers and businesses fall off sharply, unemployment heads higher than normal during a typical recession, and housing as well as credit problems worsen.
We can easily imagine the economy going into a free fall, with the danger that housing prices will continue to tumble, people’s ability to pull out equity will evaporate, and see a serious downturn in consumption.
There are a number of economic fears that have been voiced by a number of economists, which are: The overseas investors could pull back on investing in the US dollar and other US assets, which could cause an even greater sense of fear amount US consumers and business, as stock prices fall and bond yields rise, lifting mortgage rates and causing an even bigger drag on an already battered housing market.
Americans could just get scared by a barrage of bad news, as the stock market could continue going down because of foreigners pulling money out and home values going through the floor, it could lead to a real pullback of spending, particularly by Baby Boomers who are getting close to retirement. We are also concerned that oil prices could remain elevated, even if a recession cuts into global demand. There could be supply disruptions that support oil prices and help deepen any recession.
The worst-case scenario could see unemployment climb to 7.5% by early 2009, up from its current rate of 4.9%. The Gross Domestic Product (GDP), the broad measure of the nation’s economic activity, could contract as much as 2% by the end of 2008 than it was at the end of 2007 — the biggest downturn since 1982.
Many of those forecasting a recession this year are expecting GDP to show a slight gain by the end of the year. The biggest fear is that home prices could fall much further in the coming months, with home values falling another 15 to 25 percent on top of the 10 percent from the peaks that has already taken place.
These declines could cause much deeper problems for consumers and the credit markets. One of the most likely candidates would be the credit markets acting more violently than we thought, a tightening of the supply of credit to businesses and households.
There could also be a more substantial response by business to the downturn through layoffs, cuts in their spending and business plans. Bank woes could just be beginning, as the chances increase that the economic pullback will be much steeper than now widely assumed. This weak forecast is based on the belief that billions in dollar of write downs already reported by Merrill Lynch, Citigroup, JP Morgan Chase, Bank of America and other big banks are just the beginning of the problem in the financial sector.
Banks will be unwilling or unable to make large loans to businesses and consumers, if they have to report more losses due to bad bets on subprime mortgages. The impact of the cuts in the prevailing fed funds rate may be less potent than in previous recessions, since consumers and businesses may not be able to borrow enough to keep spending, even if the Fed keeps cutting interest rates. That could make this recession more like the one in 1991-1992 than the relatively short and mild recession of 2001.
Historically, and not surprisingly, recessions accompanied by declines in consumer spending tend to be more severe, and people are going to be constrained from spending by the declines in housing.
The state and local governments might have to cut back spending as a result of declining tax revenue, and that would be another sizable blow to the overall US economy, since this segment represents about 11 percent of total GDP.
Long-term conclusions and current month expectations . . .
December discretionary spending (total retail sales minus spending on gasoline, groceries, health and personal-care products) was down 0.5% — the second drop in three months. The 12-month change in discretionary spending (about 70% of retail sales) is currently running at a cyclical low of 2%. Higher prices, coupled with deteriorating labor-market conditions, are altering US households’ spending patterns.
We see a significant slowdown at food services and drinking establishments, and further deterioration in these sectors could have big ramifications. This industry’s share in total private employment is around 8.5% and accounts for about 30% of all new private-sector jobs created in 2007.
The stock market is anticipated to remain under pressure, as further evidence continues to unfold about the deteriorating US economy, resulting in a projected DOW trading range for the month between 11,520 and 12,775. The stock market remains within an established downtrend, with several sectors confirmed as being in defined bear markets — down more than 20% from peak price levels.
The Federal Reserves’ independence will now be questioned, after the emergency 75-basis-point (0.75%) rate cut, since they are responding to markets and not economic fundamentals. It is not the Fed’s responsibility to prop up market prices. The Federal Reserve, of course, should insure that markets function properly, but not provide a means to support the markets temporary. The true response value to interest rate cuts normally takes between 8 to 16 months before those reductions start to show any meaningful improvement to economic conditions. The US treasuries, as a result, could remain price-supported, as they continue to anticipate further slowing of the US economy, with a projected peak-yield for the US 10-year Note during the course of the month of 3.90% — remaining within a broad multi-month yield range.
The Presidents proposed $145 billion stimulus package will be added to a projected $258.3 billion federal deficit, up about $100 billion from last year and has a total of $1,677.4 (billion) over the past six years. The Federal Reserve, at the same time, is stimulating inflation by lowering interest rates when consumer prices rose 4% last year and wages increased 6%, while productivity rose by less than 3%. The Fed is also dealing with a financial panic, but the perceived economic wisdom is that in a financial crisis is to lend freely at a penalty interest rate — higher not lower rates.
The elevated level of overall inflation could support the US dollar, with a projected euro fx equivalent trading range for the month between $1.43 and $1.49. The US dollar may have found near-term support at euro fx equivalent of $1.50, which has been tested and held on several occasions.
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, Dean Baker, Chief Economist with the Center of Economic Policy Research, David Wyss, Chief Economist at Standard & Poors, Edward McKelvey, Senior Economist with Goldman Sachs, Paul Kasriel, Chief Economist at Northern Turst, Rich Yamarone, Director of Economic Research at Argus Research, Jared Bernstein, Economist with the Economic Policy Institute (a progressive Washington think tank), Stefane Marion with National Bank Financial, Fusion IQ by Barry Ritholtz, Nicocles Michas and Henry Wojtyla with Alexandros Partners.
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