WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 01-10-05:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our previous newsletter, dated December 9th, forecasted that the DOW would resume its bear market decline with a trading range for the month between 10,100 and 10,650. The DOW initially held within our expected trading range until a few days after the FOMC meeting on December 14th. The religious holidays during the remainder of December reduced the daily trading volume dramatically, causing the DOW to drift higher from small buyers, and producing an actual trading range for the month between 10,439 and 10,867. This 200 point upward drift in the last two weeks of December was quickly removed by a sharp decline in the first-two business days in January 2005, proving it to be an unsustainable advance — an aberration.
We also anticipated that the US dollar would perform a counter trend rally, due to its oversold condition, for the next few months. This proved to be accurate — with the exception of a minor decline to euro fx equivalent of $1.3678 during the December holiday period — as the US dollar began its advance shortly thereafter. The US treasuries were forecasted to have reached support levels in price and expected them to rally during the month. This proved to be fairly accurate, with the US treasuries rallying during the first half of the month for the entire yield curve. As the month progressed, the spread between the short and long-term maturities narrowed. This caused the longer term US treasuries (10 through 30-year maturities) to maintain their advance, with the shorter maturities like the one-year T-bills and 2-year Notes to declined in price, as the expectation of higher interest rates in the near-term became more apparent.
Looking forward . . .
Seasonal optimism is ringing through much of the recently released economic data, particularly the consumer-related sentiment indexes. We believe that investors should focus on the concrete economic statistics like income and spending, rather than the less telling “survey type” reports. It really should come as no surprise that consumers are more upbeat during the holiday season, especially with economic fundamentals relatively strong.
Keep in mind that talk is cheap; it is far better to watch what consumers actually do, not what they say they will do. Along those lines, over the last year we have seen nothing but positive sentiment from the countless CEO surveys with respect to hiring. Yet, this past year, the US economy has averaged only 131,000 new non-farm payroll jobs each month. This pace is barely keeping up with the growth rate in population.
Exceeding the most optimistic of all Street expectations, the Conference Board’s Consumer Confidence Index surged 10-points in December, rising to 102.3% from a revised 92.6% reading in November. This was the highest level since July last year at 105.7%. This virtual double-digit jump was undoubtedly a result of falling prices at the fuel pump and an impressive late-year stock-market rally. Similarly, the University of Michigan’s Consumer Sentiment Index jumped to 97.1% during December from a 95.8% reading in November.
Still, we sense cautiousness with respect to the economic outlook, more specifically the level of activity within the household arena. The overall pace of retail inflation has exceeded 3.5% over the past 12 months, and there has been an extraordinary 100,000-plus surge in the number of job layoff announcements in the September through November period last year. And, given the anecdotal reports from December and the below average creation of 157,000 new jobs in last Friday’s January employment number, it appears as though there will be four consecutive months of troubling layoff announcements.
Sooner or later — probably in this first quarter after some of those glad tidings have faded — those announcements will turn into actual cuts, which will assuredly hurt confidence and consequently crimp spending. We simply can not neglect the more meaningful and powerful influence of job elimination, which should counter any prior holiday euphoria that may be ringing through the survey-type releases.
ISSUES OF CONCERN FOR 2005:
There appears to be five (5) less obvious issues that have received little exposure, but are of major importance. We feel these issues have not been fully discounted by the market and still have the ability to surprise as well as significantly impact market prices.
1.) Job Creation is Still Anemic: Employment growth of 7 million net new jobs, is substantially below par, especially being 44 months into this so-called recovery. A disproportionate percentage of jobs come from government, rather than the private sector — which is creating jobs that pay less and have fewer benefits than those that have been lost. Continued lack of organic job creation is a major ongoing risk factor, which will negatively effect the economy.
2.) FASB Option Expensing in June 2005: One-quarter of Standard & Poor’s 500 companies have already begun expensing options. We do not know what the various technology firms will actually do when the rules are put into effect, but we suspect that they will either cut back on their generous option packages or they will see their Price/Earnings (P/Es) shoot up dramatically.
3.) Accelerated Depreciation Expires: The incentive to make capital-expenditure purchases may add to a technology slowdown, as the “pull through” of 2005 sales (into 2004) is felt.
4.) Rise of the Pure Patent Business Model: Patent litigation in the US is substantial and rising. High-profile patent suits will only accelerate in 2005. Reason being, the new business model resulting in the pure patent play. Consider VC intellectual Ventures, which has been creating and buying patents. The defunct Commerce One’s 39 Web services patents were auctioned off in bankruptcy to the unknown Acquisitions for $15 million. We expect to see a slew of patent litigation from these and other players.
5.) Terrorist Act Against the US: Military experts do not believe we have vanquished terrorism, especially with the upcoming uncertain Iraqi election fast approaching on January 30th.
These are the just a few of the under-the-radar issues which have not been widely discussed, and we expect some or perhaps all of these may roil the equity markets in 2005.
Long-term conclusions and current month expectations . . .
Our October 2004 newsletter illustrated a detailed report on the growing likelihood of a global housing price bubble. This timely released report is now confirmed with additional evidence showing the bubble may be bursting. New home sales — released in mid-December 2004 — fell 12% in the month of November 2004. The backlog of unsold houses edged higher, with median new home prices sinking 8.2%, representing the steepest drop since September 1981. We encourage investors to review this special housing bubble report outlined within the October 2004 newsletter, and reduce their real estate holdings to no more than 25% of total household net worth. The housing market has been the main support beam for the economy during the past four years, and this change in momentum will affect the US as well as global economies going forward.
We continue to feel that investors have an exaggerated notion of how long this bear market rally within the stock market can last. Any type of rally, either a bull or counter trend rally over the past 70 years have faded on average in roughly 2-1/2 years, which means this advance maybe near an end. This historical study is further evidence for the resumption in the bear market decline for the major stock indices. We are expecting a DOW trading range for the month between 10,400 and 10,865, as the stock market trends lower. The expected strong fourth quarter earnings reports — due for release this week — have been factored into the marketplace. Therefore, these earnings reports should have a limited effect on the announcing stocks, as well as the overall stock market.
The US dollar began its counter trend rally shortly after the completion of the holiday season, with the euro fx equivalent declining from $1.3678 to $1.3060. The rising US dollar will cause the current-account deficit to increase, putting additional pressure on imports and the large trade imbalance. This US dollar advance could last for several months, with a large consolidating trading range, as it gets rid of the factored-in oversold condition. The US treasuries should continue to be supported, especially the longer maturities, as investors seek higher yields instead of the shorter maturity low yields offered. The US 10-year note, currently yielding 4.25%, will likely decline in yield and advance in price as the US economy slows. The Fed may continue to raise the prevailing Fed funds rate from 2.25% to 3.00%, with an objective of reaching a level of equilibrium. However, as more evidence becomes more readily apparent that the US economy is not growing overall and inflation risks remain low, the Fed could suspend their interest rate hikes. The US treasuries have rallied in price and declined in yield since June 2004, even with the Fed raising the Fed Funds rate from 1.25% to 2.25% last year, proving that the overall US economy is not as strong as forecasted by most pundits.
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 (ETFs) 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: InvesTech, Maxim Group, Federal Data