WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 02-09-06:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our recent newsletter, dated January 11th, forecasted a resumption in the stock market primary bearish trend, with a DOW trading range for the month between 10,575 and 11,050. This projection proved to be fairly accurate, with an actual DOW trading range between 10,661 and 11,048, since the fourth quarter 2005 earnings’ reports being released had already been factored into current market price levels. There remains strong resistance (ceiling) for the DOW at 11,000 with stock market valuations near peak levels for this current economic cycle, both lending to a decline in the major stock indices during the month.
The US dollar was projected to resume it’s decline, due to the growing twin deficits (US trade imbalance and current-account deficit), with a euro fx equivalent trading range between $1.19 and $1.25. Pressure on the US dollar grew during the month, with an actual trading range between euro fx equivalent $1.1910 and $1.2341. This forecast proved to be narrower than the actual result, but accurate in determining the peak level for the US dollar.
The US treasuries were anticipated to rally in price and decline in yield, with a peak interest rate for the 10-year Note at 4.46%. The actual results saw the US treasuries rallying for the first-half, with a period of consolidation for the second-half of the month, producing a 10-year Note yield range between 4.33% and 4.53%. The US treasuries rally was refrained due to the upcoming quarterly refunding auctions for 3-year Notes, 10-year Notes and 30-year Bonds being held on February 6th, 8th and 9th, respectively.
Looking forward . . .
Margins for the S&P 500 companies are near their 40-year highs, which can be perceived as good news. However, the discerning news is that this is about as good as it can get. The markets typically stall their advance or go nowhere, when margins advance to these levels.
There are signs that pressures from labor, which have been held in check by globalization, may begin to affect profits. Reason being, in the later stages of expansions, the balance of power shifts toward labor. We are currently in a transition of power from capitalists to labor.
If this is the case, Corporate America is not giving in without a fight. The auto industry is looking to slash payroll to remain competitive. Companies like IBM are eliminating their pension plans, to reduce operating expenses. The new Medicare prescription drug plan benefits Corporate America more by letting companies end their retiree’s — usually better — drug coverage.
Big government is stepping in, where labor lacks the strength to exert economic power. The Maryland legislature recently passed a bill mandating a minimum level of spending on health care by big employers. Similar bills are pending in other states facing their own Medicaid and health-cost crises.
It is very clear that corporate-profits margins can only get skinnier. Hiring will be held in even tighter check to keep margins from shrinking further, as wage and compensation pressures increase. The government, meanwhile, wants to make sure the burden is not shifted it’s way.
The greatest consumer buying binge ever is starting to fade, due to the contraction in home-equity loans, which have been one of the great springboards of growth in this consumer-driven US economy. The marginal consumption dollars have been declining for the first time since the last recession in 2000.
The downturn in home-equity loans is partly due to the recent overall sharp retreat in consumer borrowing, which has suffered its first quarterly decline since the recession of 1991. And credit, has come to replace wages as the driver of consumption. Last year, the $370 billion gain in disposable income fell way short of the $500 billion increase in consumption.
HOUSING MARKET STARTS IT’S DECLINE:
There are clear signs that the great housing boom is rolling over, as evident in December 2005 steep drop in the sales of existing houses — declining 5.7%. New home sales, released by the commerce Department, showed a rise of 2.9% in the same period, but it simply does not represent the housing industry as a whole. The US government and builder’s findings themselves seem more credible, which are confirming an overall decline in new home sales.
The startling collapse in sales of existing single-family homes during the October through December 2005 time span — falling at a 35% annual rate — is persuasive proof that the bull market in housing has definitely transitioned into a bear market.
The extended and powerful real estate cycle was built on cheap credit and incredibly relaxed loan standards. Some 42% of first-time buyers put zero money down on their home purchases last year, where as only two years ago 27% bought a house with no down payment. Well over a fourth of the mortgages in 2005 were of the speculative type, “buy now, pay later” variety. Not exactly sturdy underpinnings for a housing boom, especially with credit likely to get increasingly less cheap and the regulators fretting over lending standards.
The backlog of unsold inventories in the resale housing market in December 2005 shot up to 26%, compared to the prior year December 2004 level, to a 5.1 months’ supply. This compares to a lowest level of 3.7 months in January of last year. Inventory of new homes stand at its highest level in nine years. The overhang of unsold units in the condo market constitutes a formidable 6.2 months’ supply. Pricing is beginning to reflect the inventory bulge: December’s median price of $210,000 for an existing home was virtually unchanged from last spring and down 4% from the August 2005 peak.
The end of the housing boom could be a serious drag on the US economic growth. In the past three years, the surge in housing prices, accounted for nearly 40% of the expansion in household spending through home equity extractions. Merely stagnant home prices would shave a full percentage point (1%) off consumer spending growth in 2006. An outright decline obviously would have that much more of an impact.
The raging bull market in housing contributed 25% to the overall growth in the Gross Domestic Product (GDP) since 2003. The real-estate boom was responsible for nearly 20% of the rise in total retail sales, while enlarging the nation’s payrolls by around a million payroll jobs.
The real question remains, what sector, if any, will support the US economy now that the housing boom is over? Or, do we now rotate into another recession with either growing deflation (slowing economy with declining interest rates) or stagflation (slowing economy with rising interest rates) concerns.
Long-term conclusions and current month expectations . . .
The US treasuries, especially the 30-year dated paper, should see renewed demand as pension-fund managers soon realize that their portfolios have a big hole within their longer dated maturities. Pension fund assets were up a measly 2.5% in 2005, far below their 8.5% target end zone — roughly the return assumed by many funds. Demand for the newly issued 30-year US treasury bond should be well received, and proceed to rally in price and decline in yield until the pension funds are clamoring in at the top of the bond market cycle.
Therefore, the US treasuries are forecasted to rally in price and decline in yield after the completion of the quarterly refunding auction being held this week, with a 10-year Note peak yield of 4.56%. This rally could be ignited by renewed interest in US treasuries and/or the continued slowing of the US economy.
The DOW, along with the other major stock indices have been artificially supported by the robust earnings’ reports released recently. However, the US economies underlining strengths are beginning to deteriorate and will affect the earnings’ reports going forward, as the housing bubble continues to burst and the employment situation declines. We are forecasted a trading range for the DOW between 10,560 and 10,970, similar to last month’s range. The DOW and the major stock indices could be range-bound until some decisive fundamental data drives the stock market as a whole below DOW support levels of 10,500 and 10,000.
The US dollar could be in the process of forming a near-term support level, even with the ever growing US trade imbalance and current-account deficit, based on our technical analysis. More time will be required to draw a more confirmed conclusion; however in this month, we are anticipating a euro fx equivalent trading range between $1.17 and $1.215. The US dollar could become a safe haven currency, as the foreign economies slow along with the United States. The decline in the global housing market will have a greater affect on world economies than most pundits are willing to accept, leading to a flight to safety within the US dollar.
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 are determined after reviewing the investor’s current assets and fund allocations. These services are 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, Ned Davis Research, David Rosenberg, Economist, Commerce Department, MacroMavens.
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.