Private Account Wealth Management Services
Newsletter Issued 02-08-07:
By: John T. Moir
Chief Editor: Clare Mc Kendrick

Position overview . . .

Our recent newsletter, dated January 13th, forecasted that the DOW would have a trading range, for the month, between 12,050 and 12,580. The actual result saw the DOW being elevated through the month, due to the earnings being released, with a trading range between 12,355 and 12,657. Most of the various earnings reports for the fourth quarter of 2006 were either inline with expectations or above, leading to a continued slow and narrow advance in the major stock indices.

The US treasury 10-year note was anticipated to have a low-yield for the month at 4.60%, as increased wage pressures and the tight employment situation continued to support higher interest rates. This forecast proved to be accurate, as the US treasury 10-year note yield rose from 4.62% to 4.89%, and concluded the month at 4.83%.

The US dollar was projected to remain firmly supported during the course of the month, with a expected trading range between euro fx equivalent of $1.25 and $1.33. This proved to be somewhat accurate, but with a slightly narrower range, between euro fx equivalent of $1.2904 and $1.3339. Many foreign counties are still considering the US dollar the currency of choice, even with the growing US trade imbalance and current-account deficit.

Looking forward . . .

The truckload of recently released numbers from the government has inspired near-euphoria: Real Gross Domestic Product (GDP) grew at a 3.5% annual rate in the fourth quarter of 2006 — despite plunges in home construction and automobile production — while inflation remained subdued. Non-farm payrolls rose by 111,000 in January, a low number at first glance, but after revisions of previous months’ data, some 933,000 more jobs were counted by the statisticians.

The Federal Open Market Committee (FOMC), for its part, observed “somewhat firmer economic growth” in its statement on January 31st, following the panel’s meeting, at which it held the federal-funds interest rate target unchanged at 5.25%. That assessment was more sanguine than in December, when the FOMC said that “recent indicators have been mixed.” Meanwhile, “readings on core inflation have improved modestly in recent months” instead of being “elevated,” as the panel described them at their previous gathering.

As noted, GDP grew strongly, despite residential construction falling at a 19.2% seasonally adjusted annual rate, even with unseasonably warm weather in the fourth quarter. Still the FOMC saw “signs of stabilization” in housing, a distinct improvement from the “substantial cooling” it observed in December 2006.

Even so, cracks continue to widen in the basement of the housing market sub-prime mortgages. Credit derivatives that track this sector have been in a nosedive since the beginning of 2007. That is consistent with soaring sub-prime loan defaults, which have exceeded their peak of the 2001 recession.

The liquidity-fueled stock market consists of illiquid inhabitants. Cash, as a percentage of household debt, is shrinking dramatically, from 125% in 1985 to 45% today. The $6 trillion in cash that households have sitting on their balance sheets, relative to household debt, is at record lows.

Furthermore, the households with the cash (and assets) are not the ones with the debt. The top 1% of householders hold 30% of the assets and 7% of the debt, while the bottom 50% hold a mere 6% of assets but a burdensome 24% of the debt.

We believe, looking forward, an increase in savings by households, as they endeavor to repair the damage inflicted by the burst of the housing bubble. The effect of a great mass of consumers finally taking a deep breath and cutting back on their adsorbent level of spending would be grim news for the economy, corporate earnings and, hard as it may be to believe, the stock market.

The growing number of baby boomers have caused a bias in the ‘normal’ income/consumption relationship in two ways. First, those who continue working are likely to have a higher propensity to spend current income than the average worker — either they need the money to support their current lifestyle or they prefer to work but have little need to save. Second, those who drop out of the labor force will see their ‘income,’ as defined in the national income accounts, decline substantially more than their consumption.

Both of these biases work to make consumption larger relative to income, as measured in the national accounts. This bias will also grow stronger, as the number of boomers over the age of 55 grows, but will not be reflected in the historical relationships that underlie most economic models and projections. The result will produce consumption levels that tend to be stronger than expected and savings that remain chronically below expectations.

Long-term conclusions and current month expectations . . .

The insatiable appetite for credit has been a critical element in the various asset bubbles in recent years (housing, private equity, hedge funds, etc.). These bubbles have been hugely aided by the open spigot policy of the Federal Reserve, which has been a powerful reason for the stock market revival over the past few years.

The combined debit balance of both the NYSE and NASDAQ have reached a record high of $303.29 billion, which tops the previous peak of $299.93 billion set at the end of March 2000.

This confirms the return of extreme speculation, which we clearly saw in 2000, and is the kind of excess that is typically a prelude to a fall. The stock market, from a technical prospective, is close to completing this extended advance and resuming the bear market decline. Therefore, we are anticipating a DOW trading range for the month between 12,150 and 12,700. The completion of the fourth quarter 2006 earnings season could be one of the fundamental catalysts for the decline, as the US economy begins to slow, while wages pressures remain firm and the employment situation still tight.

The Fed jump started the flat-lined economy when they slashed rates to half-century lows several years ago. First, they reflated, then they inflated. Demand for anything dollar-denominated lifted off, with the cost of borrowing money being so cheap. This sent prices for oil, gold, real estate, industrial metals and others skyrocketing.

Politicians dislike to make it appear that growth is merely price increases, so the US government has an inherent bias in its data reporting — inflation is understated and growth is overstated. The cumulative impact is to create a disconnect between the model and reality, especially as time moves forward. This small error has similar repercussions to a rocket launch, with a few million miles later, it is discovered to be way off course.

Economist must put themselves through many adjustments to rationalize the disconnect between the model and reality. A classic example: Rising oil prices are not considered inflationary, but falling oil prices are somehow disinflationary. This reality could be tested this month, as interest rates will likely remain firm, with the US treasury 10-year note having a yield range between 4.65% and 4.83%. The US treasuries could continue to have its yield supported with a tight employment situation and rising wage pressures, but this could change in the future if the housing market continued to deteriorate, leading to additional layoffs and more available jobs.

The US dollar is expected to be technically supported for the month, with a euro fx equivalent trading range between $1.26 and $1.31. There still remains the possibility of a stronger US dollar advance, but it will depend on its technical trading movements over the next few months. The large twin deficits (trade imbalance and current-account deficit) could eventually put undo pressure on the US dollar, causing it to decline further. However, at least for the near-term, it appears to be firmly supported within a narrow trading range.


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
E-mail: JOHNTMOIR@aol.com

Acknowledgements: Federal Data, MacroMavens by Stephanie Pomboy, Economics from Washington, Ritholtz Research & Analytics.

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