WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 02-09-05:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Using our technical wave pattern analysis, our January 10th newsletter forecasted a trading range for the DOW between 10,400 and 10,865 over the course of the month. This projection proved to be very accurate, with the actual range being between 10,368 and 10,867. Based on these results, it seems as though the major stock indices have begun their bear market declines. A majority of the strong forecasted fourth-quarter earnings’ reports were already factored into the marketplace, thus proving the common reoccurring theory — “buy on the fundamental earnings rumor and sell on factual result.”
In addition, we also forecasted that the US dollar would begin a counter trend rally, which we expected to continue. This projection proved to be accurate, with the US dollar continuing its ascent against a majority of foreign currencies. The US treasuries were forecasted to be supported for the longer 10 to 30-year maturities, with the shorter durations remaining under pressure due to the continuing Fed rate increases — at a measured pace — during the coming months. As expected, the Federal Reserve raised the prevailing fed funds rate by 0.25% (1/4 of 1 percent) to 2.50% at their most recent FOMC meeting. This motivated the longer maturities to rally further, while producing only a minor decline within the shorter maturities, from treasury-bills to the 5-year notes. We could be heading toward an inverted yield curve, which will be discussed later within this newsletter.
Looking forward . . .
Last Friday, the Bureau of Labor Statistics released the January 2005 employment report showing 146,000 new jobs, far below the prior consensus of 200,000. The previous month gain of 157,000 was revised downward to 133,000, further confirming the dismal employment picture. In 2004, the prognosticators of this monthly jobs report missed the actual employment gain and/or loss respectively, on average, by nearly 100,000. This illustrates the complacent optimism that leads to melancholy results.
There was heated speculation that Corporate America had wrung out everything it possibly could from the present work force and would have to start hiring in earnest. As it turns out, this was not even close to accurate. Even the apparent good news in the latest report — the decline in the unemployment rate of 5.2% from 5.4% — was not as positive after closer review. The rate of jobless Americans declined solely by virtue of a population exodus from the labor force, as well as by folks who could not find jobs and simply gave up the search. If these frustrated individuals had not dropped out of the quest for gainful employment, the unemployment rate would have increased rather than decline.
The manufacturing sector, which was supposedly on the rise after being down for what appeared to be an eternity, has suffered another setback, losing 25,000 jobs in January 2005. Moreover, the December 2004 reported gain of 3,000, on revision, became a loss of 7,000. Furthermore, the workweek contracted, and hourly wages displayed only a modest 0.2% rise.
Job growth in January may have been deterred due to bad weather, but the total employment rate is still 10 million below where it would be in a normal recovery/expansion, while the labor force remains 4 million lower. This continues to be defined as a jobless recovery.
Investors bought on the employment news, seizing the poor report in the hope that it might persuade the Federal Reserve to temper its rise of the fed funds rate. However, Alan Greenspan, Chairman of the Federal Reserve, has other concerns such as the US dollar, the towering twin deficits and the housing bubble. This tightening cycle may continue until the fed funds rate reaches a point of equilibrium, relative to the current rate of inflation, 3.2%. However, as the year matures, concerns of growing inflation could shift to renewed worries over stagflation or deflation.
The weak employment report also produced a strong US treasury rally in price and decline in yield, which could spark consumer borrowing and spending once again. However, we suspect that any spending spree would be limited, since yields have been hovering near historic lows long enough that there are very few people left to refinance their mortgages. If rates continue to drop, with the entire yield curve nearing the “inverted” yield levels (longer maturities have lower yields than shorter maturities), this would mean that the Federal Reserve rate increases have taken a toll on the US economy or at least on investors.
The last time the yield curve was inverted was in late-1999, when the 30-year bond was the benchmark and the yield fell below the overnight rates. As a result, the DOW and the other major indices, topped out in March and April 2000. This is just too close in time to be considered a coincidence.
The curve is still far from inverted. The 10-year yield is still 150 basis points (1.50% yield) above the fed funds rate, but the Federal Reserve keeps raising rates while the economic data continues to be relatively tame and long-term yields look technically weak. In addition, the spread between the 2-year and 10-year treasury yields continues to narrow.
If US economic data stays weak enough to give the Federal Reserve a reason to stop rate increases, yields could drop substantially, producing the inverted yield curve and a major declining stock market.
ADDITIONAL INDICATORS OF THE HOUSING BUBBLE SOON TO BURST:
The only people insisting that there is no housing bubble are the people who build houses and folks who are drooling over the prospect of selling theirs for some obscene multiple of what they paid for it. The real question is not whether or not there is a bubble in housing, but when it is going to burst. We are encouraging investors to sell early instead of being sorry, even though this bubble may not be crystal clear.
The affordability index, which divides existing home prices by the median family income, shows that the home-to-price-to-income ratio is at a record high of 3.35. The previous housing bubble occurred in the early 1980’s with this ratio at 3.10, and a considerably higher level of interest rates. This leads us to conclude that there is limited maneuvering for investors if they have more than 25% of their net worth invested in real estate.
The housing boom is even more heated in Canada, Great Britain and Japan. Some investors conclude that there are varying degrees of these housing bubbles globally, but we simply do not see this as a persuasive investment argument. The recently released University of Michigan survey for January 2005 on consumer sentiment, showed that the share of households convinced this is the time to take the plunge into real estate jumped to 22%; double the percentage a scant 15 months ago.
Still another ominous sighting of “bubble trouble” ahead are stories that real estate is “one of the hottest curriculums on college campuses” these days. Over 60 colleges offer degrees in real estate, which is more than double the number a decade ago. A full 5,000 young students now attend New York University’s Real Estate Institute, an institute of which we were unaware.
It is important to remember that in the late 1990’s, as the stock market bubble was getting reading to burst, enrollment in financial-services courses ballooned all over the United States.
Our final illustration in the case for a housing bubble ready to burst comes from the recent activity of Lennar, a leading homebuilder based in Florida with stakes in Texas, California, Nevada and elsewhere. The activity comes from its chief operating officer, who “talks like a bull but walks like a bear.” Even though this officer and his executive cohorts were brimming over with optimism in a conference call with analysts in mid-December, this did not prevent said officer from selling over 98,000 common shares of Lennar less than a month later. He may still own 60,000 shares of restricted shares and another 71,000 through various trusts, but the sale represents over 40% of his total holdings and probably 100% of what this officer “could” sell.
Insiders may have numerous justifiable reasons for selling their shares, but their primary motive is always defined by the expectations of their stocks’ impending decline.
Long-term conclusions and current month expectations . . .
The January “effect” indicator holds that it sets the stock market direction for the remainder of the year. The DOW and other major indices closed down for the month, raising the probability of a stock market decline. There is also a consensus that in each of the past 13 post-election years, January has been a forerunner of the stock market’s action, up or down, for the remainder of the year.
These are both interesting indicators and consensuses with high levels of accuracy, which provide further supporting indications of a year long stock market decline. Therefore, we forecast that the DOW will have a trading range during this month between 10,350 and 10,750 as it continues its gradual descent. The US dollar should continue to be supported as it proceeds further within this counter trend rally from euro fx equivalent of $1.28 to between $1.25 and $1.29. Just one month ago, the US dollar bottomed at euro fx equivalent of $1.3678, showing the magnitude of this rally in such a short period of time. It is technically possible that the US dollar has actually bottomed, which would aid dollar-denominated assets while ballooning the already large trade imbalance and current-account deficit. This possible adjustment will become much more clearly defined in the coming months, as the US dollar and the various foreign currencies’ technical wave patterns develop.
The US treasuries should continue to be supported, especially the longer maturities (10 to 30-year), as investors seek more attractive yields. The Federal Reserve could raise the prevailing fed funds rate to as high as 3.00%, but eventually growing concerns of an inverted yield curve and a slowing economy should cause them to suspend their “measured pace” of interest rate hikes.
The current savings rate today of nearly 0% from over 12% in the early 1980’s could be another fundamental reason for the US treasuries support. This adjustment in savings will probably require a nasty shock to consumer incomes and finances before a change occurs. After all, most consumers do not quit as winners, but continue until they lose. The next recession with big layoffs might be the trigger or possibly another terrorist attack on US soil — frightening Americans into savings. The collapse in the housing price bubble could also be a fundamental catalyst, given that consumers have over 50% of their net worth in home ownership compared with only 20% in equities. More saving and subdued consumer spending will depress interest rates, boosting holders of US treasuries — especially longer maturities.
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 Private Account Wealth Management Services. The minimum investment criteria is 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 35% 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, Liscio Report, ISI Group, Christian Science Monitor, New York University, Daily Business Review in Miami.
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 judgement. 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.