WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 01-11-06:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our previous newsletter, dated December 8th, forecasted that the US treasuries would continue to rise in price and decline in yield, with the yield peaking on the 10-year treasury Note for the month at 4.52%. And, that the Fed would raise the prevailing fed funds rate from 4.00% to 4.25%, which could represent their last hike in rates prior to resuming another easing cycle. These projected occurrences for the US treasuries proved to be accurate, as the 10-year Note rose in price with a yield during the month between 4.53% and 4.34% before closing the month at 4.40%. Also, the Fed did raise the fed funds rate as forecasted, and stated within the released minutes that they may have reached an “accommodative” level for interest rates — leading us to conclude that they are close to refraining from further interest rate hikes.
The US dollar was anticipated to resume it’s bearish declining trend, with a forecasted trading range for the month between the euro fx equivalent of $1.165 and $1.20. This proved fairly accurate, as the US trade imbalance continued to grow, putting undue pressure on the US dollar — leading to a actual trading range for the month between euro fx equivalent of $1.1690 and $1.2059.
The DOW was forecasted to resume it’s primary bearish declining trend during the month, with an anticipated trading range between 10,200 and 10,936. The actual range proved to be narrower, between 10,709 and 10,940, due to a reduced level of implied volatility. Also, the narrower range could have been the result of less-than-expected holiday trading volume, with no meaningful level of committed buyers or sellers to extend a level of advance or decline. The projected high for the range was accurate and was maintained throughout the month, but simply did not create any form of declining momentum, resulting in a very narrow trading range.
Looking forward . . .
The employment report, released last Friday from the Bureau of Labor Statistics, outlined an addition of 108,000 new payroll jobs — substantially less than the Street consensus of over 200,000. The November employment gain was revised upward to 305,000, from the originally reported 215,000, as if that somehow offsetting the December report miscalculation. There remains the possibility that the November report was artificially inflated by a post-Katrina lift.
The December report from any standard was a disappointment and not much larger than the surveys margin of error. Private services added 82,000 new jobs, with few sectors standing out as leaders, except for bars and restaurants, which has represented 11% of all of the job gains over the last year.
Health care was a job-generator, accounting for 21,000 payroll additions. Our suspicion is that these new job gains most likely were not in very high-paying positions, and are not necessarily good news for the rest of the US economy.
The average weekly hours worked slipped 0.1%, and the average earnings were up a modest 0.1%. On a yearly basis, earning gains are still lagging behind inflation. We would be seeing stronger wage gains, if the labor market were really as tight as some pundits claim.
The released unemployment rate was down slightly to 4.9%, but that largely reflected a shrinkage of the labor force. The true unemployment rate would have been 5.1%, if those labor-force dropouts had been added to the unemployed.
In summary, the labor market continues to under perform, further confirming the unsustainability of US economic growth at current levels.
GROWING CONSUMER SPENDING BUBBLE:
Home-equity lines of credit have enabled consumers to access accumulated wealth in their real estate. Furthermore, the tax-free capital gains of up to $500,000 on the sale of one’s primary residence, and the cash-out refinancing’s that banks have been actively marketing, have added to an environment wherein gains in real-estate wealth have keep real consumption-related growth. Commercial property values also have advanced, since owners have been declaring another property to purchase at the time of sale (1031 exchange) — avoiding to pay any applicable taxes — helping fuel the US economy through further equity financing extractions and creating the current real estate bubble.
Cash-out refinancing give homeowners the opportunity to get a lower mortgage rate and to increase the size of their mortgage, so as to withdraw cash. This carries risk to an already over leveraged consumer. These are loans not kept on the bank’s balance sheets, since they are packaged to other intermediaries who “securitize” the collection of mortgage loans, and often resell them to foreign investors.
But, now the field of play within the real-estate market has changed. Permits have badly lagged starts, forecasting a material slowing in housing activity. The inventory of unsold homes continues to grow, and measures of housing affordability suggest a real lessening of demand. The housing bubble has become an overall consumer-sector bubble, using off-balance-sheet financing instruments to propel continued spending, as current savings rate remain low at -1.5%.
The Fed is focused on the unsustainability of these bubbles, and is emphasizing the intent to raise short-term interest rates, gradually taking some air out of these bubbles in order to contain potential inflation. We feel that the Fed’s policy thrust will slow the year-over-year pace of the US real economic momentum, and global competition for market share will assist the process to help avoid an appreciable escalation of inflation.
Long-term conclusions and current month expectations . . .
One of the big arguing points of the bulls is the extraordinary strength in corporate earnings, which has had a spectacular boom in profits. In the third quarter of 2005, to illustrate, operating profits of the S&P 500 were up nearly 11.5%, the 14th quarter in a row of double-digit gains. However, such splendid performance does not reflect an inordinate growth of revenues but the impact of an unprecedented mass of stock buyback’s — $455 billion worth of stock repurchases took place last year alone.
Operating earnings in dollar terms — as against the per-share net — actually were up only 7.7% over the comparable year-earlier total. This represents the narrowest gain in over three years — showing that there is a good deal less in the corporate bottom line than initially perceived.
The DOW, along with the other major stock indices, remain in a primary bear market, but corrections (counter trend moves) can and do extend over months and in some cases years — resulting in prolonged periods of consolidation prior to resuming their primary trends. This period of consolidation for the major stock indices still continues, but is approaching an end, where investors will be encouraged to consider management services designed to generate profits through either a rising or declining stock or bond market as outlined within the “Suggested Investment Allocations” section of this newsletter.
There is mounting evidence that the US economy is due to slow significantly in 2006, as the housing bubble burst and consumers spendable funds diminish, which have both supported the US economy over the past three years. Therefore, we are anticipating that the DOW should resume the decline within the primary bearish trend, with a trading range for the month between 10,575 and 11,050. There remains major resistance (ceiling) for the DOW at 11,000 and support (floor) at 10,000. A confirmed resumption in the primary bearish trend would occur with an end-of-the-day close below DOW 10,000.
The US treasuries should continue to adjust for the slowing US economy and the anticipated end of the interest rate hikes to the prevailing fed funds rate, currently at 4.25%. There could be one or two more rate hikes of 25 basis points each (0.25%), but our wave pattern technical analysis suggests that prices for US treasuries should continue to rise in price and decline in yield during the month. We anticipate that the 10-year US Treasury Note will have a peak yield for the month at 4.46%, as it resumes a price rally, resulting in a declining yield.
The US dollar is starting to feel the growing pressure of the twin deficits (US trade imbalance and current-account deficit), and we are expecting it to continue it’s primary bearish decline in value during the month, with a forecasted euro fx equivalent trading range between $1.19 and $1.25. In addition to the growing trade imbalances with foreign countries, global confidence could be strained as the US housing market starts to decline and foreign holders of both US commercial and residential real estate start to review, evaluate and/or liquidate some of these assets. This strain in global confidence could affect the US economy far beyond the real estate market, and could contribute to the slowing of the US economy in 2006.
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, Lavery Consulting Group, Liscio Report, Bureau of Labor Statistics, David Rosenberg, Economist, TrimTabs Investment Research.
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.