WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 02-27-10:
By: John T. Moir
Position overview . . .
Our recent newsletter, dated January 22nd, stated that we remain bearish, as Main Street readjusts it consumption/saving patterns to the new normal. The stock market sugar high remains in place for the time being, but several technical indicators suggest prices are within the throes of a topping process. We anticipated that the DOW could continue within this “elevated topping process period of consolidation” during the course of the month, with a projected trading range between 10,150 and 10,950. The actual result saw the DOW trade within a narrower range than projected, between 10,043 and 10,729.
The US dollar was anticipated to remain within a broad trading range, between euro fx equivalent of $1.40 and $1.46, during the course of the month, as investors continue to decide if this the their global currency-of-choice for the short and long-term future. The actual result produced a slightly larger trading range than projected, between euro fx equivalent $1.3865 and $1.4561.
The US treasuries, at least for the near-term, was forecasted to remain within a supported price trading range, during the course of the month, with a peak-yield for the US 10-year Note of 3.85% or lower. We further stated that China and Japan will continue to feed the US debt addiction, eventually equaling the US Gross Domestic Product, and producing undesirable long-term consequences. The actual result saw the US treasuries remain within a supported price trading range, with the US 10-year Note having a yield-range for the month between 3.58% and 3.86%.
Looking forward . . .
The Commerce Department recently reported that the Gross Domestic Product (GDP) grew at 5.9% in last year’s final three months, the best showing since the July-September stretch in 2003. The report was alright, but not a great performance by the economy, when poking into the details that reveals something less ebullient.
For nearly half of that 5.9% gain — 3.4 percentage points, to be exact — came by virtue of a slower pace of inventory reduction. The change in inventories did not represent the start of a new cycle but, rather, an adjustment, a transitory realignment of stocks of merchandise to sales. The fourth-quarter GDP would have weighed in at a nothing-to-write-home-about 2.2% annual rate, excluding the $100 billion-plus decline in inventory reduction.
It is quite unusual for inventories to chip in such a hefty part of GDP at the same time import growth is cut in half, as it was in the December quarter. Growth of domestic demand dwindles to a paltry 1.7%, from 2.3%, in the previous quarter, when stripping out inventories and the foreign trade sector.
Moreover, demand growth, in light of all the massive doses of fiscal and monetary stimulus, should be running at a better than 10% annual rate, not shuffling along at 1.7%. So, the real question is, why has demand remained so muted more than two years after such an unprecedented supply of stimulus? The answer is that this epic credit collapse is a pervasive drain on spending and very likely has another five years or more to play out.
The 15.4% decline in non-residential structures and enormous overbuilding in that sector, will likely cause spending to extend its mournful contraction through the first half of the year. Residential investment may have grown at 5.7% clip in 2009’s final quarter, but recent declines in home starts and sales indicate spending on housing will level off or even dip this year.
The economy may be growing, but it is striking how much damage was caused by the recession. Net GDP, minus depreciation, was 0.3% lower than in the fourth quarter of 2006, and the drop in net domestic income has been even more dramatic. Such prolonged downturns have not occurred, since the Great Depression.
A lot has been written about the exploding US Treasury debt and how the US dollar will surely suffer as a result, but , as of 2008, Japan leads developed economies with regard to government debt-to-GDP ratios, coming in at 167.6%, followed by the US at 70.2%, with the euro zone at 69.3% and the U.K. at 51.7%. So, Japan, as of 2008, already had a much higher government debt-to-GDP ratio than the US is projected to have in the 10 years ended 2019 — talk about scary stuff!
Japan has a high household-saving rate. In effect, the Japanese have saved so much that they not only have been financing their own government deficits but exporting financial capital to other economies to help finance their government deficits, too. The real questions is will Japan be able to keep financing its own government deficits internally. The Japanese population is declining, as more and more Japanese retire, and the household saving rate will presumably decline even further.
Households in the US have stepped up their rate of saving, although the federal government has increased its rate of dissavings. In the first three quarters of 2009, US households purchases of US Treasury debt outstripped foreign purchase of US debt, including foreign official purchases.
Where would you rather place some of your funds, if you were a middle-aged Chinese or Indian investor? In Japan, with its declining population, entrepreneur-sapping government regulation and cultural bias against individualism? Or in the US, with its still-growing population and culture of entrepreneurship?.The answer is very clear for now, but for long much longer.
Long-term conclusions and current month expectations . . .
Portfolio Managers possess far less reach now than a year ago. More importantly, $55 billion of institutional spending during January failed to push the financial markets higher. One important sign of an imploding bubble is that large inflows fail to push prices higher. A financial bubble constantly needs new inflow, but with cash levels rapidly dwindling, required inflows become increasingly unlikely — a new financial crash looms large.
The trend to releverage can also be inferred from reports of banks reopening credit lines to hedge funds during the past year. The “too-big-to-fail” banks themselves are releveraging, as a perfect example of the moral hazard unleashed by repeated bailouts. All of the major banks are moving back into a carry trade — using cash supplied by various Federal Reserves and Federal Deposit Insurance Corporation Programs to purchase mortgage-back securities.
The Federal Reserve has virtually no room to tighten credit in a system where the real inflation-adjusted broad money supply is in severe contraction, and where general bank lending into the flow of commerce is not adequate to maintain economic growth.
The US central bank is not going to raise rates right away, but the Federal Reserve is increasingly aware that banks, insurers, and other fixed-income investors can not really tolerate artificially low yields on bonds much longer. The recent Fed action to raise the discount rate by 25 basis points, from 0.50% to 0.75%, is a sign that banks are no longer at risk from asset-quality woes; on the contrary, we expect continued record losses from some of the largest players in the banking industry through much of 2010.
We could see interest rates go higher, as various states and countries find themselves in budget deficits, and will have to pay more to borrow money, because of the slippage in their ratings. This could lead to higher interest rates all around, as people value risk more carefully.This could cause the US the treasuries, at least for the near-term, to decline in price. We are, therefore, anticipating the US 10-year Note to have a base-yield of 3.53% or higher, as prices decline and yields inversely rise, during the course of the month.
Meanwhile, homeowners will find that real-estate taxes are increasing, even as house values continue to retreat and yet, pay more in real-estate taxes. Why? Primarily because homeowners are paying for those neighboring homes that have gone into foreclosure, and people who are still employed continue to have trouble paying their bills. Real-estate taxes, along with high utility bills and other increases, are causing the steady earner to fall behind.
Credit-card companies, instead of understanding that some money is better than no money on a bill, are recklessly raising the rate that they charge on their cards. You would think the financial wizards that run the credit-card companies would understand that higher rates on already stressed balances will likely lead to default, which will lead to additional write-downs on their financial statements. These various US company actions, along with the continued overall weak consumer confidence, could produce a decline in the US dollar, at least for the near-term. We are, therefore, anticipating a euro fx equivalent trading range during the course of the month between $1.34 and $1.40
The January sales rate of 309,000 new homes was substantially below the median forecast of 355,000. It had been the general view that January results would benefit from the extension and broadening of the first-time home-buyers’ tax credit announced shortly before the original November 30th 2009 expiry — indeed, this was expected to have aided the December results, but that was not the case. January 2010, however, was another month that did not see the expected improvement, and the cumulative 23% drop in new-home sales since October 2009 underscores just how much demand was pulled forward by the original expiration date of the tax credit.
It remains our view that the extension and broadening of the tax incentive will have a temporary beneficial impact on home sales in the coming months. It would also appear that weaning the housing market from the government’s incentives is going to be a difficult process, especially with supply remaining at considerably elevated and still-rising levels.
The stock market remains within an elevated period of consolidation, as the various stimulus programs try to rejuvenate the US economy, at least for the near-term. We are projecting the DOW to remain price-supported, due to these various stimulus packages, and are anticipating a trading range for the month between 9,800 and 10,600.
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 them 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 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.
We operate within the “Exemption from Registration” provision provided by the Code of Federal Regulations (CFR) Title 15, Chapter 2D, Subchapter 2D, Subchapter II, Section 80b-3. This provision allows investment firms to grow their business prior to registration, and the large expenses associated with such a process. Investors’ funds remain securely in their name at major brokerage firms and/or banks, while, we, at Wavetech Enterprises, LLC., manage the funds “Online.”
We are pleased to provide a letter written by Attorney, Steven Stucker, regarding the “Exemption from Registration” provision, who has also been aware of our wealth management services, as well as our operating procedures, for more than ten years. Investors are more than welcome to telephone him directly at 775-884-1979 to discuss this provided letter as well as our unique Private Account Wealth Management Services in further detail.
INVESTORS, take action NOW to maintain, keep, protect and grow what wealth you have with our unique Private Account Wealth Management services. What more can we do and/or offer to help you preserve as well as grow your wealth toward achieving both your short and long-term investment objectives? Call us today at 775-841-9400.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, David Rosenberg with Gluskin & Sheff, Dean Baker of the Center for Economic and Policy Research, Joshua Shapiro with Maria Fiorini Ramirez, (MFR), Paul Kasriel with Northern Trust, Unified Cycle Theory Newsletter by Steve Puetz, John Shadow with Shadow Government Statistics, Institutional Risk Analysis, The Option Queen by Jeanette Schwarz Young.
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.